Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the FinancialSystem--and Themselves

CHAPTER EIGHT

Jamie Dimon’s 10:00 a.m. meeting was running long.

“Tell Bob I’ll be there in a minute,” he told Kathy, his assistant.

Robert “Bob” Willumstad and Dimon both had once been part of Sandy Weill’s team of financial empire builders. At different points in time, each had been considered Weill’s heir apparent at the behemoth Citigroup they had all helped create, though ultimately, neither would be given a chance to assume its leadership. The two had remained close in the decade since Dimon had been forced out.

A tall, white-haired executive who could have been the archetype of the Manhattan banker, Willumstad sat patiently on this early June day in the waiting room on the eighth floor of JP Morgan in the old Union Carbide offices. A glass cabinet displayed replicas of two wood-handled pistols with a resonant history: They had been used by Aaron Burr and Alexander Hamilton in the 1804 duel that killed Hamilton, the first U.S. secretary of the Treasury.

Like Dimon, Willumstad had been outmaneuvered by Weill and, after leaving Citi in July 2005, went on to start a private-equity fund, Brysam Global Partners, which made investments in consumer finance businesses in Latin America and Russia. His partner, Marge Magner, was another Citigroup exile. Under Dimon, JP Morgan had become the largest investor in Willumstad’s fund, whose offices were just across Park Avenue from JP Morgan’s own headquarters. While under his and Magner’s direction, Brysam had become a profitable firm. Willumstad held another, much more important position: He was the chairman of the board of American International Group, AIG, the giant insurer, which was the reason for his visit to Dimon this day.

“I’ve been thinking about something and could use your advice,” Willumstad, a soft-spoken man, said to Dimon after he had finally been ushered into his office. He revealed that the AIG board had just asked him if he’d be interested in becoming CEO; the current CEO, Martin Sullivan, would likely be fired within the week. As chairman, Willumstad himself would be responsible for paying a visit to AIG’s headquarters the following day to warn Sullivan that his job was in jeopardy.

“I like what I’m doing,” he said earnestly. “No one’s looking over my shoulder.”

“Except for me!” Dimon, one of his biggest financial backers, countered with a laugh.

Willumstad explained that he had been pondering accepting the top position over the past several months, ever since the credit crisis had engulfed AIG, and it had become increasingly clear that he might be given an opportunity to run the company. That prospect had left him painfully conflicted: While he had always wanted to be a CEO, he was sixty-two and now had the time to pursue outside interests, like auto racing.

A third-generation son of Norwegian immigrants, Willumstad came from a working-class background, growing up in Bay Ridge, Brooklyn, and then on Long Island. By the mid-1980s, he was rising through the executive ranks of Chemical Bank. As a favor to a former boss, Robert Lipp, he flew down to Baltimore to see what Weill and his right-hand man, Dimon, were up to at Commercial Credit, a subprime lender they were running. The drive and entrepreneurial energy of the Weill-Dimon team was strikingly different from the stuffy bureaucracy of Chemical and every other firm he’d seen in the New York banking industry.

The two offered Willumstad a job, which he accepted, though he couldn’t help but feel a bit of buyer’s remorse when, on his first day on the job, he met seventy-five Commercial Credit branch managers at a conference in Boca Raton and realized he had never seen so many middle-aged men in polyester leisure suits. Willumstad survived that shock—as well as the golf and the drinking—and eventually grew comfortable at the firm. In 1998 he helped lead a blitzkrieg of acquisitions that shocked the financial establishment: Primerica, Shearson, Travelers, and the biggest of all financial mergers, Citicorp. For a brief time the three of them had towered over a financial industry that had an abundance of towering figures; four years after Dimon departed Citi following a bitter falling-out with Weill, Willumstad assumed his old job of president, which proved to be as far as he would rise in the company.

For a good half hour, Willumstad and Dimon discussed the pros and cons of the AIG position. As chairman of the company, Willumstad knew better than most how deep the company’s problems ran; solving them would be an unimaginably huge challenge. Its parlous state kept bringing him back to the same decision: “I should take the job on an interim basis,” he said firmly.

