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LATE  TO EARLY : BILLIONS IN SUBPRIME LOSSES 

nancial Products, told Forster that SocGen “received marks from GS on positions that

would result in big collateral calls but SG disputed them with GS.” Several weeks
later, Cassano told AIG Financial Services CFO Elias Habayeb that he believed the
SocGen margin call had been “spurred by Goldman,” and that AIG “disputed the call

and [had] not heard from SocGen again on that specific call.” In the second week of
October, the rating agencies announced hundreds of additional downgrades affecting
tens of billions of dollars of subprime mortgage–backed securities and CDOs. By
November , Goldman’s demand had almost doubled, to . billion. On November ,
Bensinger, the CFO, informed AIG’s Audit Committee that Financial Products had re-
ceived margin calls from five counterparties and was disputing every single one. 
This stance was rooted in the company’s continuing belief that Goldman had set
values too low. AIG’s position was corroborated, at least in part, by the wide disparity
in marks from other counterparties. At one point, Merrill Lynch and Goldman made
collateral demands on the very same CDS positions, but Goldman’s marks were al-
most  lower than Merrill’s. Goldman insisted that its marks represented the

“constantly evolving additional information from our market making activities, in-
cluding trades that we had executed, market activity we observed, price changes in
comparable securities and derivatives and the current prices of relevant liquid . . . in-
dices.” Trading in the ABX would fall from over  trades per week through the

end of September  to less than  per week in the fourth quarter of ; trad-
ing in the TABX, which focuses on lower-rated tranches, dropped from roughly 
trades per week through mid-July to almost zero by mid-August. 
But Cassano believed that the quick reduction in Goldman’s first collateral de-
mand (from . billion on July  to . billion on August ) and the interim
agreement on the  million deposit confirmed that Goldman was not as certain of
its marks as it later insisted. According to Cassano, Michael Sherwood, co-CEO of
Goldman Sachs International, told him that Goldman “didn’t cover ourselves in glory
during this period” but that “the market’s starting to come our [Goldman’s] way”;
Cassano took those comments as an implicit admission that Goldman’s initial marks
had been aggressive. 

“More love notes”

In mid-August, Forster told Frost in an email that Goldman was pursuing a strategy
of aggressively marking down assets to “cause maximum pain to their competi-
tors.”  PricewaterhouseCoopers, which served as auditor for both AIG and Gold-
man during this period, knew full well that AIG had never before marked these
positions to market. In the third quarter of , with the collateral demands piling
up, PwC prompted AIG to begin developing a model of its own. Prior to the Gold-
man margin call, PwC had concluded that “compensating controls” made up for
AIG’s not having a model. Among those was notice from counterparties that collat-
eral was due.  In other words, one of AIG’s risk management tools was to learn of its
own problems from counterparties who did have the ability to mark their own posi-
tions to market prices and then demand collateral from AIG.