Interesting story in today's New York Times that paints another aspect of how the credit crisis occured and who may be responsible. Most of this info is taken from the NY Times.
UPDATE BELOW
Everyone talks about the rich guys on Wall St. Well how about the rich guys in London.
Although America’s housing collapse is often said to have caused the crisis, the system was vulnerable because of financial contracts known as credit derivatives, which insure debt holders against default. They are done privately and beyond the scope of regulators (thanks John McCain) In the case of A.I.G. it exploded from a little 377-person unit in London known as A.I.G. Financial Products. This company was run by Joseph J. Cassano, a onetime executive with Drexel Burnham Lambert — the investment bank made famous in the 1980s by the junk bond king Michael R. Milken, who pleaded guilty to six felony charges.
Ten years ago, derivatives specialists from J. P. Morgan proposed that A.I.G. should write insurance on packages of debt known as "collateralized debt obligations." (C.D.O.’s. were pools of loans sliced into portions and sold to investors based on the credit quality of the underlying securities.) Essentially AIG was agreeing to provide insurance to financial institutions holding C.D.O.’s and other debts in case they defaulted — in much the same way some homeowners are required to buy mortgage insurance to protect lenders in case the borrowers cannot pay back their loans.
AIG's London unit’s revenue rose to $3.26 billion in 2005 from $737 million in 1999. By last year its portfolio of credit default swaps stood at roughly $500 billion. Mr. Cassano and his colleagues received fortunes during these years. Since 2001, compensation at the small unit ranged from $423 million to $616 million each year, according to corporate filings. That meant that on average each person in the unit made more than $1 million a year.
Unknown to most people, one firm involved in all of this business was Goldman Sachs. The same Goldman Sachs Treasury Secy Paulson worked at. It was a customer of A.I.G.’s credit insurance and also acted as an intermediary for trades between A.I.G. and its other clients.
Two weeks ago there had been a huge meeting at the Federal Reserve Bank of New York. The group, led by Secretary Paulson were discussing the possible collapse of Lehman Brothers (which the government let collapse), when a more dangerous threat emerged: A.I.G. needed billions of dollars to right itself and had suddenly begged for help.
The only Wall Street chief executive in the meeting was Lloyd C. Blankfein of Goldman Sachs. A collapse of A.I.G. threatened to leave a hole of as much as $20 billion in Goldman Sachs. Goldman Sachs eventually was allowed (as was Morgan Stanley) to change its regulatory status from investment bank to a bank holding company.
As the credit crisis deepened the AIG London unit began to choke on losses — though they were only on paper.
In the quarter that ended Sept. 30, 2007, A.I.G. recognized a $352 million unrealized loss on the credit default swap portfolio.
Because the London unit was set up as a bank and not an insurer, and because of the way its derivatives contracts were written, it had to put up collateral to its trading partners when the value of the underlying securities they had insured declined. Any obligations that the unit could not pay had to be met by its corporate parent. A.I.G.
So began A.I.G.’s downward spiral as it, its clients, its trading partners and other companies were swept into the drowning set in motion by the housing downturn.
"It is beyond shocking that this small operation could blow up the holding company," said Robert Arvanitis, chief executive of Risk Finance Advisors in Westport, Conn. "They found a quick way to make a fast buck on derivatives based on A.I.G.’s solid credit rating and strong balance sheet. But it all got out of control."
Yet throughout much of 2007, the unit maintained that its risk assessments were reliable and its portfolios conservative. But at the end of A.I.G.’s most recent quarter, the London unit’s losses reached $25 billion. As those losses mounted, and A.I.G.’s stock price plunged, it became harder for the insurer to survive — imperiling other companies that did business with it and leading it to stun the Federal Reserve gathering two weeks ago with a plea for help.
And we all now what happened after that. Lehman Brothers collapsed, A.I.G. survived (so Goldman Sachs survived) and now Secy Paulson and W claim they need more $$$$.
UPDATE: Interesting facts:
Cassano "stepped down" from his position at the AIG London unit March 31st but will work as a consultant to AIG through the end of the year. How many of us are asked to quit and then allowed to be paid as a consultant?
Then there's also Jeffrey Maher, former co-head of fixed income at Bear Stearns, who turned down an offer of $27million to join JP Morgan and now works at UBS (remember that's Phil Gramm's favorite bank). How many of us who are part of a financially destroyed company are offered $27 million to join another company and we can refuse it?
And finally, there's the CEO of failed Washington Mutual on the job only a few weeks before it failed. Alan Fishman is now entitled to more than $13 million in severance and bonus pay. He had an agreement that provides around $6 million in cash severance and retention of his signing bonus of $7.5 million if he were to leave his job.
So no matter what happens, the rich still get richer.