The man in charge of AIG's doomed Financial Products division in London has defiantly denied taking reckless risks on hefty derivatives contracts that were widely blamed for pushing the huge US insurer to the brink of bankruptcy.
Joseph Cassano, who ran AIG's financial products unit between 2002 and 2008, will tell the US Financial Crisis Inquiry Commission today that his division, widely derided as a hedge fund attached to a stable insurance company, took "prudent" and "appropriate" decisions but was undermined, in part, by an intervention from external auditors.
However, one of his superiors, AIG's former chief risk officer Robert Lewis, will offer a bleaker picture to the commission, admitting that AIG was "wrong about how bad things could get". In written evidence to the commission, Lewis says: "What ended up happening was so extreme that it was beyond anything we had planned for."
Largely working out of their Mayfair office, Cassano and his team wrote vast amounts of credit default swaps insuring financial institutions against default by counterparties to the tune of nearly $300bn. These blew up when the credit crunch began to bite, and many top officials, including the Federal Reserve's chairman, Ben Bernanke, have blamed the division for AIG's near collapse in 2008.
In written evidence to the commission today, Cassano defends a now-notorious remark during a conference call in August 2007 when he said he did not expect any "realised economic losses" on the portfolio. Cassano insists he meant "realised" losses, rather than "unrealised accounting losses", adding: "I meant exactly what I said in August 2007."
Describing it as a "distinct honour" to manage "such a diverse business with so many talented employees", Cassano accepts no mistakes in his oversight of the division. He says every deal was subject to a "rigorous evaluation process".
Referring to one block of deals, named Maiden Lane 3, Cassano blames government intervention for losses: "I think there would have been few, if any, realised losses on the CDS contracts if they had not been unwound in the bailout."
When AIG's credit rating was downgraded in 2008, top banks such as Goldman Sachs, Deutsche Bank and Credit Suisse made $35bn in collateral calls related to their swaps with Cassano's division – an outflow of cash that forced the insurer to seek government aid. Cassano maintains that these calls could have been dealt with through a dispute resolution process that he refers to as a "dealer poll".
"During my tenure, no counterparty declared us in breach or threatened litigation, which shows our strategy was effective," says Cassano, who learned in April that he will face no criminal charges related to AIG's meltdown. "I believe this strategy was appropriate and in the best interests of the company and its shareholders."
He recounts that in February 2008, AIG's auditors disallowed a practice known as "negative basis adjustment" that allowed AIG to limit its reported losses – a decision that sparked market concerns about the financial products division's activities. Cassano defends the practice: "We believed then, and I still believe now, that it was a wholly appropriate adjustment."
Of the auditors' move, he says: "I disagreed with that decision, as did several others at AIG. It was, however, the auditors' final decision and we had to abide by it."
The lack of any mea culpa is likely to go down poorly with the US commission, which is chaired by Californian Democrat Phil Angelides. The commission has grilled a host of top Wall Street figures, including, recently, Bear Stearns's former boss Jimmy Cayne, and it has roasted Goldman Sachs for failing to co-operate adequately with subpoenas for information on its credit crunch dealings.