The Man Who Crashed the World

July 9, 2009 10:05 AM

Michael Lewis going after Joseph CassanoTrying to find out what happened to the AIG guys who crashed the system.

liddy: I’m just not going to do that, sir, because that will provide—that’ll be the—that could be a list of people that we could do—individuals who want to do damage to them could do that. It’s just not …

grayson: Not a single one. You’re talking about a group, a small group of people who caused your company to lose $100 billion, as you sit here today, you can’t give me one single name.

liddy: The single name I would give you is Joseph Cassano, who ran …


grayson: Well, listen, these same people could now be working right now today at Citibank. Is it more important to protect them, the ones who caused the $100 billion loss, or protect us? Which is more important to you right now?

posted by manny_calavera (35 comments total)

Anyone who has ever worked in a corporation knows that there is no way a single individual, overseeing 400 people, brought anything to its knees. I call b.s.
posted by spicynuts at 10:21 AM on July 9, 2009

Did I just see someone else point a finger at Goldman?
posted by Slothrup at 10:21 AM on July 9, 2009

Anyone who has ever worked in a corporation knows that there is no way a single individual, overseeing 400 people, brought anything to its knees. I call b.s.

Maybe, but a single person can lose $7 billion dollars, which is one hell of a whack at a knee cap.
posted by shen1138 at 10:41 AM on July 9, 2009

Did I just see someone else point a finger at Goldman?

*points*
posted by DreamerFi at 10:42 AM on July 9, 2009

spicynuts: "Anyone who has ever worked in a corporation knows that there is no way a single individual, overseeing 400 people, brought anything to its knees. I call b.s."

yeah. one dude? am I so ignorant of finance (probably yes) that I can't believe that one dude could accomplish all that? isn't the problem more systemic? hope me, financial experts!
posted by shmegegge at 10:45 AM on July 9, 2009

Maybe, but a single person can lose $7 billion dollars, which is one hell of a whack at a knee cap.

Did he check in the couch?
posted by spicynuts at 10:49 AM on July 9, 2009

Anyone who has ever worked in a corporation knows that there is no way a single individual, overseeing 400 people, brought anything to its knees. I call b.s.

I could see that. you know how people always get promoted one level beyond their competence? how they get promoted until they prove incompetent at something but then are left there long enough to do harm? I could see that happening here.
posted by krautland at 10:53 AM on July 9, 2009

yeah. one dude? am I so ignorant of finance (probably yes) that I can't believe that one dude could accomplish all that?

I would say the one dude was more of an enabler, being the CEO of business unit that did all the damage. He likely wasn't making trades himself, but certainly didn't do anything about the risky dealings his employees were undertaking as the fees coming in were very nice for the bottom line.

There's also the angle that they were exploiting AIG's AAA rating to reduce the amount of cash needed on hand to cover potential losses.
posted by jbiz at 10:58 AM on July 9, 2009

Well I was thinking more along the lines of the theory that no one individual can track his directives accurately down to 400 people to see that they are being implemented properly. So, whether you look at it from a malicious or malign perspective, by the time it gets through 400 people the shit is watered down, misinterpreted, twisted, etc. Meaning, 400 people share the blame.
posted by spicynuts at 10:59 AM on July 9, 2009

If people in the US had the Revolutionary War mentality where they would overthrow systems for financial misdeeds, it wouldn't matter if AIG employee names were public domain. The marauders would taking every single person involved with investment banking hostage, from the dirtiest slimeball to the most ignorant and sheltered intern.

Worst these guys will get is piles of hate mail, a few death threats, maybe some car vandalism. Protecting their names is just encouraging their fiscal malfeasance.
posted by Saydur at 11:01 AM on July 9, 2009

The thing that has bothered most about this whole scandal, aside from the obvious greedy evil, is the fact there is now this pejorative connotation associated with "quant". Like knowing math is somehow bad.

