Thursday, June 25, 2009

AIG's 10(b) 5 Fraud, And Goldman's CDO Collateral Calls

Recently uncovered critical documents disclosing details about AIG's CDO portfolio and collateral calls, indicate that during a December 5th conference call with Investors, Joe Cassano, famous for singlehandedly destroying capitalism and forcing most financial companies to be subsidized by US taxpayers in perpetuity, as well as then CEO Martin Sullivan, effectively commited 10(b) 5 fraud by misrepresenting material company conditions.

The collateral disclosure, courtesy of CBS News, which comes from an email sent by Joseph Cassano to Bill Dooley on November 27, a week before the fateful "all is good" conference call, identifies $66.7 Billion in CDO Negative basis trades with 9 counterparties, most of which demand collateral to cover mark discrepancies amounting to a total of just over $4 billion. Not surprisingly, Goldman dominates the list in terms of both CDO exposure and collateral demands, with $23 billion of negative basis CDOs which according to Goldman resulting a collateral post of $3 billion.

hat tip Thomas

The full email support indicating Cassano's and Dooley's knowledge of just how underwater the firm was in the last week of November, is presented below (also available here and here).

What supports a case of 10(b) 5 violation are some of the exchanges in the ensuing December 5th, 2007 conference call (posted below in its entirety).

Probably one of the most notable utterances is that of Joseph Cassano himself, who somehow is still not facing major criminal securities fraud charges against him:
And we have from time to time gotten collateral calls from people and then we say to them, well we don't agree with your numbers. And they go, oh, and they go away. And you say well what was that? It's like a drive by in a way. And the other times they sat down with us, and none of this is hostile or anything, it's all very cordial, and we sit down and we try and find the middle ground and compare where we are. And that goes to some of this price discovery I've been talking about and how we go through that price discovery process.
Probably an even bigger smoking gun is this phrase by CEO Martin Sullivan, who, obviously had received all his substantiating data from none other than Joe Cassano.
[B]ecause this business is carefully underwritten and structured with very high attachment points to the multiples of expected losses, we believe the probability that it will sustain an economic loss is close to zero.

Did Sullivan and Joseph not have a regulatory obligation to disclose just how dire the economic loss potential on their "business" was simply as a result of the major CDO collateral calls (which they blew off as friendly banter)? Only the SEC knows the answer (and will likely take it to its grave).

Lastly, and maybe even more relevantly, is the question of the major discrepancies in disputed CDO marks between most counterparties and those of Goldman Sachs and SocGen. And while the SocGen collateral post demand has not been made clear in the email, that of Goldman, with their aggressively priced CDOs, results in a collateral call of nearly 13% ($3 billion) of GS's total negative basis exposure of $23 billion: more than double that of next closest disclosed counterparty Calyon which was at a total 7.6% collateral demand. What brought about this aggressive book mark down by GS? Also, did SocGen's Jerome Kerviel futures implosion in January 2008 have anything to do with the pain the firm was obviously experiencing as a result of book losses on its AIG CDOs? Did these actions have anything to do with the fact that the more substantial the write down, the greater the subsequent payoff to the firm (once the system became unravelled and taxpayers ended up paying Goldman and others for their collateral demands). Of course, the real question here, as everywhere else, is how much did Goldman do to precipitate the collapse: both of Bear, of Lehman, and of AIG.

This is an answer that only Cassano potentially would be able to shed some light on - is it not about time to have Joseph respond to a myriad of pent up questions about not only his potentially illegal conference call disclosures but also his conversations with major AIG counterparties such as Goldman Sachs? Sphere: Related Content
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