How AIG died

By Felix Salmon
February 8, 2011
Fatal Risk.

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Many thanks to Roddy Boyd for sending me over e-galleys of his new book on the implosion of AIG, Fatal Risk. (If you want me to read a book — I’m looking at you, publishers — then sending it over in electronic form makes it much more likely I’ll do so. I would never have read Zero-Sum Game, for instance, Erika Olson’s insider account of the CME-CBOT merger, had she not sent it to my Kindle. But she did, and I did, and I’m happy I got to read it.)

Boyd’s book is as in-depth as any autopsy of AIG will ever be and it does presume a reasonably sophisticated grasp of finance on the part of the reader. That’s smart, on Boyd’s part: he knows who his audience is for this book.

Boyd’s definitely done his homework here: he seems to have talked to almost everybody who matters, with the possible exception of Martin Sullivan, the hapless AIG CEO who ends up bearing the lion’s share of the blame for what ultimately went wrong. Sullivan’s predecessor, Hank Greenberg, is deeply flawed, of course, in part because he insisted on singlehandedly and personally being the key risk-control mechanism for an enormous company which no one man could possibly oversee in detail and in part because the company he so assiduously built managed to fail so devastatingly the minute he left. (On top of that, of course, there’s the question of his various prosecutions; Boyd is sympathetic to Greenberg on that front and very harsh on Eliot Spitzer.)

Boyd’s case that the AIG implosion would never have happened had Greenberg stayed on as CEO can never be proven one way or the other. My suspicion is that AIG was so big and Greenberg was stretched so thin, that ultimately AIG was certain to fail in any case. But the incompetence of Greenberg’s lieutenants is quite astonishing: Boyd writes at one point that neither Stasia Kelly, the general counsel, nor CFO Steven Bensinger, nor CEO Martin Sullivan had ever even heard of the “credit support annex” which proved fatal to company, by forcing AIG to put up billions of dollars in collateral when the CDOs it insured fell in value. And at a later point, Sullivan is astonished by numbers which had been carefully explained to him the previous day by the notorious Joe Cassano.

Cassano is certainly a very large part of the reason why AIG failed — his headlong rush into mortgages was a move which was explicitly ruled out by both of his predecessors at AIGFP, for good reasons, and he took full advantage of the fact that his boss, Martin Sullivan, lacked any ability to understand what he was doing or to rein in his excesses.

But in reality it was Win Neuger, with his idiotic and devastating securities-lending transactions, who probably did more harm to AIG than any other individual. Matt Taibbi told the Neuger story in his own inimitable style in Griftopia, but Boyd provides chapter and verse for anybody who really wants to understand the details.

When AIG failed along with various monoline insurers, the lesson that many of us drew was that no company should ever use its triple-A rating as a business model. If your triple-A is necessary for you to continue to make money, then you shouldn’t really have a triple-A in the first place: it’s a rating which should be reserved only for companies which don’t need it.

What happened at AIG, along with the other monolines, is pretty simple: they started taking their triple-A for granted, like it was some kind of fact of nature rather than a hard-won award which could be removed at any minute. Whatever else you might say about Hank Greenberg, he always jealously guarded his triple-A. But when he went, so did that culture.

There are no corporates any more, which rely on their triple-A rating for profits: even Berkshire Hathaway has been downgraded. That’s good. But there are still sovereigns. The UK strikes me as a little Greenbergian: it’s making deep fiscal cuts now, in an attempt to ensure its triple-A is never taken away. The U.S., by contrast, is more reckless, a bit like AIG after Greenberg left — it’s going after growth, first and foremost, rather than concentrating on its debt ratios. That might well be the right decision to make — especially if the U.S. could live with its bonds carrying a little bit of credit risk. But it’s a decision which should very much be made consciously and I don’t think that anybody has really done that.

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11 comments so far

*sigh* There is no analogy between AIG and a sovereign country with a fiat currency.

Posted by petertemplar | Report as abusive

*another sigh*
“[The fiscal stimulus is] a decision which should very much be made consciously and I don’t think that anybody has really done that.”
The rationale for the fiscal stimulus is well thought out. See fellow bloggers Krugman and DeLong.

Posted by AHooks | Report as abusive

Seriously Felix, didn’t you take your morning coffee? You should know better than to compare a company with a sovereign, without mentioning the fact that sovereign and corporate ratings are not comparable.