Dimon shook his head. “Bullshit,” he said. “Either you want to do the job or you don’t.”

“I know,” Willumstad conceded. “I know.”

“You’re confusing the issues here,” Dimon insisted. “First of all, interim CEO is a very complex and difficult thing, and as an interim CEO, it will be exactly the same job as the permanent CEO. If I were the board, I wouldn’t allow it, and if it were me, I wouldn’t do it. It’s like cutting your own balls off.”

“Zarb thinks it’s all or nothing, too,” Willumstad said, referring to Frank Zarb, AIG’s former chairman. “He doesn’t want to have three CEOs in three years with a fourth one coming in.”

“You know, if you do things well, it’s still going to take you two years at a minimum,” Dimon said about the prospects of turning things around, leaning forward and punching the air to underscore his points. “The question is, do you want to get back in the saddle or not? If you are going back in the saddle, remember how hard the saddle is.”

Willumstad nodded in agreement. But he had one other concern. “I don’t like both the public appearance of it and that it looks like I’m going to throw Martin out and put myself in,” he said, but Dimon assured him that that was not a serious issue.

The board wanted Willumstad to take the job; his wife, Carol, thought he should—she had always believed that he had been robbed of the CEO job at Citi—and now Dimon was adding his vote.

The next day Willumstad took a black Town Car to AIG’s offices at 70 Pine Street. Upon taking a seat in Martin Sullivan’s office, he delivered his message without any equivocation: “Listen, Martin, the board is going to meet on Sunday, and whether or not you continue in this job is the topic of discussion.”

Sullivan merely sighed and said, “The board doesn’t fully appreciate how difficult this market is. When I took over, I had to clean up the mess with our regulators, and I can lead us out of these troubles.”

“Yes, Martin,” Willumstad acknowledged, “but you have to look at what has happened over the last few months. The feeling among directors is that someone has to be accountable… . Look, there are three possible outcomes of the board meeting. I could be coming back to you and saying that the board fully supports you, or the board thinks you should go. The other possibility is that the board says, ‘You have to do the following things in an X period of time or else you’re out.’”

Sullivan looked down at the floor. “And what do you think the likely outcome will be?”

“There’s a strong sentiment to make a change, but who knows?” Willumstad replied with a shrug. “You put twelve people in a room, and anything could happen.”

On Sunday, June 15, the board of AIG met in the office of Richard Beattie, the chairman of the board’s outside law firm, Simpson Thacher & Bartlett. Sullivan was on the agenda, but he had chosen not to attend. After a brief discussion, the board decided to remove Sullivan and install Willumstad in his place.

The company over which Willumstad had now been assigned stewardship was one of the most peculiar success stories in American business. American International Group began as American Asiatic Underwriters in a small office in Shanghai in 1919. Nearly half a century later, it had operations throughout Asia, Europe, the Middle East, and the Americas, but with its modest market value of $300 million and about $1 billion worth of insurance policies, the privately owned firm was hardly a juggernaut.

By 2008, however, the word “modest” was seldom used in connection with AIG. In only a few decades it had grown into one of the world’s largest financial companies, with a market value of just under $80 billion (even after a steep slide in its share price earlier that year) and more than $1 trillion worth of assets on its books. That phenomenal expansion was primarily the result of the cunning and drive of one man: Maurice Raymond Greenberg, known to friends as “Hank,” after the Detroit Tigers slugger Hank Greenberg, and referred to within the company simply as “MRG.”

Greenberg had had a hardscrabble upbringing worthy of a Dickens hero. His father, Jacob Greenberg, who drove a cab and owned a candy store on the Lower East Side of Manhattan, died during the Great Depression when Hank was only seven years old. After his mother married her second husband, a dairy farmer, the family moved to upstate New York, where Hank would wake before dawn most mornings to help milk the cows. When he was seventeen, he faked his birth date to join the army. Two years later, Greenberg was among the troops who landed on Omaha Beach on D-day. He was in the unit that liberated the Dachau concentration camp and, after returning to the United States for law school, he returned to the military to fight in the Korean War, in which he was awarded the Bronze Star.

