All the Devils Are Here [121]
Many of AIG’s subsidiaries were also interlocking. So for instance, National Union Fire Insurance Company, a big insurance subsidiary, had a significant ownership stake in ILFC, AIG’s airplane leasing company. An operation called AIG Foreign Life—an overseas life insurance company that was one of the company’s crown jewels—had a large portion of its capital in AIG stock. And of course SICO, the company that Greenberg used to accumulate his top executives’ retirement money and which he himself ran, was AIG’s largest stockholder.
Although Greenberg obviously was in command of everything that went on at AIG, its formal internal controls and processes—the kind that every public company has in place—were decidedly subpar. AIG’s longtime banker was Goldman Sachs; the firm was constantly involved in AIG deals, and Greenberg had close ties with the firm’s top investment bankers. Yet one former Goldman banker recalls that whenever a new deal was in the works, the junior bankers working on it would find, as he put it, “deficiencies” in AIG’s internal controls. “In the due diligence calls, the company always did end runs around our questions and said they were aware of internal control problems and were working on fixing them. If we weren’t satisfied with the answers, we would have to go to senior relationship people at Goldman and get the go-ahead for the deal. Half the time,” he adds, “the senior people didn’t want to hear any shit about AIG’s problems.” The deals always got done.
And then there was AIG’s risk taking. Though he had built a very large company, Greenberg still wanted his executives to be risk-taking entrepreneurs in the way they approached their businesses. “He repeatedly made the point that AIG’s balance sheet was so big and so highly rated that AIG could take risks that no other company had the strength to take,” says a former executive. That was the whole point of having a triple-A, after all: AIG could take more risk, and be rewarded for it. “Being that big, and that prone to risk taking—it’s just not a good combination,” says a former AIG executive. “Those two things together do not equal prudence.”
And it wasn’t just one or two subsidiaries, either. The airline leasing subsidiary, the investment arm, the insurance companies—they were all seeking out risks they could take from leveraging the triple-A rating. Among other consequences, this led a surprising number of AIG divisions to invest in subprime mortgages. FP, of course, was insuring super-senior CDO tranches. But AIG also had a mortgage originator making subprime loans. It had a mortgage insurance unit that was guaranteeing subprime loans. And it had a securities lending program that was investing in subprime mortgages.
It’s worth pausing for a moment on that last one, to get a sense of just how willing AIG was to push into risky areas. The purpose of any securities lending program is to loan stock from a company’s investment portfolio to short sellers. (A short seller has to borrow stock in order to short it.) The borrower puts up cash as collateral, which the lender is supposed to invest in short-term liquid securities that can be quickly cashed in when the borrower returns the stock. For that reason, most companies with securities lending programs invest the cash in low-yielding, short-term commercial paper. But AIG decided to invest a portion of the money in largely illiquid CDO tranches. Its executives reasoned that since the short sellers would never all ask for their money back at the same time—would they?—they could keep some of the cash in CDOs and turn the wider spreads into bigger profits. The possibility that something might happen someday that would cause all the borrowers to demand their money at the same time was, once again, viewed as implausible. By 2007, the company had $78 billion from the securities lending program tied up in mortgage-backed securities. “It