All the Devils Are Here [201]
Unbeknownst to AIG, Goldman Sachs did something else to protect itself. Concluding that it could no longer trust AIG to pay off its swap contracts in full if the triple-A tranches started to default, Goldman began buying protection on AIG itself. Goldman would later claim that this was standard practice: it always bought protection on a counterparty if that counterparty was fighting margin calls. But it’s also true that Goldman, having done so many deals with AIG over the years and having served as AIG’s longtime investment banker, had a deeper understanding of AIG and all its foibles than anybody else. If anyone knew in advance that AIG was headed for trouble, it was going to be Goldman. Whatever the reason, between August 1 and August 10 Goldman bought $575 million worth of credit default swaps on AIG—swaps that would pay off in the event of an AIG bankruptcy.
From all outward appearances, AIG seemed to have done remarkably well in the two-plus years since Hank Greenberg’s departure. Having gotten through the trauma of Greenberg’s abrupt leave-taking, and then the earnings restatements, the company still wound up making enormous sums in both 2005 and 2006—more than $10 billion in 2005, followed by a record year in 2006, with profits that exceeded $14 billion and revenue that topped $113 billion. Its total assets were around $1 trillion, while its stock, which had dropped into the low fifties after Greenberg’s resignation, rose back up to the seventies. Sullivan was amply rewarded: his pay package in 2006 was $26.7 million.
In the view of the AIG board, Sullivan had earned those millions. When Greenberg left—with all of AIG’s secrets in his head—Sullivan had been running AIG’s sprawling insurance unit and had a seat on the AIG board. Though he was often described as Greenberg’s handpicked successor, that was a wild overstatement. There was no one at AIG Greenberg viewed as a worthy successor; Sullivan was picked because the board knew him and because he headed the company’s biggest division. Greenberg, who for a brief time remained chairman of the board, signed off on Sullivan’s promotion because there was no better option. Succession planning wasn’t exactly his strong suit.
Sullivan knew insurance as well as anyone at AIG, but despite being a director, he knew very little about the other parts of the company—which of course was the way Greenberg had always wanted things. Nor was Sullivan a natural leader. A diffident man, he had joined the company at the age of seventeen, had never gone to college, and had spent his life deferring to Hank Greenberg while he rose through the ranks. When Sullivan was preparing for the press conference that would introduce him as AIG’s new CEO, he kept referring to his predecessor as Mr. Greenberg. Someone finally asked him, “Why are you calling him Mr. Greenberg?” Replied Sullivan: “I’ve always called him Mr. Greenberg.”
And yet for a brief, shining moment, Sullivan rose to the occasion. The combination of Greenberg’s departure, the restatements, and the various probes by the New York attorney general, the SEC, and the Justice Department were “life-threatening events for AIG,” says someone who was there. “It was like having a heart attack and a stroke at the same time.” This person adds, “Sullivan saved the company.” He had to deal with the rating agencies, the investment community, government investigators, and his fellow executives. He had to mollify the accountants from PricewaterhouseCoopers, who were crawling all over the company, and AIG’s employees, many of whom felt lost without Greenberg. “He did a great job of holding on to talent,” says this same person. He was a calming influence at a time when AIG