When students, friends and family have asked me what I think “happened” to cause our current financial crisis, my response has been an embarrassed shrug. Embarrassed because (as a corporate law teacher) I’m expected to have clear answers. A shrug because the crisis doesn’t have a obvious anecdote or story that explains it, and lacks a clearly defined evil doer who might be plausibly blamed. The best candidate – who I’ve thrown out there to quiet persistent friends – is Joe Cassano, formerly head of AIG’s Financial Product’s Division, and the so-called “patient zero” in the crisis.
Now comes the myth-killer, Michael Lewis, with a must-read article in Vanity Fair. He starts by reminding us that “nearly a year after perhaps the most sensational corporate collapse in the history of finance, a collapse that, without the intervention of the government, would have led to the bankruptcy of every major American financial institution, plus a lot of foreign ones, too, A.I.G.’s losses and the trades that led to them still haven’t been properly explained.” And he then takes a crack at that problem, suggesting that AIG’s traders (i) made a bad (negligent?) bet on the likely course of the housing market, (ii) didn’t unwind their positions fast enough; (iii) fell victim to a liquidity crunch caused by covenants tied to their AAA rating; (iv) were made into a convenient villain by the media; and (v) like everyone else, were outsmarted by Goldman.
And how about Cassano? Here’s the key – and dispiriting – paragraph:
[T]he A.I.G. F.P. traders left behind, much as they despise him personally, refuse to believe Cassano was engaged in any kind of fraud. The problem is that they knew him. And they believe that his crime was not mere legal fraudulence but the deeper kind: a need for subservience in others and an unwillingness to acknowledge his own weaknesses. “When he said that he could not envision losses, that we wouldn’t lose a dime, I am positive that he believed that,” says one of the traders. The problem with Joe Cassano wasn’t that he knew he was wrong. It was that it was too important to him that he be right. More than anything, Joe Cassano wanted to be one of Wall Street’s big shots. He wound up being its perfect customer.
“A need for subservience in others and an unwillingness to acknowledge his own weaknesses.” The flip side of authority and confidence, and the hallmarks of an executive who has passed many gates in the corporate advancement tournament. The law lacks purchase on this kind of evil – if that is what it is.