All the Devils Are Here [209]
At the investor meeting, however, none of this was divulged. When asked point-blank what percentage of AIG’s collateral was 2006 and 2007 subprime vintages, Forster—whom Cassano had kicked the question to—said he didn’t know.
Still, in the immediate aftermath of the meeting, the market seemed pleased. AIG’s stock had been around $58 a share in the week preceding the investor meeting; after the meeting, it got a nice little pop, to $61 a share. And the meeting seemed to have energized Cassano as well. Two days after the meeting, on December 7, FP sent Goldman a letter demanding the return of $1.5 billion in collateral. Goldman, of course, refused. Several of the new marks that AIG-FP provided showed FP valuing the securities at par. David Lehman would later tell the Financial Crisis Inquiry Commission that AIG-FP’s valuation was “not credible.” He was right.
Though he didn’t realize it, Cassano’s biggest problem wasn’t Goldman Sachs. It was Tim Ryan at PricewaterhouseCoopers. All through November and December, in meetings with management, with the audit committee, and with the full board of directors, Ryan continued to raise concerns about the way FP was valuing the super-seniors, about the way it was managing the process, and about the inability or unwillingness of AIG management to get involved. While Cassano was focused on fending off more collateral calls—by the end of the year counterparties were demanding $2.7 billion, of which $2.1 billion were demands from Goldman—Ryan was making the case that AIG could not continue to allow Cassano and his FP team to manage the situation themselves.
It wasn’t until the beginning of 2008 that headquarters finally got involved, but by then it was too late. In a mid-January meeting with the audit committee, according to the notes of the meeting, “Mr. Habayeb believes that he is limited in his ability to influence change, and the super-senior valuation process is not going as smoothly as it could.” Ryan responded, essentially, that this was not acceptable.
Meanwhile, Cassano was scrambling to come up with a value for the portfolio in time to report year-end results in early February. It was clear that there were going to have to be more write-downs. Using a theory he called a “negative basis adjustment,” Cassano estimated the write-down would be $1.2 billion. (Essentially, he was claiming that this adjustment reflected the difference between the way the swaps were priced and the way the underlying securities were priced.) Without this adjustment, the write-down would be $5 billion. The board—and the accountants—first learned about Cassano’s theory in a January board meeting. The auditors were not pleased, and they would have the final say. Over the next few weeks, Cassano attempted to convince the auditors that the negative basis adjustment was a legitimate valuation method. But Ryan wasn’t biting. It had no basis in accounting rules, he said.
In late January, Ryan dropped the hammer, declaring that AIG had “a material weakness in its internal control over financial reporting and oversight relating to the fair value of the AIG-FP super-senior credit default swap portfolio.” On February 5, AIG released the news of the material weakness in an SEC filing. The stock sank. Counterparties that had previously sat on the sidelines began demanding collateral. Cassano was furious. The “material weakness” announcement had “weakened our negotiation position as to collateral calls,” he wrote in an e-mail.
But it was over for Cassano. The board no longer trusted him and insisted that Sullivan fire him, something Sullivan was still reluctant to do, according to a former AIG executive. Cassano made it easy for him.
“Joe, we have these issues,” Sullivan said.
“Should I retire?” Cassano replied.
“Yes.”
“Joe was just worn out,” explains a former executive. A few weeks later, when the news was made public, Cassano was at AIG headquarters. Someone asked him if he had told his mother, who was in her eighties. “No,” he replied. “She doesn’t know what I do.” A few