What do they call non-quants in the financial industry? Oh right...Boss.
posted by srboisvert at 11:02 AM on July 9, 2009 [5 favorites]

I have worked in Corporate America for my entire career, including at MCI. What I observed was that when a company is headed by a visionary, intelligent individual, that they sky is the limit as far as honest growth and innovation is concerned. For example, Bill McGowan at MCI. (May he rest in peace and angels attend him.)

I have also observed that it is possible for a guy who is all hat an no cattle, who is greedy, delusional and stupid, to run the exact same company straight into the ground, forming a financial China Syndrome so profound that it destroys the future of investors, employees and the US economy. For example, that criminal, Bernie Ebbers (may he rot in jail.)

Same company, different CEO's. The CEO creates the coroporate culture. If the culture is open and honest, then wonderful things are possible. If the culture is closed, dishonest and designed to maximize bonuses at the expense of everything else, then you get WorldCom, Enron and AIG.

It really is that simple.
posted by Ruthless Bunny at 11:03 AM on July 9, 2009 [13 favorites]

Telling excerpt from the article(emphasis mine):

For a brief moment you had a glimpse of how harshly financial people might be treated if Wall Street ever lost its political influence.
posted by Benny Andajetz at 11:08 AM on July 9, 2009 [1 favorite]

I would have called that guy who lost the $7 billion Evel Kerviel.
posted by Astro Zombie at 11:13 AM on July 9, 2009

I guess that's a good point, too, Ruthless Bunny. Perhaps I've been stuck in poorly managed corporations my whole life.
posted by spicynuts at 11:16 AM on July 9, 2009

If the system can be crashed it SHOULD be crashed. We need a system that is loosely coupled and allows segments to fail.
posted by blue_beetle at 11:27 AM on July 9, 2009 [2 favorites]

Its an interesting article but I'm also not comfortable with Lewis trying to pin this all on Cassano; after all, we know the fundamental problem was Credit Default Swaps weren't regulated properly, and if not AIG then it would have been some other entity such as another insurance company or hedge fund or even a group of firms that collectively might have caused more damage.

So if there is a bright side to all of this (and there isn't if you're holding AIG) then having all this exposure in one company made the problem easier to detect and, ultimately, resolve. Imagine the mess if AIG's book were distributed across six or more companies, all teetering then blowing up at different times. Nobody would know when the next shoe was going to drop. At least now we know where the disaster is, and hopefully that will be that.

Besides a clear lack of regulation of Credit Default Swaps (at the instrument level; they were, of course, visible at the portfolio level when calculating economic / regulatory capital but counterparty visibility wasn't available to regulators), there also seemed to be a complete breakdown in corporate governance at AIG; this quote

They went from being 2 percent subprime mortgages to being 95 percent subprime mortgages. And yet no one at A.I.G. said anything about it—not C.E.O. Martin Sullivan, not Joe Cassano, not Al Frost, the guy in A.I.G. F.P.’s Connecticut office in charge of selling his firm’s credit-default-swap services to the big Wall Street firms.

is particularly telling. Apparently nobody from the board down questioned why their book had ballooned so much. This has always puzzled me when looking back at AIG; I've worked for lots of investment banks and we've always had capital / exposure lines setup by primarily by the Asset and Liability Committee (ALCO) and secondarily by Risk Management.

The Board, The Risk Management Committee and ALCO all decide where the firm should be deploying its (limited) capital, where we should be increasing our lines and where we should be withdrawing. Sometimes firms will increase hurdle rates for some lines of business to discourage activity here while simultaneously offering other business areas below cost of capital funding rates as they'd like to either grow their exposure in that area or simply just diversify.

Complete mystery to me where the board was in all of this and why they aren't being held personally responsible. Actually, their day may be coming - Bloomberg TV today had interview with some quants from Citii who were predicting AIG equity would just evaporate, go straight to zero , so I guess the board will get their comeuppance in the form of the inevitable lawsuits.

Still, seems like Lewis is letting lots of other folks skate on this one - sorta disappointing really, as from where I'm sitting there is plenty of guilt to go around.