Returning to New York after Korea, Greenberg talked his way into a job as a $75-a-week insurance underwriting trainee with Continental Casualty, where he quickly rose to become the firm’s assistant vice president in charge of accident and health insurance. In 1960, Cornelius Vander Starr, the founder of what would become AIG, recruited Greenberg to join his company.

A onetime soda-fountain operator in Fort Bragg, California, C. V. Starr was one of the prototypical restless Americans of the early twentieth century, the kind who made their names as wildcatters, inventors, and entrepreneurs. After trying his hand at real estate, he entered the insurance business and at the age of twenty-seven sailed to Shanghai to sell policies. There he discovered a market that was dominated by British insurance companies, but they sold only to Western firms and expatriates; Starr built his business selling policies to the Chinese themselves. Forced out of China after the communist takeover in 1948, Starr expanded elsewhere in Asia. With the help of a friend in the military by the name of General Douglas MacArthur, commander of the occupying force in Japan after the war, Starr secured a deal to provide insurance to the American military for several years. Before the country opened up its insurance market to foreign underwriters, AIG Japan would become the company’s largest overseas property-casualty business.

By 1968, Starr was seventy-six and ailing, and with an oxygen tank and vials of pills never far from his side, he turned to Greenberg to crack the American market, naming him president and Gordon B. Tweedy chairman. Greenberg wasted no time in making it clear who was going to be taking the lead. At a meeting soon after his appointment, he and Tweedy were on opposite sides of an argument when Tweedy stood up and began loudly pressing his point. “Sit down, Gordon, and shut up,” Greenberg told him. “I’m in charge now.” Starr, whose bronze bust still greets visitors to AIG’s art deco headquarters, died that December. The following year, AIG went public, and Greenberg became CEO. (Tweedy left soon afterward.)

Under Greenberg, AIG grew rapidly and became increasingly profitable through expansion and acquisitions, doing business in 130 countries and diversifying into aircraft leasing and life insurance. Greenberg himself became the very model of an imperial CEO—adored by shareholders, feared by employees, and a cipher to everyone outside the company. Despite his slight build, he had an intimidating presence. He drove himself relentlessly, eating nothing but fish and steamed vegetables every day for lunch, and regularly working out on a StairMaster or playing tennis. He showed little affection for anyone, with the exception of his wife, Corinne, and his Maltese, Snowball. Within AIG he was famous for his short fuse and his ceaseless drive to know everything that was happening inside the company—his company. He was rumored to have hired former CIA agents, and security men seemed to be posted everywhere at headquarters.

To the outside world the biggest AIG drama was Greenberg’s attempt to secure a dynasty; what he created, instead, was a blood feud among insurance royalty.

Jeffrey Greenberg, his son, a graduate of Brown and Georgetown Law, had been groomed to succeed Hank. But in 1995, after a series of clashes with his father, Jeffrey left AIG, where he had worked for seventeen years. Two weeks earlier, his younger brother, Evan, had been promoted to executive vice president, his third promotion in less than sixteen months, establishing him as a rival to Jeffrey. With the departure of his brother, Evan, a former hippie who for many years had shown no interest in following his father into the business, was clearly the heir apparent. Yet Evan soon ran afoul of a patriarch who could not surrender any power and, like Jeffrey before him, bolted the company. Jeffrey would go on to become chief executive of Marsh & McLennan, the biggest insurance broker in the world, while Evan became CEO of Ace Ltd., one of the world’s largest reinsurers.

Ultimately it was clashes with regulators, not family members, that led to the downfall of Hank Greenberg. Headstrong and combative as ever, Greenberg simply picked the wrong time to take a stand against the feds. After the collapse of Enron and a procession of corporate scandals that dominated the front pages at the start of the new century, regulators and prosecutors became emboldened to come down hard on companies that were proving to be uncooperative. In 2003, AIG agreed to pay $10 million to settle a lawsuit brought by the Securities and Exchange Commission that accused the company of helping an Indiana cell phone distributor hide $11.9 million in losses. The settlement figure was relatively high, as the SEC acknowledged at the time, because AIG had attempted to withhold key documents and initially gave investigators an explanation that was later contradicted by those documents.

