Copyright 2010 Philadelphia Newspapers, LLCAll Rights Reserved The Philadelphia Inquirer
July 2, 2010 Friday CITY-C Edition
BUSINESS; P-com Biz; Pg. D03
PhillyDeals: AIG figure says not knowing would have helped
By Joseph N. DiStefano; Inquirer Staff Writer
How much do we really want to know about big financial companies in trouble?
Congress wants the Federal Reserve to tell more about its secret rescue operations, including the 2008 deals that turned into costly bailouts. Big investors have long pushed banks and investment firms to “mark to market” their loans and other assets, so you can tell what they’re really worth – today.
But the man at the center of American International Group Inc.’s ruinous 2008 write-downs, which led to the collapse of U.S. home-loan values and credit markets, the bailouts, and the economic slowdown that threw millions out of work, says AIG could and should have avoided the mess by keeping its loan investments more in the dark.
Joseph Cassano, who collected more than $300 million in a 20-year career running the giant insurer’s Financial Products group before he agreed to retire amid the massive write-offs of early 2008, told his side of the story Wednesday to the federal Financial Crisis Inquiry Commission.
How did AIG measure the risk it took as it collected bundles of sometimes-questionable home loans (collateralized debt obligations) and wrote bond insurance (credit default swaps) that bet the loans wouldn’t go bad?
Cassano said he relied on “University of Pennsylvania Professor Gary Gorton, who served as a consultant to AIG-FP [and] worked with our experienced analysts to refine the deal structure.” Gorton “used a sophisticated actuarial model” to ensure each deal “was fundamentally sound” and “to minimize risk.”
But when AIG traders realized the home-loan business was getting dangerous in 2005, Cassano and his group stopped doing subprime-mortgage deals. The problem then became how to deal with the risk AIG had already taken on.
At first, Cassano and his colleagues persuaded the company not to write off billions in potential losses; he and his colleagues “remained confident” in the assets, thanks to the analysis they’d conducted with Gorton’s help.
Auditors finally overruled Cassano in early 2008, and he agreed to “retire.” But Cassano still says they were wrong. The decision “to unwind the credit default swap contracts [was] due largely, so far as I can tell, to the proliferation of collateral calls” by nervous (or opportunistic) swaps investors. The multibillion-dollar write-downs “had a huge impact on the company,” and were followed by the government takeover, he said.
AIG’s suspect investments were taken over by the government and packed into three investment portfolios, dubbed “Maiden Lane.” Said Cassano: “As I look at the performance of some of these same [collateralized debt obligations] in Maiden Lane III, I think there would have been few, if any, realized losses on the [credit default swap] contracts had they not been unwound in the bailout.”
Is Cassano right? Should AIG’s auditors have held off demanding short-term write-downs, in hopes the panic would subside and loan and bond values would recover?
Professor Gorton might shed some light here. But he’s at Yale now; he doesn’t list his AIG work on his impressive online resume, he didn’t testify in Washington as to whether he’d have done anything differently with hindsight, and he hasn’t answered messages seeking comment.
Nails hires a lawyer After cheerfully representing himself in the bankruptcy case he filed last year, ex-Phillies and Mets star Lenny Dykstra told me Thursday that he has hired Encinitas, Calif., lawyer Michael J. Pines to face bankruptcy trustee Arturo Cisneros and a long list of creditors. Those creditors have stepped up efforts to collect some of the millions they say Dykstra owes them through the Chapter 7 liquidation of his remaining property.
“There is evidence of significant legal violations including fraud in Mr. Dykstra’s loans, and in his bankruptcy,” Pines told me. He’s planning a legal response in Dykstra’s defense.
This follows Cisneros’ long, pleasantly illustrated legal complaint two weeks ago, which accuses Dykstra of making a complete monkey out of him, Dykstra’s mortgage banker, and other creditors. According to Cisneros:
Last fall and winter, Dykstra blew off three scheduled meetings with the people to whom he owes money, where he was supposed to give them information about what he owned that could be sold to pay his bills, including the contents of his $18.5 million mansion in Thousand Oaks, Calif.
Meanwhile, Dykstra rented an office in Camarillo, Calif., where he stored “furniture, antique desks, wine refrigerator, sports memorabilia, and a four-foot-tall electronically locked safe” taken from the house.
On Feb. 6, Dykstra visited that office. Cisneros says his lawyer reached Dykstra by phone and told him it could “constitute criminal conduct” if he removed any of the property his creditors sought. Dykstra jokingly answered “that there was a lot of money in the safe but [he] had forgotten the combination.”
Cisneros says Dykstra then “gave his word” not to take anything. But “within minutes of giving Plaintiff’s counsel word that he would not remove” the stuff, Dykstra “proceeded to load up a moving van to remove the entire contents.” And promptly listed items for sale on eBay: a framed picture for $3,200, a mahogany desk for $10,000.
To DE from VA Sallie Mae, the student-loan servicing company, will move its headquarters from Reston, Va., to a new office in Delaware next year, said Albert Lord, the Sallie Mae chief executive officer, and Delaware Gov. Jack Markell.
Sallie Mae will spend up to $100 million on a new headquarters, and Delaware will give Sallie Mae a grant of up to $3 million. The company currently employs 900 at its offices near Newark, Del., headed by Jack Hewes, an Upper Darby native who used to be a boss at the former credit card lender MBNA Corp.
Delaware’s small congressional delegation mostly backed Sallie Mae in its unsuccessful fight to prevent Congress from cutting the subsidy to Sallie Mae and other private companies that make student loans using government money. Sallie Mae says it will continue as a provider of higher-rate private student loans, and collecting students’ government-loan payments.
The new student-loan law took effect Thursday, and Sallie Mae plans 30 percent cuts to its national workforce, notes bond analyst Kathleen Shanley of Gimme Credit L.L.C. in a note to clients. Sallie Mae is also weighing plans to set up a separate bank-holding company, according to analyst Michael Taiano of Sandler O’Neill + Partners.
Contact Joseph N. DiStefano at 215-854-5194 or JoeD@phillynews.com.
July 2, 2010