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EARLY : SPREADING SUBPRIME WORRIES
and each sale had the potential to further depress prices. If at all possible, the borrow-
ers sold other assets in more liquid markets, for which prices were readily available,
pushing prices downward in those markets, too.
AIG: “WELL BIGGER THAN WE EVER PLANNED FOR”
Of all the possible losers in the looming rout, AIG should have been among the most
concerned. After several years of aggressive growth, AIG’s Financial Products sub-
sidiary had written billion in over-the-counter credit default swap (CDS) protec-
tion on super-senior tranches of multisector CDOs backed mostly by subprime
mortgages.
In a phone call made July , the day after the downgrades, Andrew Forster, the
head of credit trading at AIG Financial Products, told Alan Frost, the executive vice
president of Financial Product’s Marketing Group, that he had to analyze exposures
because “every f***ing . . . rating agency we’ve spoken to . . . [came] out with more
downgrades” and that he was increasingly concerned: “About a month ago I was like,
you know, suicidal. . . . The problem that we’re going to face is that we’re going to have
just enormous downgrades on the stuff that we’ve got. . . . Everyone tells me that it’s
trading and it’s two points lower and all the rest of it and how come you can’t mark
your book. So it’s definitely going to give it renewed focus. I mean we can’t . . . we
have to mark it. It’s, it’s, uh, we’re [unintelligible] f***ed basically.”
Forster was likely worried that most of AIG’s credit default swap contracts re-
quired that collateral be posted to the purchasers, should the market value of the ref-
erenced securities decline by a certain amount, or should rating agencies downgrade
AIG’s long-term debt. That is, collateral calls could be triggered even if there were no
actual cash losses in, for example, the super-senior tranches of CDOs upon which the
protection had been written. Remarkably, top AIG executives—including CEO Mar-
tin Sullivan, CFO Steven Bensinger, Chief Risk Officer Robert Lewis, Chief Credit
Officer Kevin McGinn, and Financial Services Division CFO Elias Habayeb—told
FCIC investigators that they did not even know about these terms of the swaps until
the collateral calls started rolling in during July. Office of Thrift Supervision regula-
tors who supervised AIG on a consolidated basis didn’t know either. Frost, who was
the chief credit default swap salesman at AIG Financial Products, did know about the
terms, and he said he believed they were standard for the industry. Joseph Cassano,
the division’s CEO, also knew about the terms.
And the counterparties knew, of course. On the evening of July , Goldman
Sachs, which held billion of AIG’s super-senior credit default swaps, sent news
of the first collateral call in the form of an email from Goldman’s salesman Andrew
Davilman to Frost:
DAVILMAN: Sorry to bother you on vacation. Margin call coming your way. Want to
give you a heads up.
FROST, minutes later: On what?
DAVILMAN, one minute later: bb [ billion] of supersenior. 
