Figure in A.I.G. Crisis Testifies

Joseph J. Cassano, the man who oversaw the unit that brought the American International Group to its knees, testified Wednesday that he could have saved taxpayers billions of dollars if he had stayed at the company to negotiate with banks that were demanding more collateral as the insurer hit trouble.

Speaking on the issue in public for the first time, Mr. Cassano appeared before the Financial Crisis Inquiry Commission, which is studying the causes of the financial crisis, in Washington.

A.I.G.’s derivative contracts are the subject of the commission’s latest hearing, scheduled to last for two days. The commission is interviewing experts, regulators and A.I.G. executives about the contracts, most of which were dismantled by the New York Federal Reserve during the bailout of 2008. The Fed retained the risk of the mortgage securities that A.I.G. insured.

Goldman was one of the largest banks on the other side of A.I.G.’s mortgage deals, and executives from that bank, including Gary D. Cohn, the president of Goldman, are also scheduled to testify. A little-known financial executive before A.I.G. hit trouble, Mr. Cassano spoke slowly and declined to read his testimony, which had already been posted on A.I.G.’s site. In his opening remarks, he simply noted that his perspective “diverges in important ways from the popular wisdom.”

To the commission’s chairman, he said, “you said this commission’s work will be tethered to the hard facts, I am grateful for that. I intend to give you my best recollection and candid perspectives.”

Mr. Cassano told commissioners that he wished he had stayed on beyond his retirement in March 2008, when A.I.G.’s then chief executive asked him to leave. He said if he had been A.I.G.’s “chief negotiator” when banks asked for more collateral, he would have extracted concessions from the banks and greatly reduced the amount of taxpayer money the insurer needed.

In his posted testimony, Mr. Cassano acknowledged that A.I.G. made a large bet that the housing market would do well. But he defended A.I.G.’s risk decisions, saying the insurer stopped issuing new insurance on mortgage securities in 2006. He also said he believed that the insurance instruments — known as credit-default swaps or C.D.S.’s — would have performed fine over time, if left in place.

He said the contracts’ performance for the Fed was good.

“The portfolios are withstanding the test of time in extremely difficult circumstances,” Mr. Cassano said.

The problem for A.I.G. was that the banks on the other side of the contracts demanded that A.I.G. put up cash as the mortgage market deteriorated. The demands had greater impact still at the start of 2008 when A.I.G.’s accounting firm changed its view on an aspect of A.I.G.’s valuation process. That change increased A.I.G.’s accounting losses on the deals, and Mr. Cassano said in his prepared testimony that he disagreed with it.

Several of the commissioners asked Mr. Cassano what he wished he had done differently. Mr. Cassano said he believed he could have saved taxpayers billions of dollars if he had stayed at the company through 2008 to negotiate against the bank counterparties who were demanding cash on the mortgage securities.

“I would have gone to the counterparties, and I think even then I would have been able to negotiate substantial discounts by using the rights available to us such that the taxpayer would not have had to accelerate the $40 billion to the counterparties,” Mr. Cassano said. “I see that as the linchpin in the issues we’re talking about.”

Until recently, Mr. Cassano was under investigation by the Securities and Exchange Commission for whether he made intentionally misleading statements about the value of the mortgage contracts A.I.G. entered into with banks. The S.E.C. dropped the case earlier this month.

Also on the panel were Martin J. Sullivan, A.I.G.’s former chief executive, and Robert Lewis, the company’s chief risk officer. The commission’s chairman, Phil Angelides, questioned them about their statements to the commission’s staff that they had not understood the exposure in Mr. Cassano’s unit until it was too late, in 2007 when the collateral calls began. In particular, the unit drained A.I.G.’s liquidity.

“The liquidity aspect was something quite frankly we didn’t focus on to the extent that we now know we should have,” Mr. Lewis said.