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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
quoted prices. “The above estimated values . . . do not represent actual bids or offers
by Merrill Lynch” was the disclaimer in a listing of estimated market values provided
by Merrill to AIG. Goldman Sachs disputed the reliability of such estimates.
“Without being flippant”
On August , for the first time, AIG executives publicly disclosed the billion in
credit default swaps on the super-senior tranches of CDOs during the company’s sec-
ond-quarter earnings call. They acknowledged that the great majority of the underly-
ing bonds thus insured— billion—were backed by subprime mortgages. Of this
amount, billion was written on CDOs predominantly backed by risky BBB-rated
collateral. On the call, Cassano maintained that the exposures were no problem: “It is
hard for us, without being flippant, to even see a scenario within any kind of realm or
reason that would see us losing in any of those transactions.” He concluded: “We
see no issues at all emerging. We see no dollar of loss associated with any of [the
CDO] business. Any reasonable scenario that anyone can draw, and when I say rea-
sonable, I mean a severe recession scenario that you can draw out for the life of the
securities.” Senior Vice President and Chief Risk Officer Robert Lewis seconded that
reassurance: “We believe that it would take declines in housing values to reach de-
pression proportions, along with default frequencies never experienced, before our
AAA and AA investments would be impaired.”
These assurances focused on the risk that actual mortgage defaults would create
real economic losses on the company’s credit default swap positions. But more im-
portant at the time were the other tremendous risks that AIG executives had already
discussed internally. No one on the conference call mentioned Goldman’s demand
for . billion in collateral; the clear possibility that future, much-larger collateral
calls could jeopardize AIG’s liquidity; or the risk that AIG would be forced to take an
“enormous mark” on its existing book, the concern Forster had noted.
The day after the conference call, AIG posted million in cash to Goldman,
its first collateral posting since Goldman had requested the . billion. As Frost
wrote to Forster in an August , , email, the idea was “to get everyone to chill
out.” For one thing, some AIG executives, including Cassano, had late-summer va-
cations planned. Cassano signed off on the million “good faith deposit” before
leaving for a cycling trip through Germany and Austria. The parties executed a side
letter making clear that both disputed the amount. For the time being, two compa-
nies that had been doing business together for decades agreed to disagree.
On August , Frost went to Goldman’s offices to “start the dialog,” which had
stalled while Cassano and other key executives were on vacation. Two days later, Frost
wrote to Forster: “Trust me. This is not the last margin call we are going to debate.”
He was right. By September , Société Générale—known more commonly as Soc-
Gen—had demanded million in collateral on CDS it had purchased from AIG Fi-
nancial Products, UBS had demanded million, and Goldman had upped its
demand by million. The SocGen demand was based on an . bid price pro-
vided by Goldman, which AIG disputed. Tom Athan, managing director at AIG Fi-
