Tuesday, July 07, 2009

From inside the meltdown

Michael Lewis talks to some folks at AIG's Financial Products division and gets their side of the story, which they are eager to attribute to one person in particular.

I liked this on how good the good times got:
... the people who worked at A.I.G. F.P. got rich. Exactly how rich is hard to say, but there are plenty of hints. One is that a company lawyer—a mere lawyer!—took home a $25 million bonus at the end of one year.
Indeed, that was a warning sign.

But things went south. Why? Lots of reasons, including one with a name:
That Joe Cassano is the son of a police officer and was a political-science major at Brooklyn College seems, in retrospect, far less relevant than that he’d spent most of his career, both at Drexel and A.I.G. F.P., in the back office, doing operations. Across A.I.G. F.P. the view of the boss was remarkably consistent: a guy with a crude feel for financial risk but a real talent for bullying people who doubted him. “A.I.G. F.P. became a dictatorship,” says one London trader. “Joe would bully people around. He’d humiliate them and then try to make it up to them by giving them huge amounts of money.”

“One day he got me on the phone and was pissed off about a trade that had lost money,” says a Connecticut trader. “He said, ‘When you lose money it’s my fucking money. Say it.’ I said, ‘What?’ ‘Say “Joe, it’s your fucking money!”’ So I said, ‘It’s your fucking money, Joe.’”
That's an interesting dialogue, to a lawyer. Presumably Mr. Cassano can remember whom he had this exchange with, so the speaker is not afraid that his ex-boss will know he was talking; no, he's afraid of being sued. Unless Mr. Cassano had that same conversation with lots of people, which god knows, from the article, seems it might be the case.

I did raise an eyebrow here however:
Says a fourth, “Joe always said, ‘This is my company. You work for my company.’ He’d see you with a bottle of water. He’d come over and say, ‘That’s my water.’ Lunch was free, but Joe always made you feel he had bought it.
Well, I sympathize a bit with Joe here. "Lunch was free"? Lunch is never free, and traders who think their lunches are "free" are showing the incipient symptoms of Somebody Else's Money Disorder.

Regardless, this could not end well:
A.I.G. F.P. could attract extremely bright people, whose success depended on precision of both calculation and judgment. It was now run, roughly, by a man who didn’t fully understand all the calculations and whose judgment was clouded by his insecurity. The few people willing to question that judgment wound up quitting the firm. Left behind were people who more or less accommodated Cassano. “If someone is a complete asshole,” one of them puts it to me, “you seek his approval in a way you don’t if he’s a nice guy.”
Hubris, nemesis. Goes together like a horse and carriage.

Anyway, for one view of why AIG melted down, and for more psychological insights into Mr. Cassano (and why you should never let anyone whose business is his whole life run the business), read the whole thing.

... And if you've wondered, like me, whether Paulson's bailout scheme was really just the most naked theft of taxpayer dollars ever achieved, then this will be of interest:
In the beginning, A.I.G. F.P. had required its counter-parties simply to accept its AAA credit: it refused to post collateral. But in the case of the subprime-mortgage credit-default swaps, Cassano had agreed to several triggers, including A.I.G.’s losing its AAA credit rating, that would require the firm to post collateral. If the value of the underlying bonds fell, it would fork over cash, so that, for instance, Goldman Sachs would not need to be exposed for more than a day to A.I.G. Worse still, Goldman Sachs assigned the price to the underlying bonds--and thus could effectively demand as much collateral as it wanted. In the summer of 2007, the value of everything fell, but subprime fell fastest of all. The subsequent race by big Wall Street banks to obtain billions in collateral from A.I.G. was an upmarket version of a run on the bank. Goldman Sachs was the first to the door, with shockingly low prices for subprime-mortgage bonds--prices that Cassano wanted to dispute in court, but was prevented by A.I.G. from doing so when he was fired. A.I.G. couldn’t afford to pay Goldman off in March 2008, but that was O.K. The U.S. Treasury, led by the former head of Goldman Sachs, Hank Paulson, agreed to make good on A.I.G.’s gambling debts. One hundred cents on the dollar.
Kinda boggles the mind, don't it? In broad daylight, with the eager connivance of Congress: do this right now, or it's The Great Depression 2.0. Makes those AIG guys look like pikers.

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