The following year, after yet another long tussle with federal investigators, AIG agreed to pay $126 million to settle criminal and civil charges that it had allowed PNC Financial Services to shift $762 million in bad loans off its books. As part of that settlement, a unit of AIG was placed under a deferred prosecution agreement, meaning that the Justice Department would drop the criminal charges after thirteen months if the company abided by the terms of the settlement. (After the indictment of the giant accounting firm Arthur Andersen had led to its collapse, the government preferred the softer cudgel of deferred prosecution agreements as a kind of probation—an approach that had previously been more common in narcotics cases.)

It was the AIG unit that had been placed on probation for thirteen months—AIG Financial Products Corp., or FP for short—that became Ground Zero for the financial shenanigans that would nearly destroy the company.

FP had been created in 1987, the product of a remarkable deal between Greenberg and Howard Sosin, a finance scholar from Bell Labs who became known as the “Dr. Strangelove of Derivatives.” A great deal of money can be made from derivatives, which are, in simplest terms, financial instruments that are based on some underlying asset, such as residential mortgages, to weather conditions. Like the bomb that ended the film Dr. Strangelove, derivatives could, and did, blow up; Warren Buffett called them weapons of mass destruction.

Sosin had been at Drexel Burnham Lambert, Michael Milken’s ill-fated junk bond operation, but left before that Beverly Hills-based powerhouse folded amid an epoch-defining scandal that drove it into bankruptcy in 1990. Seeking a partner with deeper pockets and a higher credit rating, Sosin fled to AIG in 1987 with a team of thirteen Drexel employees, including a thirty-two-year-old named Joseph Cassano.

Working from a windowless room on Third Avenue in Manhattan, Sosin’s small, highly leveraged unit operated almost like a hedge fund. The early days at the firm were awkward: The wrong rental furniture arrived at the office, and employees had to make do for a while sitting on children’s chairs and working on tiny tables—generating almost immediately, nevertheless, the same immensely profitable returns as they had at Drexel. As was the practice with some hedge funds, the traders got to keep some 38 percent of the profits, with the parent company getting the rest.

The key to the success of the business was AIG’s triple-A credit rating from Standard & Poor’s. With it the fund’s cost of capital was significantly lower than that of just about any other firm, enabling it to take more risk at a lower cost. Greenberg had always recognized how valuable the triple-A rating had been to him and guarded it carefully. “You guys up at FP ever do anything to my Triple-A rating, and I’m coming after you with a pitchfork,” he warned them.

But Sosin chafed under the short management leash that had been placed on the unit and in 1994 left along with the other founders after a falling-out with Greenberg.

(Long before Sosin’s departure, however, Greenberg, infatuated with the profit machine that FP had become, had formed a “shadow group” to study Sosin’s business model in case he ever decided to leave. Greenberg had PricewaterhouseCoopers build a covert computer system to track Sosin’s trades, so they could later be reverse engineered.) After much persuasion from Greenberg, Cassano agreed to stay on and was promoted to chief operating officer.

A Brooklyn native and the son of a police officer, Cassano was known for his organizational skills, not his acumen in finance, unlike most of the talent Sosin had brought with him—“quants,” quantitative analysts, with PhDs who created the complex trading programs that defined the unit.

In late 1997, the so-called Asian flu became a pandemic, and after Thailand’s currency crashed, setting off a financial chain reaction, Cassano began looking for some safe-haven investments. It was during that search that he met with some bankers from JP Morgan who were pitching a new kind of credit derivative product called the broad index secured trust offering—an unwieldy name—that was known by its more felicitous acronym, BISTRO. With banks and the rest of the world economy taking hits in the Asian financial crisis, JP Morgan was looking for a way to reduce its risk from bad loans.

