Feds say evidence insufficient to charge AIG executives

McClatchy NewspapersMay 22, 2010 

WASHINGTON — Federal prosecutors have found insufficient evidence to bring criminal charges against three current and former executives of a unit of the American International Group whose huge bets on risky mortgage securities have been blamed for worsening the financial crisis.

Joseph Cassano, the former head of AIG's London-based Financial Products unit, had been a central focus of a lengthy FBI investigation into possible securities fraud.

Author Michael Lewis vilified Cassano in an article in Vanity Fair last year titled "The Man Who Crashed the World," describing how AIG Financial Products' massive insurance contracts heightened banks' ability to leverage their investments in subprime mortgage securities.

However, federal prosecutors found insufficient evidence of criminal intent in the firm's accounting practices to charge him, AIG Financial Products executive vice president Andrew Forster or Tom Athan, a managing director.

A person familiar with the investigation, who was not authorized to comment publicly and spoke on condition of anonymity, said that AIG and attorneys for Cassano, Forster and Athan were informed of the decision to close the investigation without charges late Friday.

"We are very happy for our client," Cassano's Washington attorneys, F. Joseph Warin and Jim Walden, said in a statement. "Although a two-year, intense investigation is tough for anyone, the results are wholly appropriate in light of our client's factual innocence."

Under Cassano, AIG Financial Products wrote about $527 billion in insurance-like contracts known as credit-default swaps, including about $80 billion in swap protection on securities backed by home loans to marginally qualified borrowers. Many of the mortgage securities had top investment-grade ratings at the time, and investigators are now examining whether investment banks deceived credit rating agencies about the quality of the securities.

When the housing market turned south beginning in 2007 and default rates soared on mortgages underlying the securities, Goldman Sachs and other major U.S. and European investment houses demanded that AIG Financial Products post billions of dollars to cover the declines in value.

By September 2008, the growing demands for collateral threatened to push AIG into bankruptcy, leading to a $182 billion government rescue to prevent a systemic financial chaos. Much of the bailout money flowed to the banks to satisfy AIG's obligations under the swaps.

Critics have complained that Cassano signed off on protection contracts that even AIG, the world's largest insurer, couldn't cover in the event of an economic cataclysm. The main focus of the investigation, however, was on whether the AIG Financial Products executives misled investors by understating sharp declines in the value of the underlying securities, most of which were packaged via the Cayman Islands, the person familiar with the investigation said.

Taxpayers wound up in possession of most of the securities when the Federal Reserve Bank of New York elected to settle the swap contracts, paying full face value of $62 billion. The case was weakened because none of the securities has defaulted since taxpayers acquired them in late 2008, and defense attorneys argued that some of them had in fact gained in value.

Cassano helped launch AIG Financial Products in 1987 and led the firm through its boom years from 2001 until March 2008, when the U.S. Office of Thrift Supervision sent AIG a letter challenging its risky financial decisions. The next day, AIG's chief executive, Martin Sullivan, removed Cassano from his job but kept him on as a consultant for $1 million per month. Cassano left the firm last year.

CBS News first reported last month that prosecutors had decided to close the inquiry without charges, but the final decision apparently was not made by the Justice Department's Criminal Division and the U.S. Attorney's Office in Brooklyn until recent days.

Warin and Walden, partners in the firm of Gibson, Dunn & Crutcher, said in their statement that "the large group of federal agents and prosecutors was diligent and professional throughout the investigation, and our client is grateful that they did their jobs by following the facts to the end."

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