Too Big to Fail [127]
Left unspoken was the fact that if AIG could not come up with the cash, bankruptcy was the only alternative.
As Dimon saw it, this was a short-term liquidity problem. “You have a lot of collateral, you know, you have a trillion-dollar balance sheet, you have plenty of securities,” he told them. Yes, it could get much worse, but for now, it was just a temporary annoyance.
“We do,” Willumstad agreed, “but it’s not that simple. Most of the collateral is in the regulated insurance companies.”
By midyear AIG had $78 billion more in assets than it had in liabilities. But most of those assets were held by its seventy-one state-regulated insurance subsidiaries, which could not be sold easily by the parent company. There is no federal regulation or supervision of the insurance business. Instead, state insurance commissioners and superintendents have substantial powers to regulate and restrict an insurer’s asset sales. The responsibility of the state regulator at all times is to protect the policyholder. There was virtually no possibility that AIG would be able to raise cash quickly by selling some of these assets.
Now Dimon finally understood the scope of the problem, as did everyone else in the room.
Just as they were walking out, Dimon pulled Willumstad aside. “Listen, you don’t have the luxury of time,” he told him. “If it’s not us, get someone else, but you need to get on this.”
The next day, Willumstad followed up on the meeting.
“Jamie, this is only going to work if there is chemistry on both sides,” Willumstad began. “With all due respect, I know you guys have a lot of confidence in Tim Main, but the reality is, you saw what I saw.”
Dimon knew exactly what Willumstad was about to say and interrupted him with, “Steve Black will handle it.”
“Good,” Willumstad replied.
“You got to plan on packing your clothes and coming up,” Ken Wilson told Herb Allison, the former Merrill Lynch and TIAA-CREF executive whom he located on a beach in the Virgin Islands on Thursday night and let in on the big secret: The government planned to take over Fannie and Freddie that coming weekend, September 6.
It wasn’t just a social call, however; Wilson had phoned Allison to hire him as the CEO of Fannie. After all, if they were going to take over the company, they wanted to install their own management.
“Look, Ken,” Allison told him. “I would like to. For reasons of public service, I’m interested in this job. I want to help you guys, and so you have to let me know what to do. I don’t have any clothes. All I have is shorts and flip-flops.” Wilson promised to buy him some clothes when he arrived in Washington.
Paulson had decided to execute the takeover plan earlier in the week after a visit by Richard Syron, the chief executive of Freddie Mac. Syron, whom Paulson detested, told him that he had gone to Goldman Sachs’s headquarters to pitch potential investors but several days of meetings proved to be in vain: No one was willing to make a significant investment in the company. Paulson’s conversation with Dan Mudd, Fannie Mae’s CEO, whom Paulson liked better, still wasn’t inspiring.
And so on the night of Thursday, September 4, Treasury began its battle plan.
Like clockwork, the chief executives of Fannie and Freddie were instructed to attend meetings on Friday afternoon with Paulson and Bernanke at the offices of the Federal Housing Finance Agency. Mudd’s meeting would start at 3:00; Syron’s at 4:00. They were each advised to bring their lead director, but told nothing else. Paulson figured that by the time any of this could leak, the markets would be closed and he’d have forty-eight hours to execute his plan.
That afternoon, dark rain clouds massed over the capital as Tropical Storm Hanna approached. In an upstairs conference room Bernanke took a seat on one side of James Lockhart while Paulson took his place on the other. At each meeting, James Lockhart began