All the Devils Are Here [200]
“We’re fucked basically,” he concluded.
It took only two weeks after that conversation for Frost and Forster’s worst nightmare to come true. On July 26, a junior AIG-FP official sent Frost a short e-mail with the heading “Sorry to bother you.” (Frost had left for vacation.) It read, “Margin call coming your way. Wanted to give you a heads-up.”
“On what?” asked Frost.
“20bb of super-senior,” replied the official.
The next day the demand for cash officially arrived. It sought $1.8 billion, meaning that the counterparty was claiming that $20 billion in super-seniors that AIG had wrapped had declined by that amount, and FP had a contractual obligation to make up the difference. FP executives were stunned at the size of the demand. It “hit out of the blue, and a fucking number that’s well bigger than we ever planned for,” Forster complained in another phone call a few days later. Nor was this your run-of-the-mill counterparty that was making this demand. It was Goldman Sachs.
Faced with its first collateral call, AIG-FP pushed back hard. For the next few days FP and Goldman Sachs argued ferociously about how much collateral AIG needed to put up. FP insisted that because the actual underlying collateral remained sound, it was not required to mark the securities to market and could keep it at par. Which meant it didn’t have to put up any cash. It also argued that Goldman was unfairly lowballing the marks to squeeze more cash out of AIG than was justified.
For its part, Goldman argued that under the terms of the contract, it didn’t matter how sound the underlying collateral was. All that mattered was how the market was valuing it at any given moment. At this given moment, the market was saying that the value of the super-seniors had declined. Therefore FP’s marks had to be lowered—and it had to put up cash. Those were the rules of the game.
On August 1, FP executive Tom Athan e-mailed Forster; he had just gotten off what he described as a “tough conf call with Goldman.” The firm, he said, was “not budging and acting irrationally.” “I played almost every card I had,” he wrote. “Legal wording, market practice, intent of the language . . . and also stressed the potential damage to the relationship. . . .” Goldman was unmoved. Meanwhile, Goldman Sachs executives viewed AIG as the irrational party. Goldman was making similar demands to counterparties all over town. Nobody was happy about it, but nobody was fighting it like AIG. “These were head-butting conversations,” says a former Goldman employee.
On August 2, Cassano got involved. Taking another look at its marks, Goldman lowered its collateral demand to $1.2 billion and sent a new spreadsheet with its marks for the disputed securities. An AIG accountant then put together a spreadsheet for Cassano showing how Merrill Lynch was valuing the same securities. Goldman had one CDO valued at 85 cents on the dollar; Merrill had it at 98 cents. Goldman had another CDO at 85 cents that Merrill valued at 99 cents. AIG-FP had them both valued at par.
Finally, on August 10, after another week of wrangling, Cassano and the Goldman trader he was negotiating with agreed that FP would post $450 million in collateral. Why that amount? Not because the two sides had come to an agreement. (In fact, they signed a separate side letter acknowledging that the $450 million did not satisfy the collateral agreement.) The real reason, recalls a former AIG executive, was that “they were both going on vacation and didn’t want it lingering.” For Goldman, the fact that it had gotten money out of AIG was viewed as a victory. For the FP executives, the fact that the amount was less than half of what Goldman had demanded caused them to mistake Goldman’s seriousness of purpose in getting the collateral it felt it was owed. “We thought, ‘This can’t be real,’” recalls a former AIG executive. “If they had been serious about the $1.2 billion, they would have been in here with an ax.”
A few days later Frost e-mailed Forster again. The posting of $450 million, he