All the Devils Are Here [120]
It is also unclear who else in the company knew about the triggers. Cassano knew, of course. Greenberg says he knew as well, but they didn’t trouble him: “At the time, the business was so small, and besides, we had the triple-A.” But almost nobody else at AIG appears to have known about them—not AIG’s risk managers, not the executives who oversaw Cassano and FP, and not other FP executives. Every quarter, AIG-FP sent a memorandum to AIG management, updating its positions and exposure. The collateral calls were never a part of those memos, according to former AIG executives. “I don’t think Joe ever really focused on them. It was just another facet of the deal,” says one executive. Cassano and Frost appear to have assumed it was simply not possible that they would ever have to put up collateral. In the days when Sosin and then Savage had run AIG-FP, it is likely that the collateral triggers would have been discussed openly with FP and the AIG executive suite. But Cassano’s FP was a much more secretive place; former AIG executives say they had to practically conduct interrogations to pry even the most mundane information out of FP. It wasn’t until 2007, when Cassano acknowledged the collateral triggers on a conference call with investors, that most AIG executives first found out about them.
“It was startling news,” says a former trader. “It was the stupidest thing we ever did.”
By the time FP was getting into the multisector CDO business, Hank Greenberg was in his late seventies. He still didn’t have a succession plan. He still ruled AIG with an iron fist. And he was still heralded as the Great Man of modern insurance. Even though by 2004 AIG ranked tenth on the Fortune 500, with almost $100 billion in revenue and more than $11 billion in profits, Greenberg still managed to churn out 15 percent earnings gains each year. It seemed a miracle.
As ever, the intricacies of AIG remained largely in Hank Greenberg’s head. And those intricacies had become truly bewildering, beyond the ken of most mere mortals. When AIG set up a new subsidiary, it often launched a dozen or more surrounding subsidiaries to take advantage of tax laws, reinsurance possibilities, a whole gamut of small advantages. It had, literally, hundreds of such subsidiaries. “There was a kind of scheming mentality,” says someone familiar with the AIG culture. “They always seemed to be thinking, ‘How do we beat the system?’”
Most CEOs have maybe a half dozen top executives reporting directly to them; Greenberg had nearly thirty direct reports. That meant that only Greenberg and maybe his longtime sidekick Ed Matthews had a complete grasp of AIG’s convoluted businesses. It also meant that nobody besides Greenberg and Matthews understood all the risks the company was taking. “In other firms, there are checks and balances,” says a former AIG consultant.
“So far as I could tell, AIG had no formal risk function.” In effect, Hank Greenberg was AIG’s one-man risk department.
“Hank ran the company unlike any other twentieth-century company,” says another AIG consultant. “Even though it had gotten huge, there was no big company infrastructure. The systems were completely antiquated. It still gathered its earnings data every quarter by hand. And all decisions were made by him to a remarkable degree.”
To put it another way, while outsiders may have thought they were seeing an earnings machine, insiders saw something that more resembled a Rube Goldberg contraption. Why did AIG have such an antiquated infrastructure? Because Greenberg didn’t like to pay for anything that didn’t generate revenue. So he scrimped on computers and software that other companies bought as a matter of course, and refused to pay the salaries necessary to hire a first-rate operations staff.
Why did he have thirty direct reports? Because that way he could keep all his division managers segregated from each other. “Hank