With BISTROs, a bank took a basket of hundreds of corporate loans on its books, calculated the risk of the loans defaulting, and then tried to minimize its exposure by creating a special-purpose vehicle and selling slices of it to investors. It was a seamless, if ominous, strategy. These bond-like investments were called insurance: JP Morgan was protected from the risk of the loans going bad, and investors were paid premiums for taking on the risk.

Ultimately, Cassano passed on buying BISTROs from JP Morgan, but he was intrigued enough that he ordered his own quants to dissect it. Building computer models based on years of historical data on corporate bonds, they concluded that this new device—a credit default swap—seemed foolproof. The odds of a wave of defaults occurring simultaneously were remote, short of another Great Depression. So, absent a catastrophe of that magnitude, the holders of the swap could expect to receive millions of dollars in premiums a year. It was like free money.

Cassano, who became head of the unit in 2001, pushed AIG into the business of writing credit default swaps. By early 2005, it was such a big player in the area that even Cassano had begun to wonder how it had happened so quickly. “How could we possibly be doing so many deals?” he asked his top marketing executive, Alan Frost, during a conference call with the unit’s office in Wilton, Connecticut.

“Dealers know we can close and close quickly,” Frost answered. “That’s why we’re the go-to.”

Even as the bubble was inflating, Cassano and others at AIG expressed little concern. When in August of 2007 credit markets began seizing up, Cassano was telling investors, “It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of those transactions.” His boss, Martin Sullivan, concurred. “That’s why I am sleeping a little bit easier at night.”

The pyramidlike structure of a collateralized debt obligation is a beautiful thing—if you are fascinated by the intricacies of financial engineering. A banker creates a CDO by assembling pieces of debt according to their credit ratings and their yields. The mistake made by AIG and others who were lured by them was believing that the ones with the higher credit ratings were such a sure bet that the companies did not bother to set aside much capital against them in the unlikely event that the CDO would generate losses.

Buoyed by their earnings, AIG executives stubbornly clung to the belief that their firm was invulnerable. They thought they’d dodged a bullet when, toward the end of 2005, they stopped underwriting insurance on CDOs that had pieces tied to subprime mortgage-backed securities. That decision enabled them to avoid the most toxic CDOs, issued over the following two years. The biggest reason, though, for the confidence within the firm was the unusual nature of AIG itself. It was not an investment bank at the mercy of the short-term financing market. It had very little debt and some $40 billion in cash on hand. With a balance sheet of more than $1 trillion, it was simply too big to fail.

Speaking to investors at the Metropolitan Club in Manhattan in December 2007, Sullivan boasted that AIG was one of the five largest businesses in the world. His company, he stressed, “does not rely on asset-backed commercial paper or the securitization markets responding, and importantly, we have the ability to hold devalued investments to recovery. That’s very important.”

He did acknowledge that AIG had a large exposure to underwriting a certain financial product whose future even then seemed dubious: tranches of credit derivatives known as super-seniors. “But because this business is carefully underwritten and structured with very high attachment points to the multiples of expected losses, we believe the probability that it will sustain an economic loss is close to zero.”

By that point in time, however, how AIG saw itself and how everyone had come to view it were rapidly diverging. The clients who bought super-seniors insured by AIG might still be making their payments, but on paper they saw their values falling. Market confidence in CDOs had collapsed; the credit-rating agencies were lowering their rankings on tens of billions of dollars’ worth of CDOs, even those that had triple-A ratings.

In 2007 one of its biggest clients, Goldman Sachs, demanded that AIG put up billions of dollars more in collateral as required under its swaps contracts. AIG disclosed the existence of the collateral dispute in November. At the December conference, Charles Gates, a longtime insurance analyst for Credit Suisse, asked pointedly what it meant that “your assessment of certain super-senior credit default swaps and the related collateral … differs significantly from your counterparties.”

“It means the market’s a little screwed up,” Cassano said, playing on his Brooklyn roots. “How are you, Charlie? Seriously, that is what it means. The market is—and I don’t mean to make light of this—actually just so everybody is aware—the section that Charlie was reading from was a section that dealt with collateral call disputes that we have had with other counterparts in this transaction. It goes to some of the things that James [Bridgwater, who did the modeling at AIG Financial Partners] and I talked about, about the opacity in this market and the inability to see what valuations are.”

