Contents Cast of Characters Introduction Chapter : The (Noncorrelated) Dream Team Chapter : Who Dares, Wins Chapter : The Man with the Plan Chapter : Changes Chapter : The Dirt Below Chapter : War by Another Name Chapter : The Kids Are Alright Chapter : In the Shipping Business Chapter : The Preservation Instinct Chapter 10 : The Down Staircase Chapter 11 : Midnight in September Epilogue Notes Acknowledgments Index Copyright © 2011 by Roderick Boyd All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our web site at www.wiley.com Library of Congress Cataloging-in-Publication Data: Boyd, Roddy, 1968Fatal risk : a cautionary tale of AIG’s corporate suicide / Roddy Boyd p cm Includes index ISBN 978-0-470-88980-0 (hardback); ISBN 978-1-118-08429-8 (ebk); ISBN 978-1-118-08427-4 (ebk); ISBN 978-1-118-08428-1 (ebk) Insurance companies–United States–History American International Group, Inc.– History Federal aid–United States Financial crises–United States Global Financial Crisis, 2008-2009 I Title HG8540.A43B69 2011 368.006′573—dc22 2011001512 To Laura: More than 20 years ago we said that even if we didn’t have money or a plan, we had each other and that better days would come We still have each other, and the better days are here To enjoy them with you is a treasure and a privilege Cast of Characters AIG Martin Sullivan, Chief executive officer of AIG until 2008 Steven Bensinger, Chief financial officer of AIG until 2008 William Dooley, Head of AIG’s Financial Services Division Ernie Patrikis, General counsel of AIG until 2006 Anastasia Kelly, General counsel of AIG until 2009 Chuck Lucas, Risk management chief of AIG until 2001 (consultant until 2007) Robert Lewis, Risk management chief of AIG until 2010 Kevin McGinn, Credit risk management head of AIG Win Neuger, Global investment chief of AIG until 2009 Michael Rieger, Mortgage-backed securities fund manager at AIG until 2007 Richard Scott, Head of global fixed income at AIG until 2008 Elias Habayeb, CFO of financial services Chris Winans, Vice president of media relations until 2008 Nicholas Ashooh, Head of corporate communications until 2010 Edward Liddy, CEO of AIG 2008–2009 International Lease Finance Corporation Steven Udvar-Hazy, CEO of ILFC until 2009 AIG Financial Products Howard Sosin, Cofounder, CEO of AIGFP until 1992 Randy Rackson, Cofounder AIGFP until 1992 Barry Goldman, Cofounder AIGFP until 1992 Tom Savage, CEO of AIGFP from 1994 to 2001 Joseph Cassano, CEO of AIGFP from 2001 to 2008 David Ackert, Former head of Transaction Development Group and Energy Group at FP until 2007 Jacob DeSantis, Head of Equities and Commodities at FP until 2008 Jon Liebergall, Former head of Municipal Group and co-head of North American Marketing at FP Andrew Forster, Head of Asset Finance Group Alan Frost, Former head of U.S investment bank and structured securitizations effort Gary Gorton, (consultant) Yale finance professor and author of FP CDO risk software Eugene Park, Corporate marketer and former head of structured securitizations Kelly Kirkland, Consultant and former head of European business at FP AIG Trading Gary Davis, Former cofounder AIG Trading Robert Rubin, Former cofounder AIG Trading Barry Klein, Former cofounder AIG Trading AIG Board of Directors Robert Willumstad, Former AIG CEO and chairman of the board Frank Zarb, Former AIG chairman of the board Carla Hills, Former U.S trade representative Richard Holbrooke, Former senior U.S diplomat Frederick Langhammer, Former CEO at Estee Lauder Cos Stephen Bollenbach, Former CEO of Hilton Hotels C V Starr & Co (ex-AIG) Maurice “Hank” Greenberg, Former AIG chief executive officer (until 2005) Edward Matthews, Former AIG vice chairman, finance Howard Smith, Former AIG CFO Bertil Lundqvist, General counsel at C V Starr Goldman Sachs Gary Cohn Goldman, president and chief operating officer Lloyd Blankfein, COO Craig Broderick, Risk management chief David Viniar, CFO Andrew Davilman, Managing director, sales Ram Sundaram, Managing director, prop trading Daniel Sparks, Partner, mortgage trading Boies, Schiller & Flexner LLP David Boies, Lawyer for Greenberg Lee Wolosky, Lawyer for Greenberg Nick Gravante, Lawyer for Greenberg Simpson Thacher & Bartlett Richard “Dick”, Beattie Outside adviser to AIG board Sard Verbinen & Co George Sard, Public relations adviser to AIG The Federal Reserve Bank of New York Timothy Geithner, President FRBNY Sarah Dahlgren, Head of supervision FRBNY Thomas Baxter, General counsel Kynikos Advisers Jim Chanos, Kynikos general partner Chuck Hobbs, Kynikos research chief Gradient Analytics Donn Vickrey, Cofounder and research chief Introduction Robert Willumstad viewed himself as one of the good guys Most men do, of course, but he had tried to be one: forthright, a by-the-book