All the Devils Are Here [50]
Two years after Sosin had signed his new deal, FP lost $100 million in a complicated deal with Edper, the holding company of the Canadian billionaires Edward and Peter Bronfman. According to the Washington Post, FP had a second deal with Edper, which was not losing money but nonetheless “spooked” Greenberg. Greenberg had a document drawn up that gave AIG more control over the joint venture and “placed restrictions on transactions into which AIG-FP could enter,” according to the Rackson lawsuit. In February 1993, Sosin sent AIG his “notice of termination,” which he set for the end of the year. If he stayed through 1993, he would retain control of FP’s incentive compensation, which he estimated at $250 million.
This time, however, Greenberg was ready. He set in motion a secret plan, one that “verged on a covert operation,” the Washington Post would later write. Enlisting the company’s auditors at PricewaterhouseCoopers, Greenberg set up a secret office near FP’s Connecticut office. There, they built a computer system from scratch that was able to, in effect, reverse engineer FP’s trades. Sosin’s secret sauce was now Greenberg’s as well.
Then, when Sosin began an arbitration proceeding against AIG, as part of his effort to stay on until the end of the year, Greenberg hit back hard. He accused Sosin of fraud and breach of duty—exactly the kind of allegations that, if proven, would strip Sosin of his right to any of the $250 million. The two sides fought over FP’s executives, with Greenberg offering them promotions and Sosin dangling the prospect of a big chunk of whatever incentive compensation he won. Most of the executives stayed loyal to Sosin.
In November, the two sides settled, with Sosin agreeing to take $200 million, a portion of which he paid to the executives who had left with him.2 A month before the settlement, the Wall Street Journal published a lengthy article about the dispute, reporting that Sosin “was holed up with his team in a secluded office in Westport, Conn., plotting a comeback.” But to make a comeback, Sosin needed another triple-A-rated company to back him, and that he never found. He was never again a factor in the derivatives business.
At FP, life went on. By the spring of 1994, Greenberg had chosen a new executive to run AIG-FP, which was no longer a joint venture but a full-fledged division of AIG. That man was Tom Savage, a well-liked FP veteran with a PhD from Claremont Graduate University who’d gotten his start working on Larry Fink’s mortgage desk at First Boston. “He was from Minnesota,” recalls one of his former traders. “He had a quiet, unemotional, analytical approach.” Another former trader described him as “mild mannered, intelligent, and extremely risk averse.”
There was no question that FP was going to stay in the derivatives business. There was also no question that things were going to be different. Greenberg wanted a larger share of the profits for AIG. He wanted FP traders to defer some of their compensation in case a deal went sour. He wanted to be informed—on a daily basis at first—about every deal FP was working on. And he wanted to be sure that FP never did anything that would put the parent company in danger. “Tom spent most of his time managing Hank Greenberg,” recalls an ex-trader. “It was not an easy task.” Early on, Greenberg warned Savage, “If you ever do anything to my triple-A rating, I’m coming after you with a pitchfork.”
It was probably inevitable that FP would one day get into credit derivatives. Part of its self-image, after all, came from its willingness to find the bleeding edge of the derivatives business, and get there before everyone else. By the late 1990s, nothing was more bleeding edge than credit derivatives.
In another sense, though, there was nothing inevitable about it at all. Savage, like Sosin, was a firm believer