The dispute with Goldman had become an irritant to Cassano. Another counterparty, Merrill Lynch, had also been seeking more collateral but wasn’t being as aggressive about it as Goldman. Cassano seemed almost proud of his ability to get these firms to back off. “We have, from time to time, gotten collateral calls from people,” he said on December 5, 2007. “Then we say to them: ‘Well, we don’t agree with your numbers.’ And they go, ‘Oh.’ And they go away.”

At a board meeting that fall, Cassano bristled when questioned about the Goldman collateral issue. “Everyone thinks Goldman is so fucking smart,” he railed. “Just because Goldman says this is the right valuation, you shouldn’t assume it’s correct just because Goldman said it. My brother works at Goldman, and he’s an idiot!”

Even before Willumstad had been given the position of CEO, he had been consumed by FP. Problems at the unit had been simmering at AIG since Greenberg had been forced to resign in 2005 as the result of another major accounting scandal. New York attorney general Eliot Spitzer had even threatened to bring criminal charges against him after launching an investigation into a transaction between AIG and a subsidiary of General Re, an insurer owned by Warren Buffett, that inflated AIG’s cash reserves by $500 million.

In late January of 2008, Willumstad had been sitting in his corner office at Brysam Global Partners when he noticed something startling in a monthly report issued to AIG board members: The FP group had insured some $500 billion in assets, including more than $61 billion in subprime mortgages—most of that for European banks. That piece of business was actually a very clever bit of financial engineering on FP’s part. To meet regulatory requirements, banks could not exceed a certain level of debt, relative to their capital. The beauty of AIG’s insurance—for a short time, at least—was that it enabled banks to step up their leverage without raising new money because they had insurance.

Willumstad did the math and was appalled: With mortgage defaults rapidly mounting, AIG could soon be forced to pay out astronomical sums of money.

He immediately contacted PricewaterhouseCoopers, AIG’s outside auditor, and ordered them to come to his office for a secret meeting the following day to review exactly what was happening at the troubled unit. No one bothered to tell Sullivan, who was still CEO, about the gathering.

By early February, the auditor had instructed AIG to revalue every last one of its credit default swaps in light of recent market setbacks. Days later the company embarrassingly disclosed that it had found a “material weakness”—a rather innocuous euphemism for a host of problems—in its accounting methods. At the same time, a humiliated AIG had to revise its estimate of losses in November and December, an adjustment that raised the figure from $1 billion to more than $5 billion.

Willumstad was vacationing at his ski house in Vail, Colorado, when he finally called Martin Sullivan to deliver the order to fire Joe Cassano.

“You have to take some action on him,” Willumstad said.

A startled Sullivan responded that, even if the firm had to restate its earnings, it wasn’t anything to worry about: They were only paper losses. “Well, you know, we’re not going to lose any money,” he said calmly.

It was now Willumstad’s turn to be taken aback. “That’s not the issue,” he said “We’re about to report a multibillion-dollar loss, a material weakness! You have the auditors saying that Cassano has not been as open and forthcoming as he could be.”

Sullivan acknowledged the controversy surrounding Cassano, but was it really necessary that he be fired?

“Two very high-profile CEOs have just been fired for less,” Willumstad reminded him. Charles Prince of Citigroup and Stan O’Neal of Merrill Lynch had both been ousted in the fall of 2007 after overseeing comparably large write-downs. “You can’t not take some action both publicly as well as to send a message to the rest of the organization.”

Finally, Sullivan relented but made one last pitch for Cassano. “We should keep him on as a consultant,” Sullivan recommended.

“Why?” Willumstad asked, as perturbed as he was baffled by the suggestion.

Sullivan maintained that FP was a complicated business and that he didn’t have the resources to manage it without some help, at least initially.

In exasperation Willumstad said, “Take a step back. Just think about it for a minute, both from an internal as well as an external point of view. The guy’s not good enough to run the company, but you’re saying you’re going to need to keep him around?”

