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.
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.
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.