Did Elliott Spitzer create the financial crisis?

Posted by Marc Hodak on August 8, 2009 under Scandal, Unintended consequences | Read the First Comment

Probably not.  No one knows which of the many elements contributing to the meltdown of last September were necessary or sufficient to be labeled a cause, but Larry Ribstein connects the dots in an intriguing way.

Treasury Secretary Paulson was obviously willing to let Lehman go down.  But he saved AIG in order to “mitigate broader disruptions” in the economy.  AIG was simply too big or too connected to fail, and their book of credit default swaps was the focus of Paulson’s concern.

So, why did their CDS exposure get so completely out of hand?  Larry refers to a piece Michael Lewis had written about AIG:

Lewis blames everything on Joe Cassano, head of AIG Financial Products, whom Lewis dubs “the man who crashed the world.” According to Lewis, Cassano was not a financial wizard – just a back office guy with “a real talent for bullying people who doubted him.” He became ascendant when the man who put him in power, and who could control him (Hank Greenberg), was forced to resign by Eliot Spitzer (so, hey, let’s blame all this on Spitzer).

And so he does, first by referring to a WSJ item:

More than four years later, the federal government has decided that it cannot even make a civil case for fraud against Mr. Greenberg, never mind a criminal one. The SEC has essentially settled with Mr. Greenberg on the charge that he was the CEO at the time that “material misstatements” in earnings occurred.

Yet even if one accepts the SEC’s view of events, it may be a stretch to call them material, as they add up to less than 1% of AIG’s net income during the period at issue. The accounting items in the SEC charges, which Mr. Greenberg neither admits nor denies, represent less than 10% of the restatement AIG filed to justify the Greenberg firing demanded by Mr. Spitzer. The impact on retained earnings was roughly $250 million, when AIG’s total retained earnings at the time were approaching $70 billion.

So Larry concludes:

The bottom line:  if Joe Cassano was the “man who crashed the world,” Spitzer was the guy who gave him the keys to the car.  And all this for his supposed non-fraudulent responsibility for a barely material (if that) accounting mistake, plus, of course, the boost to Spitzer’s then career.