Three months later, in a conference call with investors, AIG Chief Executive Martin Sullivan struck a different note, acknowledging the growing unrest over mortgage defaults.
Cassano joined Sullivan on the call. Asked by a Goldman Sachs analyst about the stability of Financial Products' huge portfolio of credit derivatives, Cassano responded with his trademark calm and confidence.
"It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of those transactions," Cassano said.
Sullivan chimed in: "That's why I am sleeping a little bit easier at night."
Days after Sullivan's comment, a wave of collateral calls would begin, eventually swamping AIG.
The first came from Goldman Sachs & Co., the venerable Wall Street investment bank and one of Financial Products' biggest counterparties. Citing the plummeting value of some subprime assets underlying securities that Financial Products had insured, Goldman demanded $1.5 billion to help cover its exposure.
The 2005 downgrade of AIG to a AA company now came into play. Under the swaps contracts, AIG had to post more collateral than in its AAA days. AIG disputed the amount but agreed to post $450 million.
On top of AIG's other problems, the crumbling real estate market was causing the ratings services to downgrade the securities in CDOs, including the top layers that investors had been led to believe were safe. Those downgrades also made AIG more vulnerable under the swaps contracts.
In October, Goldman came calling again, demanding $3 billion. AIG balked once more but agreed to provide an additional $1.5 billion.
These and other events sent AIG's stock price tumbling. In six weeks, from early October to mid-November, it fell more than 25%, contributing to the perception that AIG was in trouble.
The collateral calls also set off alarms at PricewaterhouseCoopers, AIG's outside auditing firm. The auditors told Sullivan on Nov. 29 that they had found serious oversight problems. More ominously, they said, no one knew whether the value that Financial Products placed on its portfolio of derivatives was accurate. That meant the losses in market value could be much worse.
About the same time, the SEC required companies such as AIG to adopt an accounting standard known as mark-to-market, designed to give investors a better sense of the current values of a company's assets. As the housing market declined and the rate of defaults increased, the swaps looked at greater risk. That allowed counterparties to ask for more collateral.
Greenberg said swaps weren't traded, so the mark-to-market value essentially had no meaning. "Mark-to-market accounting, I would argue, probably caused a great deal of the trauma that the financial industry is in today," he said.
On paper, the value of the credit-default swaps was sliding. In November, the company reported the portfolio had lost $352 million. In the next month's webcast, Cassano reported a higher number, $1.1 billion.
Sullivan, Cassano and others at the company remained bullish on their ability to weather the calls, and in the long run, even recover the collateral they had posted. "But because this business is carefully underwritten," Sullivan said, "we believe the probability that it will sustain an economic loss is close to zero."
Federal investigators are examining the December 2007 webcast to determine whether Cassano, Sullivan and others at the company misled investors about how dire the situation had become.
On Feb. 11, 2008, AIG disclosed that its auditors had found that the company "had a material weakness in its internal control over financial reporting and oversight relating to the fair value valuation of the AIGFP super-senior credit-default swap portfolio."
On Feb. 28, AIG announced that its estimate of paper losses had spiraled to $11.5 billion. The company also acknowledged that its collateral postings had reached $5.3 billion.
The next day, Sullivan announced that Cassano, the Financial Products president, had resigned effective March 31.
The worst was still to come.
Heading off disaster
The urgent phone call that alerted Eric Dinallo to the extent of the financial meltdown came Friday, Sept. 12, as he drove to his family's weekend home in the Hudson Valley, north of Manhattan.
Dinallo, head of New York state's insurance department, got a briefing about AIG, where panicked executives were desperately trying to come up with a huge infusion of cash. They had heard the bond-rating agencies were going to downgrade the company's already sagging credit grade, which would trigger more collateral calls. "And if downgraded -- even like one notch -- they didn't have sufficient liquidity" to meet the calls, Dinallo said recently.