"...bankers at J. P. Morgan, having invented credit-default swaps, "

Sorry, they didn't invent the products so much as provide a vehicle in the form of their institution's balance sheet for validating the trading of Credit Default Swaps because we could now calculate their fair value precisely.

Like many derivatives, Credit Default Swaps had been around in parametric form for years, but nobody did much with them as fair value was all but impossible to determine. Nobody is gonna pony up serious cash for a Credit Default Swap - on either side of the trade, mind you, if you can't calculate fair value.

This problem (like valuing stock options before this and futures contract before that and ...) had stumped lots of Quants until David Li, an actuary by profession noted that the problem of calculating the joint probability of default, and thus fair value of a Credit Default Swap was isomorphic to the well known joint mortality problem in insurance - the probability of one spouse passing away increases when the other dies.

Same thing for a CDS, and Li's Gaussian Copula helped us to easily calculate the fair value of these derivatives.

Li's original paper, published online in 1999 can be downloaded here. Journal of Fixed Income published it in late 2000, but by then many firms, were already using the model or its variants.

We were trading CDSs pretty actively at Deutsche Bank at that time, and the entire period reminded me a lot of when Value at Risk (VAR) was first mainstreaming; we all were doing similar things for the same ends, but lots of the nomenclature was different - we had Capital at Risk (CAR), J.P. Morgan and Daily Earnings at Risk (DEAR), other firms had other variants (e.g., Money at Risk, MAR) but the point is Morgan didn't really invent the instrument as much as become one of the players driving that part of finance. Go to a academic conference on credit and most of the guys presenting were from Morgan, same thing for publishing.

Its tough bordering on almost impossible to keep these things secret as folks change jobs often and word gets out quick when someones got a new product or valuation edge on existing products.


Interesting article, sort of a hatchet job it seems, although this line "He’d humiliate them and then try to make it up to them by giving them huge amounts of money.” brought to mind my first boss at Deutsche Bank, who would scream until he got his way. Not very pleasant to sit through even though you knew he'd invariably feel guilty and (try to) make things right at bonus time.

Never really worked with me as I'm a saver not a spender and as soon as I could I got another job and far away from my maniac. As far as I know the only thing he blew up was his career as nobody wanted to work with him, solely due to his temper. Taught me a lot about finance, but still wasn't worth the regular drama episodes.
posted by Mutant at 11:37 AM on July 9, 2009 [16 favorites]

Hey all,

My understanding is that Nick Leeson brought down the the oldest merchant bank in London, Barings Bank, essentially by himself (and before he was 30, to boot). Didn't Joseph Jett also basically cause the collapse of an investment bank by himself, too?

FWIW, business news is new to me (and hard). I look forward to people correcting me if I said something incorrect.
posted by Hypnotic Chick at 11:39 AM on July 9, 2009

there is no way a single individual, overseeing 400 people, brought anything to its knees.

But there is every likelyhood that said individual is earning a six or seven figure sum precisely on the grounds that they are shouldering greater risk and greater responsibility than the peons below them.

And to fulfill that contract, if said person fails in their duty to prevent the 400 peons from destroying the world (or losing billions, or whatever), said person, rightfully, should be nailed to the wall, harder than what is suffered by the peons below.

Otherwise, you won't get good leadership at the top, you'll get incompetent freeloaders - tails they win, heads you lose. And you'll lose billions.
posted by -harlequin- at 11:39 AM on July 9, 2009

Iowa senator Charles Grassley said that A.I.G.’s leaders should follow the Japanese example and “either do one of two things, resign or go commit suicide.”

