Page 234 - TrumpsEconEra_Flat

Chapter 12: The Collapse!

Now Joe Cassano, who was head of the Financial
Products Division of American International Group
(AIG) from 2001 to 2008, enters the picture. AIG is an
insurance and financial services conglomerate that was
once the largest insurer in the world. The Financial
Products Division and Joe Cassano made billions of
dollars for AIG.

Because the CDS market was not a regulated
market, Cassano could sell as many credit default swaps
as he wanted without considering how the company
would pay the claims in the event of massive defaults.
However, unbeknownst to buyers, the finances of the
Financial Products Division and its parent company,
AIG, could not be co-mingled.
Investors had a misconception of the relationship
between the parent company, AIG, and its subsidiary,
the Financial Products Division. The Financial Products
Division was self-financed; the finances of the parent
company were not available to the Financial Products
Division. Investors assumed that they were the same
entities. Consequently, Cassano was able to sell credit
default swaps without sufficient collateral to back them.

Banks argued that when they purchased a credit
default swap from AIG on a collateralized debt
obligation, the CDO should have a triple-A rating
because AIG had a triple-A rating. Therefore, even
though there was a likelihood of default, the risk level
was low because AIG was backing the CDO. In other
words, investors in the CDO were safe because AIG
would pay if people stopped making their payments, or
so they thought.
When the government accepted this argument,
Cassano was able to sell billions of dollars’ worth of

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