Sullivan then appealed to Willumstad’s sense of competitiveness. If the firm kept Cassano on the payroll, he wouldn’t be able to jump to a rival firm—which, leaving aside his questionable business schemes, might still be valuable to the company. “If I keep him on a consulting contract, he’ll have a noncompete and he won’t go someplace else and steal all our people.”

On that issue Willumstad finally relented. He was a pragmatist, and consultants were easily gotten rid of.

“Okay,” he agreed, “but you have to figure out how to manage that if you want to keep consulting with him. And you can’t let him stay actively engaged in the business. That’s just insanity.”

Cassano did remain on a consulting contract, at the rate of $1 million a month, but Sullivan and others continued to worry about the defection of their staff. With Cassano shunted aside and the FP group already reporting a $5 billion loss, there was constant speculation that FP’s top producers would quickly depart. William Dooley, who replaced Cassano, went to Sullivan with a request: “We need to put together a retention program or we’re going to lose the team.”

Sullivan appreciated the scope of the problem. Because AIG’s employees were paid a percentage of profits—and the firm had just recorded such a huge loss—“the likelihood of these guys getting paid out anything is zero going forward,” as he told the compensation committee. “It’s not like it’s a bad quarter; they can’t make it back next quarter or next year.” For most FP employees it would make more sense to start over elsewhere than to stay in place, he told the board. (In a way, ironically enough, FP’s compensation package better aligned the interests of the employees with shareholders than most traders on Wall Street, who were paid based on the performance of their own book rather than on the profits of the entire firm.)

In early March, AIG’s board, after requiring Sullivan to redraft the proposed retention program more than once, approved a plan that would pay out $165 million in 2009 and $235 million in 2010. At the time, it hardly seemed like a decision that anyone outside AIG would care about—let alone give rise to the political nightmare that would result in censure, death threats, and a mad scramble on Capitol Hill to undo the bonuses.

In May, AIG reported dismal results for the first quarter, a $9.1 billion write-down on credit derivatives and a $7.8 billion loss—its largest ever. Standard & Poor’s responded by cutting its rating on the company by one notch, to AA minus. Four days later, on May 12, the Wall Street Journal reported that management at one of AIG’s most profitable units, the aircraft-leasing business International Lease Finance Corp., was pushing for a split from the parent company through either a sale or a spin-off.

Hank Greenberg, meanwhile, who had just turned eighty-three years old, was urging AIG to postpone its annual meeting, pointing to the poor quarterly performance and the effort to raise $7.5 billion in capital. “I am as concerned as millions of other investors as I watch the deterioration of a great company,” Greenberg wrote in a letter made public. “The company is in crisis.”

In private, other large AIG shareholders had also begun campaigning for changes. Two days before the annual meeting on May 14, 2008, a fax arrived at Willumstad’s office at Brysam—a letter from Eli Broad, a former AIG director who had sold his giant annuities business, SunAmerica, to AIG in 1998 for $18 billion in stock, and a close business associate of Greenberg’s. Joining Broad in the missive were two influential fund managers, Bill Miller of Legg Mason Capital Management and Shelby Davis of Davis Selected Advisers. The group, which controlled roughly 4 percent of AIG’s shares, wanted a meeting to discuss “steps that can be taken to improve senior management and restore credibility.”

On the following evening, Willumstad and another AIG director, Morris Offit, went to Broad’s apartment at the Sherry-Netherland hotel on Fifth Avenue to meet with the three investors. Joining them was Chris Davis, Shelby’s son, a portfolio manager at his firm. Sitting in his expansive living room, with dramatic views of Central Park and the city skyline, Broad quickly launched into a list of complaints about Sullivan and the company’s performance.

After hearing him out briefly, Willumstad interrupted him. “Listen, before you go too far, I just have to be very clear. We are in the middle of raising capital, so I cannot disclose to you anything we haven’t told everyone else. We’re happy to listen and to try to answer any questions.” From then on the evening was awkward and uncomfortable for all parties involved, as Willumstad and Offit could say little more than that the board understood their concerns. “You’re not telling us anything we don’t know,” he acknowledged.

