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THE CDO MACHINE
AIG also bestowed the imprimatur of its pristine credit rating on commercial pa-
per programs by providing liquidity puts, similar to the ones that Citigroup’s bank
wrote for many of its own deals, guaranteeing it would buy commercial paper if no
one else wanted it. It entered this business in ; by , it had written more than
billion of liquidity puts on commercial paper issued by CDOs. AIG also wrote
more than billion in CDS to protect Société Générale against the risks on liquidity
puts that the French bank itself wrote on commercial paper issued by CDOs. “What
we would always try to do is to structure a transaction where the transaction was vir-
tually riskless, and get paid a small premium,” Gene Park, who was a managing direc-
tor at AIG Financial Products, told the FCIC. “And we’re one of the few guys who can
do that. Because if you think about it, no one wants to buy disaster protection from
someone who is not going to be around. . . . That was AIGFP’s sales pitch to the Street
or to banks.”
AIG’s business of offering credit protection on assets of many sorts, including
mortgage-backed securities and CDOs, grew from billion in to billion
in and billion in . This business was a small part of the AIG Finan-
cial Services business unit, which included AIG Financial Products; AIG Financial
Services generated operating income of . billion in , or of AIG’s total.
AIG did not post any collateral when it wrote these contracts; but unlike mono-
line insurers, AIG Financial Products agreed to post collateral if the value of the un-
derlying securities dropped, or if the rating agencies downgraded AIG’s long-term
debt ratings. Its competitors, the monoline financial guarantors—insurance compa-
nies such as MBIA and Ambac that focused on guaranteeing financial contracts—
were forbidden under insurance regulations from paying out until actual losses
occurred. The collateral posting terms in AIG’s credit default swap contracts would
have an enormous impact on the crisis about to unfold.
But during the boom, these terms didn’t matter. The investors got their triple-A-
rated protection, AIG got its fees for providing that insurance—about . of the
notional amount of the swap per year —and the managers got their bonuses. In the
case of the London subsidiary that ran the operation, the bonus pool was of new
earnings. Financial Products CEO Joseph J. Cassano made the allocations at the end
of the year. Between and , the least amount Cassano paid himself in a year
was million. In the later years, his compensation was sometimes double that of
the parent company’s CEO.
In the spring of , disaster struck: AIG lost its triple-A rating when auditors
discovered that it had manipulated earnings. By November , the company had
reduced its reported earnings over the five-year period by . billion. The board
forced out Maurice “Hank” Greenberg, who had been CEO for years. New York
Attorney General Eliot Spitzer prepared to bring fraud charges against him.
Greenberg told the FCIC, “When the AAA credit rating disappeared in spring
, it would have been logical for AIG to have exited or reduced its business of
writing credit default swaps.” But that didn’t happen. Instead, AIG Financial Prod-
ucts wrote another billion in credit default swaps on super-senior tranches of