kind of guy He took pride in his handshake being valued in New York and even more pride in his hard work at being the engineer to Sandy Weill’s dreamer in the construction of Citigroup At that banking and financial giant, his unit was most assuredly not the one where the Securities and Exchange Commission and attorney general had had a field day; he generated profits, not subpoenas In a town full of executives, Willumstad was a businessman, or at least he tried to comport himself like one Executives were appointed, carried out orders, and were paid what they were paid A businessman built an enterprise, something that would outlast cycles and trends and perhaps even the man who built it An executive focused on his mandate and cared for little else; a businessman had to be concerned with the totality of the company Willumstad had always sought to keep perspective, to think a few moves ahead and solve the problem That he had tried to it as a human being and not a glory hound was a point of pride He thought of this as he sat in a lovely waiting room outside the president of the New York Federal Reserve’s office in the middle of September 2008 for a chance to speak to Timothy Geithner Willumstad, the chief executive of AIG, was there to inform the Fed president that all attempts to secure a solution in the private market were failing Cash was running out, and when their debt was downgraded on Monday they were going to have to come up with at least $50 billion, maybe more No one was willing to buy key units of the company and there were no loans possible Recently stung by the public outrage over its role in setting up a $30 billion portfolio to take Bear Stearns’s more troubled mortgage bonds off J P Morgan’s books, Geithner had been very blunt in telling Willumstad that no Fed help was forthcoming Willumstad hadn’t really wanted any He had tried every route they could think of, including trying to become one of the 18 banks and securities firms that buy and sell bonds directly with the Fed He had hoped this would allow AIG to access some of the funding programs the Fed had set up for these “primary dealers” to keep the markets vibrant He never heard back Hell, he couldn’t even get Geithner to focus on the $2.5 trillion in derivative exposure AIG had when he had brought it up to him earlier in the week So now he was there to frame out for Geithner and his staff what had been unimaginable for all of his more than 40 years in the banking business: AIG was going to die Hank Greenberg’s company, the cornerstone of both the New York and American business communities, was going to die Competitors and customers alike had once admired its verve and audacity, but now they just feared whatever crater it made when it died As he stared at the floor, he was struck at the spectacle of it all The CEO of one of the most important companies on earth was stuck in a chair trying to grab a few minutes with a central banker to explain just what might happen to the American economy and the global capital markets when that company died A final thought crossed Willumstad’s mind: he was hoping that he ran his own meetings more punctually than this He did not want to think that he often kept people waiting; now that the shoe was war records: Whitehead drove a landing craft on D-Day and Weinberg, whose father Sydney essentially put the modern Goldman together as its general partner, fought with the Marines in the South Pacific and again in Korea 19 The role UGC played in the mortgage food chain was like this: A borrower who wanted to put down $50,000 for a $500,000 property would owe a $450,000 balance, an amount the lender might not feel comfortable with But with UGC, the borrower buys insurance for 25 percent of the balance outstanding, or $112,500, giving the bank an effective 35 percent equity level should the borrower default 20 On December 1, 2010, the Fed released details of just how dangerous the situation was for AIG’s insurance companies Without the emergency intervention of about $20.5 billion in cash, thousands of global securities lending program trades would not have settled, meaning that the banks and brokers that had borrowed from the program were unable to get their cash collateral back 21 For the conspiratorially minded, this last paragraph is a doozy Both Dudley and Boesky worked at Goldman Sachs prior to joining the Fed—Dudley as its chief economist and Boesky as an analyst —and, yes, her father is Ivan Boesky, the famous insider trader 22 Maybe 15 years prior, Liddy had asked Greenberg to consider a merger between the companies Greenberg flew out, toured the place, met with Liddy, and told him, “I think you should keep your company.” Epilogue In calculating the massive profits of Wall Street from 2003 to 