The first clue that something was terribly amiss with the insurance giant AIG should have been made manifest when the conglomerate began offering products–and financial products at that. What exactly does an insurance company produce? The short and nasty answer is that AIG manufactured precisely what it was meant to guard against. Namely, risk. Extreme risk.
Ultimately, AIG was cashiered on several trillion dollars of risky financial products, sewn together by Ivy League math whizzes and aces in the arcane art of arbitrage. These were fanciful consolidations of debt that no sane insurer would ever have indemnified. When the company crashed in the dismal autumn of 2008, it turned sheepishly to the insurer of last resort for rescue: the U.S. government. The disgraced executives made the case that the rot in AIG was spreading and was threatening to go systemic. Too big to fail became the mantra of the bailout. AIG, perhaps the most recklessly managed company in the world, was so thoroughly enmeshed in nearly every sector of the American—and even global—economy that to let it sunder would be to risk the crash of the nation. Or so they said.
Both the Bush and the Obama teams—themselves thoroughly marinated in the AIG mindset—quickly capitulated to financial extortion and infused the company with more than $182 billion in taxpayer cash—a sum that continues to rise each month with the inexorability of a lava dome inside an active volcano. Thus did the Obama administration in one of its first official acts endorse the remorseless logic of throwing good billions after bad.
The Treasury Department and AIG’s management were so harmonious that Timothy Geithner allowed AIG’s executives to continue to run the company even after the bailout. The top brass at AIG had successfully duped Geithner and his political puppet master Larry Summers into buying the far-fetched idea that the collapse of AIG had been perpetrated by a handful of rogue traders operating out of satellite offices in distant London and suburban Wilton, Connecticut.
Indeed, Geithner and Summers were so sympathetic to the plight of these corporate titans that they sanctioned more than $450 million in executive bonuses to managers at AIG, including the disgraced Financial Products Division.
Of course, AIG had, among other giants of Wall Street, insured Goldman Sachs, which had made its own dementedly bad investments in subprime loans to the tune of tens of billions of dollars. And there was no way in hell that Geithner, Summers or Hank Paulson was going to let Goldman Sachs eat those loans. And that bit of political sleight-of-hand seems to have paid off handsomely for Goldman Sachs, which just posted record quarterly profits of $700 million only a brief nine months after it seemed like the investment house was on the verge of an ignominious collapse. In other words, the $54 billion in direct payments the feds had lavished on Goldman, Merrill-Lynch and the other Wall Street firms was just the icing on a very rich cake.
In a sense, it’s only fitting that the government ended up as the ultimate guarantor for those furious seasons of Wall Street greed. After all, by consciously dismantling the regulatory framework that tended to constrain the felonious instincts that come naturally to the Wall Street player (such as the Glass-Steagall Act), the government played a decisive role in fostering the rampant financial criminality and looting that reached its apogee in 2008, crashing the global economy, draining retirement funds and pension accounts and casting millions from their homes and millions more into the perdition of long-term unemployment. All of this coming down in an era of extreme government austerity, typified by over-burdened and underfunded social welfare programs. As with the defunct regulations to restrain corporate crimes, so too had the economic safety net been sheared away–its tethers sliced by Reagan, the Bushes and Clinton—long before the economy cratered. Now there is nothing to cushion the blow on the long fall to the bottom.
The architects of this economic deregulation achieved a truly fearful bi-partisan symmetry that persists to this day. Even now, amid the rubble of Wall Street’s collapse, the neo-liberals and neo-conservatives remain as uniform as conjoined twins in their devotion to a broadly deregulated market. Any talk of bringing back forceful correctives such as a new and improved Glass-Steagall Act was immediately squelched by Obama, flanked by John McCain and Mitch McConnell, as well. If the crash of AIG—the largest in history—was in the sclerotic parlance of the times a “teachable moment” it is apparent that while much was ventured, nothing was learned.
The problem is that the government bailout, which some accounts now estimate will eventually top $24-cap T-for Trillion—flowed almost entirely in the wrong direction. Instead of helping to mend the lives of Wall Street’s victims—the unemployed, the uninsured, the destitute and homeless—Bush and Obama rewarded the perpetrators. They even gave them bonuses.
