January 29, 2010 / 9:22 PM / 8 years ago

AIG filing casts doubt on "limited exposure" claim

NEW YORK (Reuters) - A controversial regulatory filing detailing the federal bailout of American International Group Inc (AIG.N) could put the spotlight back on the former executive who headed the division most responsible for the insurer’s near collapse in September 2008.

The five-page filing raises questions about some of Joseph Cassano’s prior statements that AIG had “limited exposure” to the subprime housing market, even though AIG had written insurance contracts on some $62 billion of mortgage-related securities held by 16 big U.S. and European banks.

An unredacted version of the document, which AIG formally made public on Friday in a filing with the U.S. Securities and Exchange Commission, reveals that 14 percent of the 178 mortgage-related securities AIG had insured were originated by Wall Street banks after 2005.

The combined face value of the 25 securities AIG agreed to insure after 2005 was about $19 billion, or roughly 30 percent of the total face value of the entire portfolio of troubled mortgage-related securities the Federal Reserve of New York assumed in its bailout of AIG.

And of those 25 securities, 7 were tranches or pieces of two big collateralized debt obligations called Triaxx Prime 2006-1 and Triaxx Prime 2006-2, according to the filing. The CDOs, which went to market in the second-half of 2006, had a combined value of $5.8 billion.

HOUSING EXPOSURE

The Triaxx CDOs, both highly-rated at the beginning, now carry junk bond ratings from Moody’s Investors Service. AIG insured all, but a small sliver of the CDOs against the risk of default, according to the filing and a prospectus for one of the deals.

Federal prosecutors and the SEC are looking into whether Cassano and others at AIG misled investors about the insurer’s exposure to the U.S. housing crisis as part of an ongoing investigation of the events that prompted the federal government to bail out the giant insurer.

The rescue package, which averted what almost certainly would have been a bankruptcy filing by AIG, has been valued at some $180 billion.

Michael Bachner, a criminal defense attorney, said regulators tend to focus on “misrepresentation that might be material to investors or the Street” in this kind of investigation, among other things.

But he cautioned that prosecutors and regulators are wary of bringing cases based on misrepresentations in conference calls and emails after the recent acquittal of two former Bear Stearns hedge fund managers. The Bear prosecution largely turned on an allegation the hedge fund managers lied to investors about the health of their funds, which invested heavily in subprime-mortgage securities.

“The jury in the Bear case said they aren’t going to blame individuals for the debacle on the Street,” Bachner said.

An AIG spokesman declined to comment. Lee Dunst, a partner with the law firm Gibson Dunn and one of Cassano’s attorneys, also declined to comment on the investigations.

GOLDMAN SACHS ROLE

Recently, most of the furor over the AIG bailout has focused on the role of the New York Fed in trying to keep secret the terms of the rescue package that funneled tens of billions of dollars to the banks that purchased insurance protection on their mortgage-related securities from AIG.

The recently unredacted document, which includes details about the specific securities AIG insured, is one of the documents the New York Fed sought to keep secret.

But the release of the so-called Schedule A filing could invite new scrutiny of Cassano’s statements at a December 5, 2007 conference call sponsored by AIG.

In that December 2007 conference call, Cassano, then the president of AIG Financial Products, said the insurer had “limited exposure” to the subprime mortgage market in the U.S. because the company largely had stopped writing insurance policies, or credit default swaps, on residential-mortgage CDOs at the end of 2005. Cassano also said his team decided to stop selling the default protection because they had become concerned about the direction of the U.S. housing market.

“In December of ‘05 we went out to almost all of our counterparts and told them that we were going to stop writing this business,” said Cassano, according to a transcript of the December 2007 call. “Now we had a pipeline in place and so through that pipeline, through that first quarter, we did accumulate some early ‘06s in the period.”

A review of the 25 transactions AIG insured after the end of 2005 reveals a little more than half of the underlying CDOs were brought to market after the first-quarter of 2006.

To be fair, two of the CDOs insured were securities backed by commercial-mortgage backed securities. In those transactions, AIG sold insurance protection to Deutsche Bank AG (DBKGn.DE).

But most of the remaining CDOs AIG insured after 2005 appear to have been deals backed mainly by residential mortgage-backed securities.

The biggest single purchaser of default protection from AIG after 2005 was Goldman Sachs Group Inc (GS.N), which purchased CDS on 10 securities with a face value of $6.54 billion.

A spokesman for Goldman, which got $8.1 billion in the deal to terminate AIG’s insurance contracts on CDOs, declined to comment.

Reporting by Matthew Goldstein; editing by Andre Grenon

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