2007, the importance of mortgagebacked trading and sales activity cannot be underestimated Not only were mortgage desks regularly 15 percent or more of their annual bottom lines, but they provided huge crossover business potential for other desks like government bonds, derivatives, and agency securities As such, the pricing power of the mortgage departments went through the roof According to veteran recruiters, the heads of these units often earned $10 million or more, with various desk chiefs earning between $6 million and $8 million and the “rank and file” earning regularly into the $5 million–plus range; frequently, these sums were earned on multiyear guarantees At a mortgage-reliant firm like Bear Stearns, desk chiefs in a good year earned $15 million or more In November 2008, the Department of the Treasury purchased a $40 billion preferred share issuance from AIG that was in large part used to pay down the Federal Reserve Bank of New York’s loan balance to $60 billion from $85 billion At the same time, the initial terms of the Fed’s deal were adjusted because repayment would have been nearly impossible for AIG to repay without risking further collapse—at an 11.3 percent interest rate, the $85 billion line of credit amounted to $9 billion in annual interest expense Maiden Lane LLC was the $30 billion credit line set up to house Bear Stearns’ portfolio of subprime mortgage loans and related derivatives in March 2008 The Fed hired BlackRock to manage the portfolio Based on interviews, the New York Fed was now fully aware of the fact that collateral calls were not just a function of an investment bank like Goldman issuing one-way demands to FP, but were a series of postings among FP, Goldman, and a counterparty like J P Morgan or Deutche Bank See the report of Neil Barofsky, the Special Inspector General of the Troubled Asset Relief Program, on the New York Fed’s handling of the CDS termination: www.sigtarp.gov/reports/audit/2009/Factors_Affecting_Efforts_to_Limit_Payments_to_AIG_Counte (specifically, pp 13 and 14) Fed insiders think the balance of the report is fair but deeply object to Barofsky’s conclusions UBS was the one exception to this, agreeing to accept 98 cents on the dollar if the other seven brokers followed suit See the SIGTARP report, p 16 This was the job of other regulators, the ratings agencies, the investment banks, and investors They didn’t their jobs, either It’s not clear that anyone really did their job in this crisis See: http://us1.institutionalriskanalytics.com/www/index.asp (registration and a fee is required) To get a sense of the article, and a corroborating view from another Wall Street iconoclast, see www.nakedcapitalism.com/2010/08/technically-incompetent-ny-fed-examiner-of-biggest-bankspre-crisis-promoted-for-blowing-up-the-economy.html 10 Geithner has given an insightful and eloquent speech on this very matter, demonstrating a clear awareness of the threats posed from the shadow banking system Unfortunately, it was in June 2008, three months after the collapse of Bear Stearns and mere weeks before the great plunge south As such, the speech has the feel of a bright and earnest politician warning of the threat posed by the Japanese to American interests—in the summer of 1942 (www.newyorkfed.org/newsevents/speeches/2008/tfg080609.html) 11 See www.propublica.org/article/the-magnetar-trade-how-one-hedge-fund-helped-keep-thehousing-bubble-going 12 www.nytimes.com/2009/03/25/opinion/25desantis.html 13 http://bigthink.com/ideas/14583 14 Goldman paid off the Treasury’s investment in 2009 with a 23 percent interest rate For information on this program, see www.federalreserve.gov/newsevents/reform_pdcf.htm Also, Warren Buffett’s Berkshire Hathaway struck a favorably priced bargain in September 2008 and invested $5 billion in the firm Acknowledgments As noted below in more detail, there are many people I’d like to thank, but most of them would be subject to civil litigation and certain job loss if they were to be identified as having helped me, so I have thanked them privately I would like to offer profound thanks to my agent Sandra Dijkstra and her colleague Elise Capron of the Dijkstra Literary Agency They were patient, enthusiastic, and forceful advocates for me, and I am grateful they were on my side Many agents claim to love books; I have never seen anyone as passionate about the art of books as Sandy and her staff Whatever shape written words take in the future, Sandy and her team will have a hand in getting the better work out there There would be no Sandy Dijkstra if there were no running into David Einhorn—yes, that David Einhorn, the hedge fund manager, poker player, and author—miles away from New York a few years back I told him I had a book in my head and he