Wow, big words, senator. Problem is these are Americans you're talking about. Quitting and suicide are not our style. While there can be some flair in these endings, it's more our style to ride things into the ground, leap off at the last second, and disappear in the cloud of dust and smoke, only to re-appear riding another giant (presumably also headed for magnificent collapse).
posted by filthy light thief at 11:42 AM on July 9, 2009 [2 favorites]

-harlequin- you're right about everything except one detail: the individual at the top isn't earning six figures. With bonuses and stock options it's likely he was earning eight figures. So yes, nail him to the wall. He's not the only one responsible, but he sure as hell was being rewarded.
posted by nushustu at 11:49 AM on July 9, 2009

Hypnotic Chick, read the writings by Mutant and Malor in regards to this sort of thing. Between the two of them, they take stuff that is insanely difficult for those of us not in finance to understand and make it comprehensible. One or both of them needs to write an article or book explaining a lot of this stuff.
posted by mephron at 11:58 AM on July 9, 2009

Interesting article, thank you. I don't find the personal story of Cassano very compelling, but all the details of how AIG FP got themselves deeper and deeper into the subprime mortgage market were great. Particularly struck by the assertion that the growing problem was clear to everyone if they just looked. They didn't bother to look because they didn't want to see.
posted by Nelson at 12:02 PM on July 9, 2009

Getting Malor and Mutant to co-operate on writing a book would be ... interesting.
posted by pharm at 12:05 PM on July 9, 2009

read the writings by Mutant and Malor in regards to this sort of thing. Between the two of them, they take stuff that is insanely difficult for those of us not in finance to understand and make it comprehensible.

But keep in mind that they are archenemies
posted by Perplexity at 12:13 PM on July 9, 2009 [1 favorite]

Perplexity: which is why both of them need to be paid attention to, and then brainpower applied.

Which, to bring this back on topic, is apparently part of the problem with Cassano: he listened to as few people as possible and applied little brainpower.
posted by mephron at 12:21 PM on July 9, 2009

Based on my reading of Malor's posts, he seems a bit...uh...to the right of me. Mutant and his wife, on the other hand have MeMailed me (thanks Mutant!...and Mrs. Mutant!) about moving to more socially-responsible countries. All of which is to say, I'd say I am familiar with both of them, but I tend to preference the analysis of one over the other.

I still find it hard, sometimes to grasp the writing, even by conscientious writers. I think that the business journalism community is grappling with this issue, though. In fact, Felix Salmon, for one, seems to be honestly taking to heart the question of whether or not business/financial reporting should be written towards a wider audience.

Having said that, I was tentatively responding to spicynuts assertion that one person can't take down a large organization (or, alternatively, hoping to get a cool link about those old scandals if I was wrong).
posted by Hypnotic Chick at 12:28 PM on July 9, 2009

So it was all Elliot Spitzer's fault for forcing out the only guy who might have minded the store?
posted by caddis at 12:30 PM on July 9, 2009

Anyone who has ever worked in a corporation knows that there is no way a single individual, overseeing 400 people, brought anything to its knees.

I worked at Drexel Burham Lambert, apparently the predecessor to all this, and knew some of the participants in the article - in particular, Tom Savage once snatched a newspaper from my hand when I was on the trading desk, "No one reads a newspaper at my desk."

It's absolutely possible for one individual to bring an entire trading firm down. The raw numbers are staggering, very few individuals know the what they are for any given firm. Look at the story of any financial firm's collapse and you'll see one hypercompetitive individual with a desire to keep winning larger and larger and a disregard for risk management.
posted by lupus_yonderboy at 12:50 PM on July 9, 2009

Even months later I find the resignation letter from Jake DeSantis infuriating... this guy worked at a company that crashed. That unfortunately means you don't get the million dollar bonus you were hoping for- especially when it's being paid by tax payer money.

