All the Devils Are Here [210]
When the year-end results were finally announced, on February 28, 2008, the super-senior write-down wasn’t $1.2 billion, or even $5 billion. It was $11.47 billion. The following week, Goldman Sachs raised its collateral demands to $4.2 billion.
By June 2008, Martin Sullivan was gone as well. In May, the board forced Sullivan to remove Bensinger as CFO. At the same time, AIG managed to raise some $20 billion, which Sullivan—and everyone else—felt would be enough to carry the company through a possible crisis. But the collateral calls kept coming; by the end of the second quarter of 2008, AIG had posted $20 billion in cash to meet them. The securities lending problems continued to get worse. The PWC auditors continued to put pressure on management and the board to improve their internal controls. The value of the subprime securities FP insured continued to deteriorate. The Office of Thrift Supervision, which regulated AIG, got into the act, too. (AIG had purchased a small thrift in the 1990s, and when AIG, like the investment banks, needed a holding company supervisor because of requirements by the European Union, the OTS took on that role.) After the material weakness announcement, it began demanding that AIG improve the risk management on its credit default swap portfolio. “There was a sense that we were drifting,” says a former executive. “I wouldn’t say it was a crisis. But it wasn’t normal.”
However heroically he had performed during AIG’s 2005 crisis, Sullivan seemed increasingly lost as the situation worsened. When it became clear that the additional $20 billion in capital hadn’t restored confidence in AIG, the board finally—and belatedly—made its move. Several directors went to the chairman of the AIG board, Robert Willumstad, a former top Citigroup official, and asked him to step in as chief executive. Willumstad had only joined the board in 2006 and had recently started a private equity firm, which he would have to leave to take the AIG job. Reluctantly, he agreed to become the CEO. On June 15, Martin Sullivan left the company where he had spent his entire adult life.
Three days later, AIG-FP agreed to post $5.4 billion to Goldman Sachs—including cash to cover losses in five of the Abacus deals.
On his fourth day as CEO, Willumstad met with Larry Fink of BlackRock and asked him to evaluate the subprime exposure. He wanted to write down as much as he possibly could, as quickly as he could, and be done with it. He also thought a BlackRock imprimatur would finally give AIG the ability to fight back against the collateral calls. In August, he announced AIG’s second-quarter results—a $5.5 billion loss. He also announced that he was conducting a strategic review of the entire company, and would soon unveil his plan. He hoped the market would give him time to get through the review. He promised to present his new strategic plan to investors on September 26.
But by then, AIG had been rescued by its new majority owner, the United States government.
22
The Volcano Erupts
And what was Fannie Mae doing during that awful summer of 2007, as the mortgage market descended into utter chaos and decades of wrong-headed policies, craven behavior, foolish mistakes, and misguided beliefs had come together to create a financial volcano that was beginning to stir? Panicking, perhaps?
No, Fannie was plotting its comeback.
Fannie at that point held or guaranteed almost $2.7 trillion in mortgages; Freddie another $2 trillion. Unlike John Paulson or Andrew Redleaf, they had no ability to short the housing market. Their singular role, set out in the charter that had long given them their advantages over their market competitors, was to support the housing market and help the country’s citizens achieve the American Dream. Yet the fact that the housing market was in decline—instead