Posted by lemarin | Report as abusive

Does the book talk about what would have happened to AIG had the government not insist that AIG pay off Goldman and 4 or 5 other banks 100 cents on the dollar, with money that the government provided? The book no doubt provides a sordid tale of risking other people’s money, and the resulting crisis surely needed to be addressed proactively, but does Boy tell us why those creditors needed to be made whole (and not at some negotiated discount), even though the loans that AIG was insuring had not defaulted?

AIG might very have failed, if they weren’t first the target of a hostile takeover.

Posted by KenG_CA | Report as abusive

Hank Greenberg left AIG in March 2005. AIG failed in September 2008. I’m not sure what life form – bristlecone pine? Galapagos tortoise? – considers that interval a “minute.”

Imagine Joe Cassano shouting down Hank Greenberg. yeah I didn’t think so either.

Posted by johnhhaskell | Report as abusive

@ KenG Greenberg has argued that had he been running the company at the time (no doubt after having fired Cassano) he would have told Goldman et al to get in line to sue him.

Who knows if Turbo Tax would have been able to browbeat him into accepting a Fed “bailout.” I would guess not.

Posted by johnhhaskell | Report as abusive

@JohnH, I also think the outcome would have been different with Greenberg as CEO of AIG, and possible even entertaining instead of just scary.

in regards to the comment just before that, 3.5 years is a minute on a geological scale. and in politics, looking backwards.

Posted by KenG_CA | Report as abusive

Gee, how odd that an extremely controlling uber-CEO happened to have immediately underneath him a whole bunch of hapless mediocrities! What an amazing coincidence, and what terrible luck for Greenberg, being saddled with incompetent direct reports. If only he could have done something about that.

Posted by SamPenrose | Report as abusive

Can we concede that Goldman Sachs may be only the root of perhaps 1/3 or 1/2 of All Evil? This whole wistful “how different things would have been if AIG hadn’t been forced to make them whole…” thing has got to stop.

Rewind the clock, take yourselves back to the week the Lehman imploded and AIG was bailed out. Whether Paulson or anyone else was secretly and quietly determined to protect GS or not really wasn’t all that relevant at the time.

The market was in a state of absolute panic and shock. We were looking into a black hole. The bleeding had to be staunched and it had to be staunched at a single choke point.

It’s Occam’s Razor. The simplest, most logical way to do at that moment was to make sure the dominoes didn’t keep falling as a result of fear and runs. Paying everyone back in full from a gov’t backstopped AIG was MUCH simpler and easier than what would have had to occur if the X number of firms on the other side of those trades–and I’m including the downstream from the direct counterparties such as GS–would have each suddenly gone into play. The market would have turned on one after another wondering who would be undermined by its exposure to AIG haircuts.

Posted by fixedincome | Report as abusive

@fixedincome, AIG wasn’t bailed out. Goldman and other buyers of credit swaps from AIG were bailed out. There is no reason why a mediator who is supposed to be neutral couldn’t have told both parties that they get 60 cents on the dollar (or something like that), or take their chance in bankruptcy court. Since the issue wasn’t defaults on loans, but rather a reduction in the value of collateral AIG was putting up, the government could have also said they were backing up the collateral. In that case, no money changes hands, and the panic stops, as Goldman doesn’t have to mark down the swaps they bought from AIG.

I’m ok with saying Goldman was the root of only 1/3 of the evil. I don’t hold them at fault for the crisis, only that they got way more than they should have, in fact, there should have been some pain inflicted on them for buying those swaps from AIG in the first place. I don’t even know or care if Paulson was determined to protect Goldman, all I know is they bluffed Geithner and Bernanke by basically saying the whole world will collapse if they weren’t made whole, and those two academics (who were negotiating with the best poker players in the business) folded. Goldman was willing to kill off a great customer (AIG) in exchange for short term profits – why anybody is their trading partner is beyond me. The executives at Goldman did not need to be made whole to avoid their own meltdown, and they didn’t care about the future business they wold lose from a decimated AIG, because they only cared about themselves, not the company they worked for, or the industry they worked in.

Posted by KenG_CA | Report as abusive

About the book ZERO-SUM GAME. It has its moments, but the author scraps up against a pet peeve of mine. She writes at one point that Chris Lown, a banker in the ICE ‘war room’ preparing their proposal for the CBOT board, was “one of the only people who got a bit of fresh air that night,” etc.

Okay, I get it. It got out of the suite just to ferry materials to and from the Kinko’s. But the expression “one of the only” is annoying. It means either “the only person who” or it means, “one of a small number.” But it doesn’t tell you which it means. Grrrr.

Posted by Christofurio | Report as abusive
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