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As the financial writer Michael Lewis explains in a fascinating article on the AIG FP division in Vanity Fair, the financial products offered by AIG were little more than complex iterations of the bizarre financial instruments designed in the 1980s by Drexel, Burnam, Lambert—the company that brought us the junk bond and other improvised explosive devices of high finance.
The young turks at AIG FP, led by Joseph Cassano, improved on the Drexel, Burnham model—or at least mutated it for their own purposes. The game was all about swallowing risk—hiding it, hedging it and repackaging it as, yes, a financial product and not a liability. In other words, something to swap, buy, sell and make money on. Lots and lots of money.
And it worked—for a while. Soon Cassano’s division was piling up $300 million a year in profits and making the platoon of financial tricksters themselves hugely wealthy. Bonuses of more than $25 million a year were commonplace. The executives were making a killing in looting their own hedge funds by skimming 35 per cent of the profits, a self-asserted gratuity that would shame even the most rapacious personal injury lawyer.
All through the high-flying 90s, the AIG risk-swallowing business continued to defy gravity, posting amazing profits on ever more opaque financial confabulations. Then in 2002 came the first whiff of rot. AIG insiders told Michael Lewis that the decomposition began to gnaw away at the FP Division the very moment Cassano replaced his mentor Tom Savage as CEO of the subsidiary. Of course, this retrospective was almost certainly motivated in large measure by post-fall ass-covering. But there’s no question that Cassano was an abrasive personality and not, like many of the traders, an Ivy Leaguer with a DNA profile shaped by generations of old money.
Like AIG’s former CEO, Hank Greenberg, who had been chased out of the company by Eliot Spitzer, Cassano was viewed by his rivals and subordinates as a reckless bully, who ruled the company through the humiliation of nearly everyone he encountered from secretaries to junior executives. Cassano’s father was a police office and the son brought the brute mentality and creepy paranoia of the street cop into the executive suites and the trading room floor. He ruled the London office by fear and did not countenance any contrarian opinions, even as the trading instruments passing before the insurers became more fantastical and the economic perils ever more extreme.
Lewis’ AIG confidents blame the terminal descent of their company on Cassano’s over-weening arrogance and his rather crude understanding of the very products his FP Division was manufacturing.
In other words, Cassano simply didn’t have the head for the complex math at play in those deep derivatives. He didn’t see the pitfalls, trapdoors and inevitable apocalypse at the end of the road. And his team of math geniuses—many with minds minted by MIT and Harvard—went along for the ride, swallowing his torrents of abuse, glossing over the hollow core of the hedge funds. Why? Because, naturally, they were making too much money to object and Cassano, despite his tyrannical fits, was dishing out eight-figure bonuses for Christmas. Indeed, many of the top AIG traders did worse than merely endure Cassano’s abuse—bother personal and organizational. They coddled his worst financial impulses and sucked up to him. In other words, they did their damnedest to suppress their consciousness of guilt.
In the aftermath of the wreckage, Cassano’s supervisors back at AIG HQ in Manhattan have worked sedulously to create the impression that they scarcely knew the man running their hottest division. From Hank Greenberg to Edward Libby, the top brass has sought to portray Cassano and his team as an out-of-control unit that had somehow fled the reservation.
This won’t wash. Not for those in the know, any way. The man who was running AIG’s darkest appendage had been installed as boss of the division by Greenberg himself, who saw in Cassano a man who shared his own despotic management style in playing billion-dollar shell games with other people’s money. When Eliot Spitzer brought down Greenberg in 2005 for the executive’s accounting high-jinks, some inside AIG thought that Cassano might eventually end up taking his place. Others in the company believed that he should’ve been slapped in leg irons. Opinions on Cassano four years ago were divided, but there was no shortage of them. Now Cassano is suddenly the man no one knew about.
According to his colleagues in London, Cassano was ascetic in his total commitment to the company he was steadily destroying. So devoted, in fact, that Cassano recycled most of his $38.5 million salary right back into AIG and its toxic products. The remainder of his AIG trove—estimated at some $238 million—he cached in that most timid of financial parking lots, the U.S. Treasury Bill. Say this for Cassano, he was no preening financial playboy. He dressed casually, drove a modest car and lived to work—and terrorize his staff. “Without AIG FP, he had nothing,” one trader told Lewis.
