All the Devils Are Here [47]
There was, however, one piece of AIG that Greenberg didn’t control. It was known as AIG Financial Products—FP, everyone called it. It was the part of the company in the derivatives business. Headquartered in Wilton, Connecticut, and London, it was run by Howard Sosin, who was every bit the control freak that Greenberg was, and who made it plain that he expected Greenberg to stay out of his playpen. Even though the division was making plenty of profits, this was hardly a situation that could continue indefinitely. And it didn’t: eventually Sosin faltered, at which point Greenberg pounced. That is what Greenberg was referring to when he spoke to Bowsher and Bothwell. He had finally managed to put FP under his thumb.
Starting a derivatives business at AIG was one of the very few moneymaking ideas that had not sprung, fully formed, from Hank Greenberg’s fertile mind. This also explains why he didn’t control it at the start. Although, as an insurance company, AIG was in the risk business, it did not necessarily follow that insurance companies were diving into derivatives. Insurance companies were generally conservative institutions; if they used derivatives at all, it was as a customer of a big bank like J.P. Morgan, trying to hedge an interest rate or a currency risk. Under Greenberg, AIG had built a reputation for its willingness to take on unusual, one-of-a-kind risks: AIG wrote kidnapping insurance, it insured satellites, it even wrote insurance on the first ostrich farm in Texas. Greenberg used to boast that AIG’s balance sheet was so big that it could take on risks other companies couldn’t. But derivatives? Greenberg hadn’t really thought of it as a potential new line of business.
It was Sosin who brought the idea to Greenberg. Sosin was the prototypical modern Wall Streeter. A native of Salt Lake City, he had gotten a PhD from Stanford, taught finance at Columbia Business School, and put in a stint at Bell Laboratories before joining Drexel Burnham Lambert in the early 1980s. He was, in other words, a quant. Drexel in those days was best known for its most infamous executive, Michael Milken, the man who popularized junk bonds and built a huge business around them. Sosin wasn’t interested in junk bonds; instead, like any good quant, he gravitated toward complex derivatives, becoming one of the pioneers in developing ever more complicated forms of swaps.
The problem for Sosin was that, at Drexel, derivatives were never going to replace junk bonds as the firm’s bread and butter. Drexel also didn’t have a particularly good credit rating, which meant its borrowing costs were higher than its competitors’. This made it difficult to run a profitable derivatives desk. Sosin had big ideas about doing swap deals that no one had ever done before, with durations of fifteen or twenty or even thirty years, instead of the much shorter durations that were then the norm. He needed to find a different corporate parent to make that happen.
By the fall of 1986, Sosin and several Drexel colleagues were searching for a company that could back them. They were particularly interested in companies with lots of heft and capital, and a triple-A credit rating. Then, as now, there were fewer than a dozen companies with triple-A ratings. Warren Buffett’s conglomerate, Berkshire Hathaway, and General Electric both had triple-A ratings; so did AIG, a fact in which Greenberg took immense pride—and which he jealously guarded.
Sosin was introduced to Greenberg through former Connecticut senator Abraham Ribicoff. (Ribicoff and Greenberg were old friends.) Greenberg was clearly enamored with Sosin, but because this was a realm outside his area of expertise, he took a backseat in the negotiations that ensued. Ed Matthews was his point man in dealing