AIG’s Cassano: Poster Child for Compensation Problems

Joseph J. Cassano, head of what was formerly an obscure 400 employee division of American International Group (AIG) with main offices in London, called AIG Financial Products (AIG-FP), testified today before the FCIC (Financial Crisis Inquiry Commission).

The inability of AIG-FP to meet collateral calls by CDS (Credit Default Swaps) partners was a major trigger to the collapse of the company and the purchase of majority ownership of AIG by the U.S. government to prevent bankruptcy.

An oversimplified summary of Cassano’s testimony is as follows:

1. AIG-FP had a diverse portfolio, including CDSs on CDOs (collateralized debt obligations).
2. The underlying loans in the CDOs were diversified, and we insured only the super-senior tranche, which always had a AAA layer of loans below it.
3. In late 2005 we (AIG-FP) came to a decision to stop writing CDSs on CDOs backed by sub-prime mortgages and announced this decision in February, 2006.

Cassano retired from AIG in early 2008, took a $1 million a month consultancy with the company and was fired on March, 2008, according to Michael Daly in the New York Daily News.  Daly said that, when all was said and done, Cassano walked away with $315 million – quite a reward for one who brought down the world’s largest insurance conglomerate.