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With Greenberg and Savage by his side, Joseph Cassano turned AIG FP into a kind of recycling station for toxic financial properties held by corporations, equity firms, banks and institutional hybrids, those freaks and sports of the post-Glass-Steagall era. Cassano opened the gates of AIG FP to them, one and all, eventually absorbing $450 billion in corporate credit-default swaps and another $75 billion in the fatal subprime mortgages. He became Wall Street’s one-stop waste manager, insuring and amalgamating bad debts of every stripe, from credit cards to student loans, corporate buyouts to commercial mortgages, transmuting this junk into big new packages with a glossy veneer that masked the entropic nature of the whole enterprise.
After the attacks of 9/11 and subsequent nosedive of the global economy, AIG’s business began to pick up, as troubled executives desperately scrambled for someplace to dump their risky debts. Cassano and Co. were happy to provide the landfill services, charging a very healthy tipping fee.
But gradually, almost imperceptibly, the weight of the debt-load began to shift, tilting away from traditional corporate investments and decisively toward the necrotic subprime mortgages. By 2005, AIG FP’s consumer loan insurance portfolio consisted of 95 per cent subprime mortgages. The seeds of destruction had been sown. When housing prices began to plummet, AIG was doomed.
But is Cassano the arch villain of this particular chapter in the annals of American capitalism or was he, in the end, Wall Street’s willing dupe?
To reach a plausible assessment it’s vital to remember that AIG was digesting what the big Wall Street houses fed it. Often these packages were artful mixes of consumer and corporate debt. So artful, in fact, that AIG’s brain trust wasn’t entirely clear what they were bonding. The risks were blended, sliced and pressurized into indecipherable collages of debt, like mutual funds from Mars. One top analyst thought that AIG’s credit-default packages consisted of no more than 10 per cent subprime loans. Another put the figure at 20 per cent tops. Cassano, it appears, had no clue about the real number and didn’t care. In his mind, there was simply no way the housing market would go bust—not across the board, any way. And his Wall Street clients at Goldman, Sachs and Merrill-Lynch backed him up in this delusion. After all, what did they have to lose?
In 2007, Cassano, as blissfully ignorant of the peril immediately before him as Wile E. Coyote ten feet off the cliff, boasted in a talk to a seraglio of investors that it was hard for him to even imagine a scenario “that would see us losing one dollar on any of these transactions.”
Less than six months later, it was all over. Cassano had been evicted from AIG (though he continued to get paid $1 million a month as a consultant without portfolio) and Goldman, Sachs was knocking at the door of the company demanding that AIG compensate the investment firm for its own landslide of bad debts. AIG was in no position to pay up, naturally, but Goldman, Sach’s man at Treasury, its former CEO Hank Paulson, did—dollar for dollar.
In for a dollar, in for a trillion.
It has been said by Wall Street apologists that the crash of AIG was an aberration, a singularity of greed run amok. No one could have predicted the fall, they say. Wall Street analysts were beguiled by the blizzard of prospectuses and portfolios on AIG operations that were, they claimed, as immune from explication as the most arcane passages in Finnegans Wake. So too with the business press, which was apparently so mesmerized by these chimerical reports that they completely missed the financial fun-and-games transpiring inside AIG FP.
The regulators at the SEC have also connived to claim ignorance about the true condition of AIG and it’s more malign operations as it veered toward the cliff of no return, fooled, they claimed, by the company’s diction of deceit. Somehow missing the daily bulletins of impending ruin, the regulators have tried to offload all the blame on Cassano and his traders for perverting the system.
This is all nonsense. AIG operated at the very heart of the system, a system enabled by the SEC and its political overlords. Indeed, AIG served as the system’s great backstop, its failsafe. What happens when the failsafe fails?
So now the bills from this tableau of financial debauchery have come due. That $182 billion pay-out wasn’t a final call, but merely an opening bid. Tens of trillions may yet follow.
No, AIG didn’t pervert the system. It was a creature of a perverse system. One that it is literally consuming itself from the inside out. A mighty leveling looms.
JEFFREY ST. CLAIR is the author of Been Brown So Long It Looked Like Green to Me: the Politics of Nature and Grand Theft Pentagon. His newest book, Born Under a Bad Sky, is just out from AK Press / CounterPunch books. He can be reached at: firstname.lastname@example.org.