WASHINGTON—The former American International Group Inc. executive who headed the division blamed for AIG's woes says he could have reduced the size of the company's federal bailout.

In his first public appearance since AIG nearly collapsed in September 2008, Joseph J. Cassano, former CEO of London-based AIG Financial Products Corp., last week told the Financial Crisis Inquiry Commission that, had he remained involved with the unit dealing with collateralized debt obligations, he would have been able negotiate better deals with counterparties—notably Goldman Sachs Group Inc. The result would have been a less expensive deal for the government, he said.

The liquidity crisis that resulted when counterparties demanded their collateral nearly destroyed AIG. The U.S. government bailed out the company, but took a nearly 80% ownership stake in return. Federal aid totaled more than $180 billion, some of which AIG has repaid.

Mr. Cassano defended the quality of the underlying CDOs in the financial products unit's portfolio in his testimony to the commission. He said he and his team had a “firm view that the portfolio would not experience realized losses” as opposed to short-term accounting losses after the unit decided to stop writing credit-default swap protection on CDOs exposed to subprime mortgages. That decision was announced in early 2006.

“As I look at the performance of some of these same CDOs in Maiden Lane III, I think there would have been few, if any, realized losses on the (credit-default swap) contracts had they not been unwound in the bailout,” said Mr. Cassano, who left the AIG unit in early 2008 but remained as an adviser until October 2008.

Maiden Lane III is a special-purpose vehicle backed by the Federal Reserve Bank of New York to purchase CDOs from AIG, canceling the associated credit-default swap contracts.

AIG Chief Risk Officer Robert Lewis also testified and said that after the financial products unit decided not to write new credit-default swaps, it was decided to hold onto swaps already on the books because AIGFP believed “they would continue to perform satisfactorily,” in part because the swaps covered mortgages provided when lending practices were “more conservative.”

“As it turned out, we were wrong about how bad things could get,” Mr. Lewis said. “What ended up happening was so extreme that it was beyond anything we had planned for.”

Mr. Lewis said AIG's liquidity was depleted despite the fact that the credit losses “were not actually occurring and, given more time, the values would have been expected to come back.” But when the credit crisis peaked, AIG's “ability to maintain its liquidity declined precipitously as credit markets froze, other liquidity issues developed” and the financial products unit “could not make good on all collateral call demands,” he said.

Former AIG President and CEO Martin J. Sullivan did not impress commission members with his assertion that he didn't know until 2007 that the financial products unit had tripled its exposure to CDOs to $54 billion from $17 billion in 2005.

Mr. Sullivan could not recall how much compensation he received from the time he took over the AIG helm in March 2005 until leaving in June 2008, months before the company had to be rescued by federal government.

After Mr. Sullivan's testimony, Commission Chairman Phil Angelides said that while the panel may debate many issues as it performs its task, he did not think the “failure of leadership and effective management” at AIG would be a matter of much debate.

The Financial Crisis Inquiry Commission is charged with conducting a comprehensive examination of 22 specific, substantive areas of inquiry related to the financial crisis.

These include derivatives and unregulated financial products and practices, corporate compensation structures, and the legal and regulatory structure governing financial institutions. The report is scheduled to be issued by Dec. 15.