emailed Sandy the next day A stout fellow, but then I knew that already, as I’d shared a trench with him on occasion on a few investigative projects I had been involved with Every author thanks his editors and it all seems so obligatory, you know? Then I wrote a book and I understand fully why F Scott Fitzgerald was so passionate about Maxwell Perkins It’s asinine to even attempt to explain how much an Emilie Herman or Pamela van Giessen from John Wiley & Sons turned a series of connected fact sets on paper into a book Like Sandy, they love books; that they so even in the face of the sausage-making process that editing entails is beyond me On a personal level, I would like to list a few people who had kind words and extended courtesies for me along the way The staff at Rinaldi’s Country Deli in Cos Cob are among the nicest people on the planet They also have a fantastic deli that doubled as a permanent work break for me since I lived 50 yards from the place Everyone should have a Rinaldi’s in their life Chris Crotty and Chris Rossman are two close friends from Fordham who are just excellent people and were very supportive during moments when I doubted if I could pull this off In Greenwich, I went to a Bible study Tuesday mornings for years with Scott Greenlee, Steve Gilbert, Mark Scarlata, Tom Wells, Dave Tilly, Rick Watson, Dan Walker, Peter Jayes, and Bill Rainford There may well be better examples of caring, decent Christian men out there, but I have never encountered any Also in Greenwich, I met Will and Susan Suarez, Jerome Kenny, and Suzanna Borthwick, as well as quite a few other friends from Tuesday nights Good people who happily spent hours and hours getting me and others back on the proper road They should rest assured that I am still on it and doing the same The first 164 pages, indeed Professionally, Tom Lamont and Steve Murray took a shot with me years ago at Institutional Investor News Polar opposites, they both drilled home the lessons of journalism on a weekly basis At II, people like Dan Freed, Mark DeCambre, Jen Ryan, Hal Lux, and Jenny Anderson were friends and colleagues who went on to bigger things as well I learned much from all of them over the years, but their decency and laughter is what stays with me At the New York Sun, Robert Messenger hired me and I think it worked out Seth Lipsky, a garrulous and eccentric genius, and Ira Stoll, a stern taskmaster who sadly kept his encouraging, helpful side a well-kept secret from too many (though not from me), taught me much A brief recollection: I had written a devastating exposé of a big hedge fund’s general partner and how he had not told his clients about how Citigroup had fired him in the 1990s because he had misvalued his trading portfolio when it declined The piece relied heavily on background sources, and Ira killed it straightaway He told me that he loved it but that allowing people to snipe at other people without identifying themselves is grossly unfair and the only thing worse than a reporter’s being wrong or lazy is a reporter’s being unfair A fine lesson, even if that was a great frigging story he squashed Ken Magill—a truly underrated editor—and Pia Catton were friends and colleagues who made the time there memorable The New York Post is a difficult place to write about since everything that has been said about it is mostly true but never totally catches the spirit of the place Jenny Anderson, whom I replaced, put it best when she said the Post was the coolest job in the world until that one day when you just get tired of it Dan Colarusso took a shot with me and stayed in the trenches with me fighting off the many, many angry executives and lawyers I attracted A reporter cannot ask for a better editor because there really isn’t a better guy to work with Jay Sherman stepped in for Dan and never missed a beat Holly Sanders, Rich Wilner, Keith Kelly, Suzanne Kapner, Zach Kouwe, Tim Arango, John Crudele, Peter Lauria, Paul Tharp, Chris Byron, and Janet Whitman were great colleagues and better people Mike Cameron was probably happy to see me go, but only because he had to defend me constantly Maybe in another life we could hang out and talk about whatever Australian lawyers talk about outside of story vetting I would be remiss if I forgot to say that Brenda Walsh, Joe Barracato, and Mike Gray came up with the headlines and were a constant source of laughs Fortune magazine was the opposite of the Post: refined, witty, and urbane—a genial culture that in ordinary times would have been a fine place to hang your hat for a few decades Xana Antunes recruited me out of the Post and said that life would be very different and she was right Jim Ledbetter was a great assistant editor for me and became a friend—and then my editor again, at