Too Big to Fail [116]
Since accepting the position of CEO at AIG just over a month earlier, he had been working long hours to try to get a handle on the company’s myriad problems. With the exception of a weekend trip to Vail over July Fourth to visit his daughter, he had been at the office seven days a week. When he began the job he had announced plans “to conduct a thorough strategic and operational review of AIG’s businesses” and “to complete the process in the next sixty to ninety days and to hold an in-depth investor meeting shortly after Labor Day to lay it all out for you.”
As Willumstad started his investigation, his head of strategy, Brian T. Schreiber, pulled him aside and shared a startling discovery he had made: “It could actually be a liquidity problem, not a capital problem.” In other words, even though this massive insurance conglomerate had hundreds of billions of dollars worth of securities and collateral, given the credit crisis, it could find itself struggling to sell them fast enough or at high enough prices to meet its obligations. The situation could become even worse if one of the ratings agencies, like Moody’s or Standard & Poor’s, were to downgrade the firm’s debt, which could trigger covenants in its debt agreements to post even more collateral.
“You scared the shit out of me last night,” Willumstad told Schreiber the following day, after spending the night contemplating the firm’s liquidity issues. The problem would soon be further compounded, Willumstad realized, with the firm scheduled to report a $5.3 billion loss in its second quarter.
On this muggy July day, Willumstad was on his way to see Geithner, whom he had only met for the first time a month earlier, to sound him out about getting some help if the markets turned against him. The Federal Reserve Bank of New York did not regulate AIG, or any insurance company for that matter, but Willumstad figured that between AIG’s securities-lending business and its financial products unit, Geithner might take an interest in his problems. Even more he hoped that Geithner appreciated how closely AIG was interconnected with the rest of Wall Street, having written insurance policies worth hundreds of billions of dollars that the brokerage firms relied on as a hedge against other trades. Like it or not, their health depended on AIG’s health.
“No reason to panic, no reason to believe anything bad is going to happen,” Willumstad said after Geithner had greeted him with his usual firm, athletic handshake and invited him back into his office. “But we’ve got this securities lending program….”
He explained that AIG lent out high-grade securities like treasuries in exchange for cash. Normally it would have been a safe business, but because the company had invested that cash in subprime mortgages that had lost enormous value, no one could peg their exact price, which made them nearly impossible to sell. If AIG’s counterparties—the firms on the other side of the trade—should all demand their cash back at the same time, Willumstad said, he could run into a serious problem.
“You’ve made the Fed window available to the broker-dealers,” he continued. “What’s the likelihood, if AIG had a crisis, that we could come to the Fed for liquidity? We’ve got billions, hundreds of billions of dollars of securities, marketable collateral.”
“Well, we’ve never done that before,” Geithner replied briskly, meaning that the Federal Reserve had never made a loan available to an insurance company, and he seemed none too swayed by Willumstad’s argument.
“I can appreciate that,” Willumstad replied. “You never did it for brokers before either, but obviously there’s some room here.” After Bear Stearns’s near-death experience, the Fed had decided to open the discount window to brokerage firms like Goldman Sachs, Morgan Stanley, Merrill Lynch, and Lehman.
“Yes,” Geithner acknowledged, but said that it would require the approval of the entire Fed board and, he added