Why AIG won't be next

NEW YORK (CNNMoney.com) -- Many believe that corporate greed brought on the Great Recession, yet Friday's fraud charge against Goldman Sachs is one of only a few federal lawsuits to come out of the economic downturn.

Why? Well for one thing, many of the products created by Wall Street firms are highly complex and difficult to understand.

On top of that, the government has to prove that fund managers were intentionally deceiving stakeholders.

For the past two years, the Justice Department has reportedly been investigating AIG, the poster child for the kind of over-the-top deals that led to the financial crisis in September 2008.

Yet criminal charges against AIG are considered unlikely "because the underlying instruments are so complex," said Matt Levine, principal at Fish & Richardson and former acting chief of the Business and Securities Fraud Division in the U.S. Attorney's office in New York's Eastern District.

In the sole criminal case against Wall Street executives stemming from the credit crisis, two former Bear Stearns hedge fund managers were found not guilty on fraud charges in November. The defendants successfully argued that that they had no way of knowing what lay ahead in the subprime mortgage market when they made their bets.

A civil case would be difficult as well. While the SEC is getting a lot of attention for its civil charges against Goldman, it was only able to formulate a case based on a very specific and narrow transaction: Goldman's failure to disclose conflicts in a 2007 sale of a single collateralized debt obligation.

AIG's downfall stemmed from bad bets made by its Financial Products division. The unit wrote insurance contracts called credit default swaps on mortgage securities. The value of those securities plummeted when the bottom fell out of the housing market in the summer of 2007. In fact, AIG had insured tens of billions of dollars of CDOs written by Goldman Sachs (GS, Fortune 500).

At the same time, Joseph Cassano, who headed up AIG's financial products unit, said publicly that the company's losses would be limited. He ultimately left AIG in March 2008 after the insurer reported an $11 billion quarterly loss for the division.

Losses related to credit default swap deepened in the second quarter of 2008, and nearly brought the company to its knees following Lehman Brothers' collapse on Sept. 15. On Sept. 16, the government gave AIG a bailout worth up to $85 billion, a total that has since risen to $182 billion.

If Cassano knew that the underlying value of those contracts was less than he made public to shareholders, that would be a criminal offense, said experts.

"He not only would have deceived investors, but he caused enormous trouble to AIG, and as a result to the government and society," said Tamar Frankel, a professor at Boston University's School of Law.

The Justice Department has reportedly been building a criminal case against Cassano over the past two years. But a recent CBS News report said that prosecutors will likely drop their case.

"The Justice Department would have to prove its case beyond a reasonable doubt," said Levine. "They don't necessarily need a smoking gun, but they'd have to pull enough smoke together to convince a jury that there was a fire inside."

That "smoke" may be difficult to find, because prosecutors would have to show that Cassano and AIG intended to lie and didn't just unintentionally screw up.

A civil case would encounter similar snags. Legal experts say AIG could easily claim it wasn't alone in believing that its credit default swaps were secure. AIG relied on ratings agencies like Standard & Poor's, Moody's and Fitch Ratings to determine the risk on the underlying assets.

"They'll say they had a [perfect] AAA rating on the securities, and that will be a good defense," said Frankel. "If no one else questioned the ratings, why should AIG?"

And if the SEC's case against Goldman succeeds, AIG could also reasonably argue that it was duped, said Mike Perlis, partner at Stroock & Stroock & Lavan and former assistant director at the SEC.

"There's a fine line between vigorous enforcement and excessive zeal," said Perlis. "AIG has made many management changes, so there's no point in proceeding against an entity in which any malfeasance, assuming there was some, is gone. The only victims would be innocent shareholders, innocent management, and the government itself."

The Justice Department, the SEC and AIG (AIG, Fortune 500) would not comment for this story. Calls to Cassano's attorney were not returned.