All the Devils Are Here [206]
Incredibly, this was a form of risk that Cassano had apparently never considered, and therefore had never modeled for. It was also a risk that AIG executives like Habayeb had never accounted for, in large part because they hadn’t even known it existed. (That is why, too late, the company was now trying to adopt the BET methodology.)
In the short term, the problem was that the market for triple-A tranches of multisector CDOs was frozen. There was no way to use trading data to establish values for the securities because no one was trading the securities. Nobody knew what a CDO was worth anymore, nobody trusted anybody else’s marks, and nobody dared to make an actual trade to find out. It was as if everybody in the mortgage market, having enjoyed a long, drunken revelry, was finally sobering up. Looking in the mirror was not a pleasant experience.
Thus everyone on Wall Street had to rely on models to come up with new marks. There was no other way to do it. This is also why everyone’s marks varied so widely. Everyone had different inputs; the imperfections of quant-style modeling had never been so clear. Merrill Lynch was also marking down its securities. Its marks, however, were much higher than Goldman’s; as Cassano liked to point out, Merrill’s marks were around ninety cents on the dollar, while Goldman’s were in the sixties and low seventies. Because Goldman’s marks were so low, AIG-FP viewed them mainly as an example of “Goldman being Goldman,” taking undue advantage of the situation to inflict pain on AIG.22 But the fact that FP didn’t have its own valuation model made it difficult to refute Goldman’s marks.
Goldman would later insist that it was not trying to gouge AIG—that it alone was being realistic about its marks. One of its tried-and-true techniques, when counterparties objected to its marks, was to offer to sell at the low price to the counterparty. Not once did a counterparty accept the offer, which, to Goldman, was proof that its marks weren’t low enough. Goldman would also later point out that because it had used AIG to hedge trades, it did not pocket the cash it got from AIG, but handed it over to the counterparties on the other side of the trade. In other words, it had no motive for putting the screws to AIG because the money wasn’t going into its own pocket.
At that November 29 meeting, the one in which the top brass for FP and AIG finally met to hash out the situation, Cassano told the others that FP was already in the process of “going to ground” to create a new model that would allow it to value the super-seniors as quickly as possible. Yet at the same time, he once again downplayed the importance of the collateral calls. “Collateral calls are part of the business,” he shrugged, adding that he “does not see this as a material issue with GS or any of the other counterparties,” according to the notes of the meeting.
Then he was asked how the dispute might affect AIG’s profits for the upcoming quarter. “JC noted if we agreed to GS values could be an impact of $5bn for the quarter,” the notes read. “MS”—Martin Sullivan—“noted this would eliminate the quarter’s profits.... JC noted that this was not what he was proposing but illustrative of a worse [sic] case scenario.” Forster would later tell the Financial Crisis Inquiry Commission that, upon hearing the $5 billion figure, Sullivan said the number would give him a heart attack. (Sullivan later testified that he didn’t remember saying that.) And with that, the meeting ended.
Or so Cassano thought. In fact, after the FP executives got off the phone, the accountants stayed in the room with Sullivan and Bensinger to discuss what