Even in the face of mounting shareholder pressure to have him removed, Sullivan appeared to be in good spirits before the annual meeting that morning. He worked the conference room on the eighth floor of the AIG tower, shaking hands and greeting shareholders. He chatted amiably with one investor about a 2-0 win by soccer’s Manchester United over Wigan Athletic the previous Sunday, which enabled the team to nip Chelsea for the league championship on the last day of the season. The victory was a feather in Sullivan’s and AIG’s caps: The company had paid Manchester United $100 million to have its logo on the players’ shirts for four seasons. Apart from that, there was little else to mollify disgruntled shareholders. The headline in the Wall Street Journal the next day observed trenchantly: “AIG Offers Empathy, Little Else.”

Despite Willumstad and Offit’s assurances about the company’s efforts to increase its liquidity, the decision to try to raise new capital only led to further clashes. JP Morgan and Citigroup were spearheading the push for AIG to take additional write-downs and to disclose them. By this time, AIG had been hit by calls for an additional $10 billion in new collateral on the swaps it had sold to Goldman and others. The JP Morgan bankers knew what was being said on Wall Street and they knew how considerably others’ valuations disagreed with AIG’s own. To the bankers, the finance executives at AIG were amateurs. Not a single one impressed them—not Sullivan, not Steven J. Bensinger, the firm’s CFO.

The contempt was mutual; AIG executives were dismayed by the arrogance of the JP Morgan team. They and the bankers at Citi had been entrusted with one of the biggest capital-raising efforts ever and were being paid handsomely for their services: more than $80 million for each bank. Their high-handedness in piously informing AIG how its assets should be valued achieved little but to provoke the insurers to dig in their heels.

JP Morgan persisted in asking AIG for a disclosure. On a Sunday afternoon conference call about the capital effort, Sullivan himself came on the line, sounding less cheerful than usual. “Look, we are going to put our pencils down right now. I think either you need to get on board with us or we will have to move on without you.”

The JP Morgan bankers hung up and discussed their options. Steve Black, who had dialed in from South Carolina, was deputized to call Sullivan back. “Okay, you want us to put our pencils down. We will. But then we are not going to participate in the capital raise, and when people ask us why we’re dropping out, we will have to tell them that we had a disagreement, that there are different views on the potential losses on some of your assets.”

In the face of that threat, AIG had no choice but to cave; raising the money was critical, and it could not afford to have a battle with its main banker become public. AIG executives were further irritated when the dispute over valuations was disclosed and JP Morgan did not want to have its name attached to it; the filing refers to “another national financial services firm.”

At a large conference table at Simpson Thacher, just moments after AIG’s directors voted Willumstad the new CEO, he addressed the board.

He stressed that one of the first things that needed to be done was to make peace with Greenberg. He was AIG’s largest shareholder, controlling 12 percent of the company, and his various battles with the firm were a costly distraction. “He’ll be linked to the company forever anyway,” Willumstad added.

After the board meeting, Willumstad returned to his apartment on the Upper East Side. He dialed Hank Greenberg’s number with some trepidation; Greenberg never made anything easy. It took some time to get him on the phone.

“Hank? Hi, this is Bob Willumstad. I wanted to let you know that the board has just met and decided to replace Martin—”

“Good riddance,” Greenberg muttered.

“—and a release is going to go out tomorrow announcing that I am the new CEO.”

There was a moment of painful silence. “Well, congratulations, Bob,” Greenberg finally said, almost faintly. “It was good of you to call and let me know.”

“Look, Hank. I know that there have been a lot of issues between you and the company. But I’m willing to make a fresh start and see if there’s some way we can’t resolve these issues.”

“I am willing to listen,” Greenberg replied. “I do want to help the company with its problems.”

The two men agreed to have dinner together that week. As he hung up the phone, Willumstad was further convinced that settling with Greenberg had been a necessary step. It would even help the stock price. But Greenberg was a hard-ass negotiator, and any deal would take time and patience.

The problem was, Willumstad wasn’t at all sure just how much time he had.