DeSantis won't miss a meal- the same can't be said for everyone who lost their job in this economy.
posted by Glarg at 2:41 PM on July 9, 2009

"Its an interesting article but I'm also not comfortable with Lewis trying to pin this all on Cassano; after all, we know the fundamental problem was Credit Default Swaps weren't regulated properly, and if not AIG then it would have been some other entity such as another insurance company or hedge fund or even a group of firms that collectively might have caused more damage"

He dicks over Cassano pretty hard but he acknowledges exactly this point:

"The people inside the big Wall Street firms who ran the machine had made so much money for their firms that they were now, in effect, in charge. And they had no interest in anything but keeping it running. A.I.G. F.P. wasn’t an aberration; what happened at A.I.G. F.P. could have happened anywhere on Wall Street … and did....The people still left inside A.I.G. F.P. like to list just how many things had to go wrong for their business to implode. Any one of a number of things might have sufficed to avert their catastrophe: our political leaders might have decided against the Wall Street argument not to regulate credit-default swaps; the ratings agencies might have resisted the Wall Street argument to rate subprime bonds AAA; Wall Street banks, in 2006 and 2007, might have declined to replace A.I.G. F.P. in the role of subprime risktaker of last resort; and on and on. Their list is mostly a catalogue of large, impersonal forces. But impersonal forces require people to conspire with them."

Meh. The more interesting point that he makes here is that Cassano was not knowingly fucking over his company; that's something that often gets lost, in the general public's reaction, they figure, "These smart guys knew they were selling bunk and knew it would blow up and must have planned on leaning on us to bail 'em out." But as Lewis points out, Cassano and a bunch of others kept the vast majority of own cash at the company. Cassano in particualr was wrapped up in the company --- the last thing he wanted was to blow it up.

That's more troubling. At the risk of being folksy, I've always found in life that you've got to budget for stupid....in the aftermath of Very Bad Things, the survivors immediately suspect malice, but much more often stupidity and ignorance are to blame. And that's a problem, because there has not as yet been a cure for stupid, that's why you've got to set up rules to prevent it from happenning. It's Taleb's argument, basically, but the mild reforms they seem to be aiming to put in place don't seem to address that concern (basically, if something makes somebody lots of money 99.9% of the time, that person is inclined to ignore or downplay the .1% of the time when it destroys the universe. But you only get the one universe....) In other news, Morgan is back to the grindstone....
posted by Diablevert at 4:49 PM on July 9, 2009

"whether or not business/financial reporting should be written towards a wider audience."

When the economy is in the midst of being blowed up, business news is of interest to everyone. When things are chugging along allright, mostly, it ain't. I paint with a broad brush; I think there are interesting things you can write about economics and money most of the time; Planet Money seems to be doing well with this approach. But I don't know if there are interesting things you can write for a general audience about, say, the process of creating financial instruments, on a day in, day out basis, without the prospect of imminent doom to hold the audience's attention. And that's what you'd have to do to catch stuff like this before everything went terrible.

Further, before everything went terrible you had lots of supposedly smart, informed people saying everything was sunshine and roses precisely because we have entered into a entirely new era, what with the invention of rain repellent and MiracleGrow, and so you may as well shred those umbrellas...while there may have been some significant voices out there saying, "Hell naw, batten the hatches and buy stock in Galoshes Co!" when you looked out the window at the time you saw blue skies....and so you get lots of articles that go "Some experts predict gloom. Other experts say they're full of shit. They're arguing about a very complex, technical matter that you have to read quite a bit about to have even the hope of understanding. For now, things seem to be allright." Next on Flip that House....
posted by Diablevert at 5:22 PM on July 9, 2009 [1 favorite]

>Anyone who has ever worked in a corporation knows that there is no way a single individual, overseeing 400 people, brought anything to its knees. I call b.s.


Yeah, that obviously never happened. A single individual can perfectly oversee four hundred people. Good thing, that.

BTW, anybody got holdings in commercial real estate? Might want to look into that.
posted by ChurchHatesTucker at 5:49 PM on July 9, 2009

Anyone who has ever worked in a corporation knows that there is no way a single individual, overseeing 400 people, brought anything to its knees. I call b.s.

I am sad to see the Nuremburg defense has been extended to "I was only giving orders"
posted by rakish_yet_centered at 9:32 AM on July 10, 2009

When I say RA, you say ROC. RA-ROC! RA-ROC!
posted by pravit at 6:22 PM on July 11, 2009