Slate’s The Big Money When I left to join Fortune, Dan Colarusso said, “Colin Barr is the best story editor I’ve ever seen.” Dan, as usual, was right Colin is a great editor, encyclopedic and keen in his understanding of financial journalism, and, naturally, Fortune has taken his talent and made him its in-house blogger or something Scott Moritz and Devin Leonard were colleagues and friends, along with Nick Varchaver and John Brodie, who had some wonderful lines and introduced me to Bill Cohan Working with Bethany McLean was cool, and just getting to watch Carol Loomis her thing was great Few gilded reputations are truly deserved in big media, if any, but she is the exception Allan Sloan is the best translator of the raw data and fact sets of investigative reporting into something the common man understands that has perhaps ever been He is also a great guy— patient, friendly, and encouraging My parents, Mike and Diane Boyd, deserve much more than a passing mention, but then they have long deserved more from me My mother let me stay up late reading and sparked a curiosity with words that has yet to abate My dad is a man who is often my role model and has long been one of the very few men on Wall Street that is a moral role model for other people My sister, Meredith, put up with me for years and deserves all of the very best Many relatives of mine have shown me kindness that went above normal family obligation: My aunts Adrienne Foran and Judy and Marie Doris have been love itself My cousins Mike and Walter McNulty have traveled many miles with me, Walter especially in that I lived with him for two years in college, and all I’ll say is that I could not have asked for better companions in tight spots and strange places My aunts and uncles Terri and John McCauley, Ann and Wally McNulty, and Mary Boyd, who along, with my late godfather, Tom Boyd, have always kept up support and interest in my reporting career Deep thanks to them all My children, Samantha, Graham, Johanna, and Ben Boyd, made sacrifices as I worked long hours in New York City and then often at home as well I love you all and pray that I have been able to provide you with the hope, love, and kindness you have given me I am blessed to be your father May your days be better than the ones I describe in these pages, and may you find the courage to stand for your beliefs and the right in this world, knowing that God will be your judge and ally Lou and Kathy Caprioglio have been excellent in-laws, and Laura’s grandparents, Emilio and Alda Caprioglio, have been equally generous and warm in their affection I have dedicated this book to my wife, Laura She has paid a price as I have spent hours chasing the financial filth in this world, and she said little, loving me all along She could have done better than me but has remained my most loyal supporter, convincing herself she was lucky and being a great parent throughout I aim to change that and show her who was really the lucky one Ultimately, all men reckon with God, either on the way up or on the way down I’m glad I caught him in Greenwich: He and his family saved me and my family and continue to so In a broad sense, a nonfiction book represents a contract between the author and the reader in which the author asserts that he or she has made every possible effort to include or obtain all information related to the work I’ll assert that I have, with one (big) qualification A company the size and scope of AIG is literally too big and expansive to condense into one work, let alone a book focusing on a narrow aspect of it like the credit crisis In the text, I argue that AIG’s founding and early days alone probably warrant a substantial effort from some economic historian; its entire history would probably take several volumes The stories about how AIG managed to consistently obtain favorable legislative or regulatory edicts across generations and in multiple countries is worth a good read in and of itself (Hint: having a Washington fixer nicknamed “Mr CIA” report directly to Hank Greenberg was probably helpful.) So my work focuses exclusively on AIG’s decision to enter the capital markets and its attempt to continually generate outsized returns in a marketplace where its competitive advantages—balance sheet and brainpower—gradually diminished My reasoning for this was simple: This is how AIG was nearly killed To that end, a word on sourcing is appropriate AIG’s collapse has been a boon to lawyers across the white-collar defense bar The preponderance of civil litigation and (for several years) potentially criminal investigations has left most people who were in a decision-making capacity at AIG between 2005 and 2008 deeply traumatized It was quite common for me to interview a source who had recently