The AIG Saga: Joe Cassano’s Performance-Based Compensation

October 8th, 2008 by

One of the many fascinating sidebars in the decline and fall of the AIG empire is the saga of Joe Cassano. He was the genius behind AIG’s Financial Products Unit, which insured high risk sub-prime mortgage deals. In other words, he is the man most responsible for AIG’s abrupt demise. Perhaps you are wondering how much money Cassano made in the course of destroying AIG. Beyond that, I am sure you are concerned that Cassano may now be struggling, like the rest of us, to make ends meet. Well, this is at least one problem that you can take off your worry list.
Cassano raked in $280 million over an eight year period beginning in 2000. That’s an average of $35 million a year – pretty good even by professional athlete standards. Keep in mind that his salary and bonus were based on the scale of business generated by his virtually unmonitored unit. Cassano and his colleagues siphoned off 30 percent of every dollar generated in his (non insurance) division. The more they wrote, the more they made. And because AIG was so well collateralized, the company did not have to back up the risks with outside capital. Sweet. Like stealing candy from a blind man, right?
OK, it kind of fell apart once the nature of the risk became public. By February 29 of this year, losses in the Financial Products Unit reached $11 billion. Cassano was fired (appropriately enough on Leap Day). That’s the fate you would expect for a man who almost single-handedly brought down the largest insurance company in the world. Of course, he was allowed to keep his bonuses, which totalled $35 million. A man’s gotta live.
Free Market Run Amok
Congress has been interviewing former AIG executives. These former “masters of the universe” sound, well, both stupid and greedy. Former CEO Marty Sullivan was grilled by lawmakers for urging a compensation committee meeting in March (just weeks after Cassano was fired) to exclude losses from AIG’s Financial Products unit when calculating bonuses.
Accused of helping himself to more compensation, Sullivan said he did it to retain key executives. “I was focusing on them more than me.” What a guy. Sullivan himself was unretained shortly after this board meeting.
Would you be surprised to learn that Cassano is still on retainer as a consultant to AIG? His fee is his usual and customary $1 million a month. Why is he on retainer? Sullivan explained to Congress: “I wanted to retain the 20-year knowledge that Mr. Cassano had.” Gee, Marty, the guy lost $11 billion. How did you come up with a pricetag for that kind of expertise?
The Shank from a Tanked Hank
Hank Greenberg was too ill to testify directly in Congress; heck, if you lost $6 billion over one weekend, you might feel a little under the weather, too. He submitted written testimony denying any knowledge of Cassano’s risky actions. After detailing how he built up A.I.G. since the late 1960s and saying he placed tough controls on its derivatives business, Mr. Greenberg said the volume of A.I.G.’s credit default insurance business “exploded after I left the company in March 2005.”
Hank asserted that the company wrote as many credit default swaps on collateralized debt obligations in the nine months following his departure as it did in the preceding seven years. Maybe so. That might mean that just half the losses associated with this particular unit of AIG – $5.5 billion – occurred under his watch. Interesting enough, that is roughly the amount Hank lost when the stock tanked. Poetic justice, perhaps, of a very crude sort.
The most stinging assessment of AIG’s demise came from Lynn Turner, the former chief accountant at the SEC. When the hapless Robert Willumstad, yet another short-term AIG CEO, blamed the problems on financial discosure laws, Turner replied: “That’s like blaming the thermometer, folks, for a fever.” Touche. And good riddance.