Analysis: Crisis panel targets Goldman as AIG skates by

(L-R) Stephen Bensinger, former CFO of the American International Group (AIG), Andrew Forster, AIG former executive vice president, Elias Habayeb, former CFO of AIG, David Lehman, managing director of Goldman Sachs Group, and David Viniar, CFO of Goldman Sachs Group, prepare to testify before the Financial Crisis Inquiry Commission hearing on the Role of Derivatives in the Financial Crisis on Capitol Hill, July 1, 2010.

NEW YORK (Reuters) - The commission studying the worst financial crisis in decades might be doing a disservice to history by focusing this week on Goldman Sachs Group Inc as the ultimate Wall Street villain while going lightly on another key player, AIG.

During two days of hearings this week, the congressionally-appointed Financial Crisis Inquiry Commission called 10 current and former Goldman and American International Group Inc executives as witnesses, quizzing them about transactions between the financial giants.

But financial experts said the Commission made a mistake in giving AIG officials a pass, in contrast to the tough questions lobbed at Goldman executives.

"AIG as a victim? This is a world of consenting adults," said Lawrence White, a professor at the New York University Stern School of Business.

For some reason, the commission decided not to rough-up Joseph Cassano, the man who ran the AIG division that insured tens of billions of dollars in toxic mortgage-backed securities and sparked an unprecedented taxpayer bailout of the firm. Instead, the commission provided Cassano with a platform to justify his actions and argue that his strong, guiding hand was missed during the crisis.

Cassano testified that securities the Federal Reserve was forced to take off AIG's hands in 2008 have since performed better. He argued the big losses AIG rang-up were more the result of aggressive mark-to-market writedowns by Wall Street banks like Goldman than an underlying problem with the collateralized debt obligations (CDOs) that AIG wrote insurance on.

He said if AIG had allowed him to stay in his job, he would have negotiated better terms than the New York Fed did with Goldman and the other Wall Street banks in the bailout.

"Cassano, my God, he spent his career selling crap and now he is saying you should have left me in charge to wind it up?" said Cornelius Hurley, a professor and director of Boston University's Morin Center for Banking and Financial Law.

This is the same Cassano who until just a few weeks ago was under investigation by criminal prosecutors and the U.S. Securities and Exchange Commission.

To be sure, this week's hearing was just one of six held so far by the commission that is due to deliver its definitive report on the causes of the financial crisis by December 15.

"We felt as though we asked tough questions of AIG and Goldman Sachs," said Tucker Warren, a spokesman for the panel, adding that the public hearing does not reveal the full extent of the panel's inquiry.

MISSING THE POINT

Commission Chairman Phil Angelides, as a former state Treasurer of California, a state particularly hard hit by the collapse of the subprime housing market, knows many players had a hand in bringing about the financial crisis.

California was home to Countrywide Financial and New Century Financial, two of the biggest producers of subprime mortgages, which were used as the building blocks for the CDOs churned out by Wall Street's securitization machine.

Since kicking off its public hearings in January, the commission has called on a broad cast of characters in the crisis. It first heard from four of the top officials at Wall Street firms, including Goldman CEO Lloyd Blankfein, moving then to subprime lending players such as New Century Financial and to government-chartered entities like Fannie Mae.

Yet Angelides, during this week's hearing, questioned the depressed valuations that Goldman was placing on CDOs in the summer of 2007, even though just a few months earlier New Century and a handful of other subprime mortgage lenders already had filed for bankruptcy.

Angelides went so far as to question whether Goldman was deliberately driving down prices on CDOs so it could apply more leverage on AIG in demanding the insurer post billions of dollars in collateral for the credit default swaps it had written on CDOs.

"Are you then creating a self-fulfilling prophecy?" he asked Goldman executives.

The issue of how Wall Street banks value complex securities like CDOs long has been a matter of debate. And analysts say the commission was right to highlight the need for more transparency in the pricing of complex securities that are infrequently traded.

But when it comes to the pricing of subprime CDOs in the summer of 2007, some say the commission is getting it all wrong by accusing Goldman of effectively driving down the market and looking to take advantage of AIG. These critics say that Goldman, if anything, might have been too conservative in marking down the price of CDOs.

The real issue, these critics said, is that Goldman was marking down valuations on complex securities that it and other banks had churned out with full knowledge that many were bound to collapse when the U.S. housing market faltered.

"These hearings are a sham," said Janet Tavakoli, a Chicago-based derivatives consultant, who has been an outspoken critic of the role both Goldman and AIG played in the events leading up to the financial crisis. "They want to make Goldman the story instead of making this a Wall Street phenomenon."

Tavakoli said there was nothing wrong with depressed marks Goldman was submitting to AIG in summer 2007. In August 2007 she publicly questioned AIG's failure at the time to mark down the value of the CDO securities it had written tens of billions dollars of insurance-like protection on.

Rather, she said the commission failed to explore the reason Goldman was marking down the price, which goes to the heart of the financial crisis.

"What they needed to hold Goldman accountable for was the underlying assets," Tavakoli said. "The underlying assets in those CDOs were horrible because of widespread securities fraud and accounting fraud in the securitization business."

(Reporting by Steve Eder and Matthew Goldstein; Editing by Tim Dobbyn)