been interviewed or subpoenaed by some combination of the following: the Securities and Exchange Commission and the Department of Justice, the Connecticut attorney general’s office, the New York attorney general’s office, the Financial Crisis Inquiry Commission, the Congressional Oversight Panel, and so many plaintiff law firms it is not really possible to go into them The upshot is that in this context, when a reporter calls someone up and seeks to interview them, they are not too thrilled to give a wide-ranging interview on the record Much of the work I did thus involved not using people’s names To combat the effects of shifting memory and exaggeration, I did not use information that could not be verified by another colleague or supported by documents I fear that the thrilling narrative arc that characterizes so much of today’s nonfiction was minimized in some places, but perhaps the reader can take some solace from the fact that though some drama fell by the wayside, many events that are laid out in this book actually occurred somewhat as described In addition to dozens of interviews with current and former AIG executives and board members, I also relied heavily on official filings, especially the footnotes buried in annual reports, a host of lawsuits and related filings, lawyers (both plaintiff and defense), and the press—both in the insurance trade press and mainstream media I actively sought AIG’s cooperation with this book In seeking it, I provided their media relations team a detailed written framework of the thrust of my work, who I sought to interview, and what I was interested in and waited many weeks for an answer Though Lauren Day, the spokeswoman assigned to deal with me, could not have been nicer, more courteous, or seemingly interested in what I was asking, AIG’s final position also could not have been more clear: my book and I could go pound sand Everyone who was named in this book was contacted one way or another; if they declined to comment, their lawyer(s) were contacted and informed of my interest In a less litigious age, Martin Sullivan and his lawyer would not cancel a long-scheduled interview and make up some blather about being “pro-Greenberg.” Win Neuger, comfortable in his Sutton Place apartment, would have more courage than to say, “I don’t think so.” But we live in the world of our own making This brings up a final point concerns the reporting of this book At least two dozen former senior executives told me that they would have been happy to talk in some fashion but they had signed exit agreements that included extraordinarily thorough nondisclosure agreements In essence, they were (generally) paid sums of between $400,000 and $750,000 for up to three years silence An executive getting a little something extra on the way out of the door is standard enough and is probably a sound practice—it keeps memories favorable—but AIG literally ran out of cash It set me to thinking: If I interviewed dozens of men and women who violated the agreement to get the story out—and encountered a few dozen more who declined to—and knowing fully there must be hundreds more who I never even considered, the numbers start to mount It’s conceivable that postbailout at least $400 million, if not more, was spent in exit payments Where did that money come from? At least indirectly, you and me Because AIG was spared its fate, and since cash is fungible, the company was presumably able to take some of the $85 billion the United States was forced to inject and use it to fund these payments Put another way, if AIG collapsed, as it was 12 hours or less from doing, then many people would have hit the street with no legal barriers in the way of their saying their peace This is perhaps a minor point within the constellation of absurdity that brought AIG to midSeptember 2008, but it is fitting somehow: In preventing the greatest man-made financial disaster of the modern era, the U.S government is going to allow many of AIG’s secrets to remain hidden, trapped in hard drives and filing cabinets, to gradually be shredded and erased In turn, for a year’s salary or so, the people who know and did what happened will say nothing and move on In the last few years of its life, AIG’s investors and employees deserved better; in its near-death experience, the American people, AIG’s rescuers, deserve a better accounting than an occasional government panel’s white paper Into this breech comes Fatal Risk Roddy Boyd Wilmington, N.C January 2011 Index A ABX index Ackert, David Adamczyk, Peter Adams, Tom Aidenoff, Bernie AIG American General Finance unit bailout of commercial paper (CP) Financial Products (AIGFP) CDO swaps compensation plan municipal securities swaps in natural resource deals Financial Services unit