All the Devils Are Here [48]
What Sosin wanted was complete autonomy—and, of course, coming from Wall Street, a piece of whatever profits he generated for AIG. And that’s what he got: the contract he signed with AIG in January 1987 called for the formation of a joint venture, with AIG owning 80 percent and Sosin 20 percent. Sosin and his team got to command 38 percent of FP’s profits, which were designated “incentive compensation.” Sosin, in turn, would have “sole discretion” in distributing his share of the pie to his staff. In truth, part of the reason Greenberg was willing to cut such a sweet deal was that he didn’t really comprehend just how profitable FP was going to be. Besides, as someone who was there would later recall, “Hank liked getting married and never thought about getting divorced.”
Almost immediately, the new joint venture was taking on larger risks than most other swap dealers. Without question, the key to the business was the triple-A rating and the enormous balance sheet of the parent company, which not only gave FP cost advantages, but made it a very desirable counterparty. Nobody worried that AIG would have problems if it lost money in a derivatives trade. It was also extremely well run. Sosin kept close tabs on FP’s risk profile, which, in turn, allowed him to take larger risks—and generate larger profits. (FP built special computer systems that could track the ever-changing value of its swap deals far more closely than anybody else in the business, for instance.) Under Sosin, FP did indeed specialize in swaps that went out as far as thirty years, controlling the risks by using a technique called dynamic hedging, which involved constantly recalibrating—and rehedging—its positions. (“The hedging challenges are extraordinary at thirty years,” one competitor told the Wall Street Journal in 1993. “We haven’t done [them]. . . .they’re too risky.”) But FP’s willingness to do long-dated deals also allowed it to charge higher fees than its competitors. In its first six months, FP generated $60 million. Greenberg was amazed.
There are other things people remember about the early years at FP. One was that as controlling as Sosin was, the environment he created was far more collaborative than other AIG businesses. Greenberg liked people to say, “How high?” when he said, “Jump.” Sosin wanted people who were willing to question deals, and he created a culture where people could express skepticism without fear of being reprimanded. Sosin also instilled in his troops a sense that they were an elite vanguard, battling bigger and more powerful forces. To some degree, they were. Despite AIG’s strong balance sheet and triple-A rating, FP was much smaller than other players with big derivatives desks, lacking the built-in client base of a Goldman or a J.P. Morgan. So it had to be more creative. Marketers at FP would come up with some exotic new product, sell it to clients, and then ride it as hard as they could for two or three years. Eventually, though, the big boys at Goldman Sachs and J.P. Morgan would come out with their own version of the FP product, at which point the profit margins would be squeezed and FP would move on to something even more exotic. Sosin’s propensity for pushing the edge of the derivative envelope caused the Wall Street Journal to label him the “Dr. Strangelove of derivatives.”
The other thing that traders noticed was that Hank Greenberg was simply not part of their lives. Elsewhere in the company, Greenberg had no compunction about calling a midlevel manager in some division somewhere to find an answer to a question he had. That never happened at FP. The special computer system Sosin had built for FP was not shared with the rest of AIG; on the contrary, he had a clause in his contract stipulating that if he ever left the company, he could take the whole system with him. Any time Greenberg did anything that Sosin considered meddling, he would erupt. In 1990, for instance, Drexel imploded and Greenberg quickly snatched up a handful of Drexel traders, with the idea of having them create a new currency trading