All the Devils Are Here [49]
Greenberg responded by sending Sosin a letter informing him that AIG planned to terminate its joint venture agreement. Sosin reacted by undertaking a search for another triple-A company to back him, knowing that he had the contractual right to take his computer system with him. When Greenberg heard through the grapevine what Sosin was doing, he blinked. Within two months, he had patched things up with Sosin and brought him back into the fold—though he did get Sosin to lower the incentive compensation pool from 38 to 32 percent. “AIG Chairman Greenberg announced renewed agreement with Howard Sosin on AIG financial products,” read the headline of the press release announcing the deal, making it sound as if Sosin had simply re-upped. No one had any idea Sosin had almost walked out the door.
Why was Greenberg so worried about Sosin leaving AIG? Money, of course. In 1991—just four years after it had opened for business—FP generated $105 million in profits, according to Business Week, and was the fastest-growing part of AIG. (The article also claimed that Sosin was taking home between $3 million and $5 million, an amount that was almost certainly too low.) In a legal brief filed in 1995 by Randall Rackson, who served for many years as Sosin’s right-hand man before falling out with him, Rackson reported that FP’s cumulative profits between 1988 and 1992 were “in excess of” $1 billion.
To journalists and stock analysts, AIG had always been something of a black box. Quarter after quarter its earnings went in only one direction—up—no matter what calamities had taken place around the globe. Hurricanes, floods, earthquakes, big lawsuits—all the bad things that insurers wrote insurance against crushed their profits when the disasters finally struck. Except at AIG. People who followed AIG often chalked this up to the business genius of Hank Greenberg, who seemed to be able to will the company into the kind of double-digit earnings that investors craved. “I thought of him as a great CEO,” says one former analyst, “but I didn’t quite get how he did it.”
The author of that Business Week article, though, put forth another explanation. AIG’s diversified units protected it from having to take the big earnings hits that other insurers regularly suffered. The magazine singled out AIG’s various financial services divisions, which it said were generating some 25 percent of AIG’s profits. “Although AIG, too, has been hit,” the magazine wrote, “suffering $150 million in property-damage claims from Typhoon Omar and Hurricanes Andrew and Iniki, it has been shielded by the cash its life insurance and finance arms continue to churn out.” As it turns out, this wasn’t the whole truth, either, though it would take another dozen or so years for people to figure that out.
It is nearly impossible for derivatives dealers to never lose money, no matter how careful they are or how well hedged. Under Sosin, FP had had a remarkable run, writing some $80 billion worth of long-dated contracts and then hedging them brilliantly as circumstances changed. But in 1993, Sosin made his one big mistake: he lost a lot of money on a swap contract.
By then, Sosin had become extraordinarily wealthy. Unlike Greenberg, who lived well but not extravagantly, Sosin used his new wealth to fund a lavish lifestyle. Among his residences was one in Fairfield, Connecticut, a five-story mansion that locals called “the castle.” According to a Wall Street Journal account at the time, “It boasts an elevator, indoor and outdoor swimming pools, a squash court and an elaborate security system, including metal gates and a guard at the end of the driveway.” The FP offices in Connecticut and London were every bit as lavish—true to his control-freak self, Sosin had overseen every detail—which stood in marked contrast to AIG’s shabby headquarters near Wall Street.
Given how events transpired, it seems pretty