All the Devils Are Here [207]
One gets the sense, reading the notes of the meeting, that the Cassano conversation was the last straw for the accountants. PWC lead Tim Ryan was not nearly as calm about the collateral calls as Cassano had been; on the contrary, he was quite agitated. He could see, in a way the AIG executives themselves could not, how their poor risk management practices were creating problems. He listed some of the things that bothered him: The fact that FP had posted $2 billion in collateral without bothering to inform headquarters. The way FP was “managing” the valuation process of the super-seniors. The growing exposure at the securities lending program. And the fact that the risk managers had inexplicably allowed the securities lending program to increase its exposure to subprime securities at the same time that FP was reducing its exposure.
“While no conclusions have been reached,” Ryan told Sullivan and Bensinger, according to the notes, “we believe that these items together raise control concerns around risk management that could be a material weakness.” For Sullivan, there were no two scarier words than “material weakness.” If that wound up being the accountants’ conclusion, it would have to be disclosed to investors—and that would be devastating. He promised to do whatever he had to do to avoid such a declaration. And on that sobering note, the meeting finally ended.
AIG had a long-scheduled investors’ meeting set for Wednesday, December 5, 2007. The planned topic was the company’s life insurance and retirement services businesses. But as the rumors continued to swirl about AIG’s subprime exposure, Sullivan decided to change the focus. The company would talk instead about its credit default swap business, along with the rest of its exposure to the mortgage market.
It was a very long meeting. Sullivan began by noting AIG’s profitability over the past few years, its strong capital position and cash flow ($30 billion in the first nine months of 2007), and its lack of debt. “We have the ability to hold devalued investments to recovery,” he told investors. “That’s very important.... AIG-FP has very large notional amounts of exposure related to its super-senior credit derivative portfolio. But because this business is carefully underwritten and structured . . . we believe the probability that it will sustain an economic loss is close to zero.”
Over the course of the day (with a break for lunch), fourteen AIG executives made presentations—including Cassano, Forster, model expert Gary Gorton, and Bob Lewis. Every one of them said essentially the same thing: there was little or no chance that the tranches AIG had either insured (in the case of FP) or bought (in the case of other AIG divisions) could ever lose money. Of the fourteen, nobody said this more fervently, or more often, than Cassano. “[W]e have an extremely low loss rate in these portfolios and the underlying reference obligations have a relatively low downgrade migration from the rating agencies,” he said in a typical remark. “It is very difficult to see how there can be any losses in these portfolios.” (Four months earlier, during an earnings call, Cassano had made a similar remark: “It is hard for us, without being flippant, to even see a scenario . . . that would see us losing one dollar in any of these transactions.” That line would come back to haunt Cassano, as it was quoted ad nauseam in the aftermath of the crisis.) At least half a dozen times he rolled out all the explanations he had been using to push back against Goldman: The due diligence that had gone into assembling the subprime tranches AIG insured. The fact that it had little or no exposure to 2006 and 2007 vintages. The amount of subordination in the CDOs AIG insured, meaning that hell would have to come close to freezing over before any of AIG’s super-seniors defaulted. He acknowledged that FP was in disputes with counterparties over marks but described those disagreements as “parlor