All the Devils Are Here [203]
And then there was the relationship between AIG and AIG-FP—and between Sullivan and Cassano. If other divisions told headquarters as little as they could get away with, FP told headquarters even less. Cassano used to meet with Greenberg regularly; Cassano and Sullivan rarely met. (One former FP executive says that in three years, he saw Sullivan in the Wilton, Connecticut, office only once.) As little as Sullivan knew about, say, AIG’s airline leasing business, he knew even less about its derivatives business. Cassano did little to enlighten him. For the most part, Cassano dealt with an AIG executive named Bill Dooley, who, as head of AIG’s financial services division, which included AIG-FP, was nominally Cassano’s boss. Mostly, they fought.
On the other hand, Sullivan had so many other fish to fry that it was easy to leave Joe Cassano alone. By all the obvious measures, he seemed to be running a shop that was at the top of its game. In 2006, the division made nearly $950 million in profits, meaning it was not only helping AIG’s income statement but also minting millionaires, since the division still kept around a third of its profits as bonuses. (Cassano later acknowledged that he made around $300 million during his time at AIG-FP, although his lawyers claim that $70 million of that was deferred compensation that he lost when the AIG was bailed out by the government.)
As for the risks it was taking, no one could really see any significant problems on the horizon. The total notional value of AIG-FP’s derivatives business was $2.66 trillion. Of that, some $527 billion was in the credit default swap book. Of that, FP insured a “mere” $60 billion in multisector CDO tranches. FP’s subprime exposure, in other words, seemed like a relatively small piece of the business, around 3 percent of its total derivatives exposure. And no one at headquarters knew about the existence of the collateral triggers—including Dooley. When the risk managers at AIG headquarters ran FP’s various derivatives business through their risk models and stress scenarios, it got a clean bill of health. After the big 2005 restatement—which included significant changes in the way FP accounted for some of its hedges—the board told Sullivan that he should take tighter control of FP. He agreed. But it never happened, in part because Cassano wouldn’t let it happen. Sullivan kept telling the board he was moving in that direction, but there were always more immediate issues that took up his attention instead. And since FP was doing so well, nobody pressed the point.
By early 2007, the board of directors was beginning to get antsy about Sullivan’s management. It wasn’t just his unwillingness to get his arms around FP; there were lots of similar issues that the board wanted him to tackle but which he seemed to be avoiding. Sullivan was still resistant to the cultural changes that were so clearly necessary. With the 2005 crisis now well in the past, the board wanted Sullivan to begin accelerating the pace of change.
“By the summer of 2007,” says a former AIG executive, “we were getting to the point where members of the board were saying, ‘We need to start setting some harder milestones.’”
Which, of course, was exactly when the collateral calls began.
September 11: With everyone back from vacation, Goldman once again begins demanding collateral—$1.5 billion this time, in addition to the $450 million AIG has already posted. Société Générale, the big French bank, also demands collateral—$40 million—which AIG-FP executives immediately suspect has been instigated by Goldman, since Société Générale is a big Goldman client and its