founding of company Global Investment Corp Global Securities Lending program Loss Mitigation Unit (LMU) PineBridge Investments Trading Group Ambac American Home Assurance Ashooh, Nicholas Athan, Tom B Baker & Botts Barber, Andrew Barings Bank Baxter, Thomas Bear Stearns Asset Management (BSAM) Beattie, Richard (Dick) “The Beautiful Machine” (O’Harrow & Dennis) Benmosche, Robert Bensinger, Steven Best, Alan The Big Short (Lewis) Binomial Expansion Technique (BET) Blankfein, Lloyd Boies, David Bollenbach, Stephen Brightpoint Broad Index Secured Trust Offering (BISTRO) Broad, Eli Broderick, Craig Bronfman family Buffett, Warren Burnett, Lucien C Cassano, Joseph (Joe) CDO-squareds Chanos, Jim Cholnoky, Tom Cioffi, Ralph Citibank Citigroup Citron, Robert Cohen, Marshall Cohn, Gary Collateralized debt obligations (CDOs) Collateralized mortgage obligations (CMOs) Conglomeration Contributed Guaranteed Alternative Investment Trusts (C-GAITs) Coral Re Countrywide Financial Corporation Credit Crisis of 2008 Credit default swaps (CDSs) Credit support annexes (CSAs) C V Starr & Co C V Starr Foundation D Dahlgren, Sarah Davilman, Andrew Davis, Gary Department of Justice (DoJ) deRegt, Ken DeSantis, Jacob (Jake) Dinallo, Eric Dooley, William (Bill) Drexel Burnham Lambert Duffy, Keith E “Early Pay Default” (report) Edper Enron Ernst & Young F Fallen Giant (Shelp) Federal Reserve Ferguson, Ron Fink, Larry Forster, Andrew Frost, Alan Futter, Ellen G Gates, Bill Geissinger, Fred Geithner, Timothy (Tim) Gen Re General Electric Glass-Steagall Act, repeal of Goldman Sachs Goldman, Barry Goldstein, Ramy Gonda, Leslie and Lou Gorton, Gary Gradient Analytics Gramm, Phil Grasso, Dick Gravante, Nick Green Tree Finance Greenberg, Evan Greenberg, Jeffrey Greenberg, Maurice “Hank” H Habayeb, Elias Hartford Steam Boiler Hills, Carla Hobbs, Chuck Holbrooke, Richard Hurst, Michael I Interest rate option swaps International Lease Finance Company (ILFC) J Joseph, Fred J P Morgan K Kanak, Donald Kelly, Anastasia (Stasia) Kidder Peabody Kirkland, Kelly Klein, Barry Kynikos funds L Langhammer, Frederick (Fred) Langone, Ken Lavers, Phil Lee, Clarence K Leeson, Nick Lehman Brothers collapse of Lewis, Robert (Bob) Li, David X Liddy, Edward Liebergall, Jon Liquidity Litzenberger, Bob London Interbank Offered Rate (LIBOR) Long Term Capital Management Lucas, Chuck Lundqvist, Bertil M Maiden Lane Main, Tim Marsh & McLennan Matthews, Edward (Ed) MBIA McGinn, Kevin Merrill Lynch Merton, Robert C Metallgesellschaft Micottis, Pierre Milken, Michael Miller, Bill Milton, Chris Morgan Stanley Mortgages Municipal guaranteed investment contracts (MGICs) Municipal securities swaps N Nahepetian, Shake National Union Fire Insurance Company Neuger, Win New York Federal Reserve New York State Department of Insurance New York Stock Exchange (NYSE) Nikkei index Nutt, Billy O Office of Thrift Supervision (OTS) Orange County, California, bankruptcy Ownit Mortgage Solutions P PaineWebber Park, Eugene (Gene) Patrikis, Ernie Paulson, Hank PNC Bank PricewaterhouseCoopers (PwC) Prudential Q Qorvis Communications R Rackson, Randy Rate swaps See Interest rate option swaps Rautenberg, Steve Reid, Charles Ribicoff, Abraham Rieger, Michael Roemer, Mike Rubin, Robert Ryan, Tim S Salomon Brothers Sard, George Savage, Tom Schiff, David Schreiber, Brian Scott, Richard Securities and Exchange Commission (SEC) Slape, Doug Smith, Fred Smith, Howard (Howie) Société Générale Soros Fund Management Sosin, Howard Sparks, Daniel (Dan) departure from Goldman Sachs Special-purpose entities (SPEs) Spitzer, Eliot Starr, Cornelius Vander Starr International Co (SICO) Steinhardt Partners Stern, Edward Structured investment vehicles (SIVs) Sullivan & Cromwell Sullivan, Martin departure from AIG Sullivan, Robert SunAmerica Sundaram, Ram T Tannin, Matthew “Ten Cubed” Texas Department of Insurance (TDI) Tiger Management Trade Review (TR) TransAtlantic Holdings Turner, Ted U UBS Udvar-Hazy, Steven United Guaranty Corporation (UGC) V Vickrey, Donn Viniar, David W Wechsler, Will Weill, Sandy Whalen, Christopher White Oak Willumstad, Robert Winans, Chris Wolosky, Lee WorldCom Z Zarb, Frank Zeitlin, Brian ... information about Wiley products, visit our web site at www.wiley.com Library of Congress Cataloging-in-Publication Data: Boyd, Roddy, 196 8Fatal risk : a cautionary tale of AIG’s corporate suicide. .. that were more fatal than others Chapter The (Noncorrelated) Dream Team In May 1997, a young man armed with a keen mind and a desire to succeed got out of a taxi at a leafy office park on Nyala... differently, a quick phone call was made and Barber happily hopped a train to Westport Passing through the doors, what struck Barber was what he didn’t see at the place that a generation of Americans has