AIG's Small London Office May Have Lost Big

Ground zero for AIG's spectacular implosion, which has soaked up more federal bailout money than any other entity, appears to have been a small London branch office that may have put as much as half a trillion dollars at risk.

The disastrous deals were built up in a decade and, when the crisis hit, the man who ran the unit for the last eight years retired after making $280 million for himself and leaving with a $1 million-a-month consulting contract.

The struggling New York-based insurance giant has avoided collapse with the massive infusion of $160 billion in taxpayer money. The U.S. government has agreed to prop up AIG because it fears that AIG has such extensive financial involvement around the world that its failure would be far more costly.

Britain's serious fraud office and U.S. regulators are combing through the records of AIG's Financial Products Group, formerly located on the fifth floor of an office building in London's Mayfair section.

The unit's small group of traders risked nearly half a trillion dollars to insure U.S. mortgages and other debt using complex financial products called credit default swaps, according to recent congressional testimony.

"AIG financial products was the core, the hottest point of the global financial crisis," freelance investigative reporter Peter Koenig told "Good Morning America" today. "It was the epicenter."

The group's traders "found a crack in the system that was unregulated," Koenig told "GMA."

Joseph Cassano, an American who ran the group for eight years, declined through his lawyer to talk with ABC News. But ABC News obtained a tape of Cassano from August 2007 telling investors just how confident he was.

"It is hard for us with, and without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of those transactions," Cassano bragged.

Koenig said Cassano "had total confidence in his judgment. And he put no money against the fact that he might be wrong."

For years, the system worked fine for Cassano and, during his eight-year reign as head of the Financial Products Group, Cassano pocketed $280 million in salary and bonus. But about one year after Cassano boasted that he wasn't worried about losing a single dollar, AIG began bleeding billions.

AIG Says London Unit 'Nearly Brought Down the Company'

"For about a decade it went OK," Koenig said. "And then, when the U.S. housing market fell out instead, they suddenly realized they had to come up with a half a trillion dollars and all they had was a couple of million in the bank."

The collapse became so severe that AIG warned the U.S. Treasury Department last month that if it wasn't given more federal aid, its failure "could potentially bankrupt or bring down the entire system."

AIG admits that Cassano's unit nearly destroyed the insurance giant.

"It was clear that this small unit engaged in trades that nearly brought down the company and it's still sound insurance business," AIG told ABC News in a statement.

AIG said it is in the process of winding down the group.

Cassano, who has homes in London and Connecticut, was forced to retire from AIG on March 31. Critics say despite the fact that the company is hemorrhaging money and being kept alive with taxpayer cash, Cassano has been allowed to keep his windfall.

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