On the surface, Goldman looked like one of AIG’s biggest counterparties, but earlier that morning, Goldman’s Gary Cohn had boasted internally that the firm had hedged so much of its exposure to AIG that it might actually make $50 million if the company collapsed. The firm’s decision to buy insurance in the form of credit default swaps against AIG beginning in late 2007 was starting to seem like a smart investment. The firm had conducted what it internally called a “WOW analysis”—a worst-of-the-worst case scenario—and it was quickly coming true. Even though Goldman had hedged its direct exposure to AIG, Blankfein appreciated the larger problem: The collateral damage to its other counterparties and the rest of the market could expose the firm to untold billions in crippling losses.
The group was ushered into a conference room with Tim Geithner. Dan Jester was at his side and Jeremiah Norton from Treasury, who had flown up from Washington that morning, joined them.
As everyone took a seat, Blankfein noticed Jamie Dimon’s absence. He himself had come because he assumed that Geithner had invited both of them. “Where the hell is Jamie?” Blankfein whispered to Winkelried, who just shrugged his shoulders.
“Look, we’d like to see if it’s possible to find a private-sector solution,” Geithner said, addressing the group. “What do we need to make this happen?”
For the next ten minutes the meeting turned into a cacophony of competing voices as the bankers tossed out their suggestions: Can we get the rating agencies to hold off on a downgrade? Can we get other state regulators of AIG’s insurance subsidiaries to allow the firm to use those assets as collateral?
Geithner soon got up to leave, saying, “I’ll leave you with Dan,” and pointed to Jester, who was Hank Paulson’s eyes and ears on the ground. “I want a status report as soon as you come up with a plan.”
Before departing, he added one more thing: “I want to be very clear: Do not assume you can use the Fed balance sheet.”
The meeting then devolved again into a half dozen side conversations until some order was restored when Braunstein walked the room through AIG’s financial position, explaining how quickly it had deteriorated over the weekend. It was coming under pressure not only because of the impending ratings downgrade but also because its counterparties were making constant requests for more collateral. The comment was a not particularly subtle jab at Goldman Sachs, which itself had been battling all weekend, as it had all year, for AIG to put up more collateral. To some in the room, it seemed Blankfein picked up on the slight immediately.
“So, when is the money going to be paid out?” Blankfein asked, ostensibly referring to all the counterparties but to some he seemed to mean himself. One attendee scribbled a note to himself: “GS—$600 million,” which was an approximation of what he thought Goldman was seeking. Even though Goldman may have been hedged against AIG, it still wanted what it thought was the appropriate amount of collateral to keep trading with the firm. Scully of Morgan Stanley interrupted with: “Is there anything you can do to put Moody’s off so that we get a little breathing room for the next couple of days?”
At that point, Jimmy Lee tried to break the log jam and take control of the meeting, having quickly become convinced that they were never going to get anywhere unless they started focusing on the big picture. AIG had forty-eight hours left to live unless the bankers sitting in this room did something productive to save it.
Lee had already started listing on a notepad some of the issues that had been raised and things he needed to know:
liquidity forecast
valuation—business, securities
term sheet
participants
legal in all
In the margins he scribbled some questions about the size of the hole—“50? 60? 70?” billion—and then drafted a mini-term sheet for a loan of this magnitude. “Maturity: 1-2 years; Collateraclass="underline" Everything; Consideration: Fees, Ratcheting Spreads, Warrants.”
Given the size of loan AIG would require, the fees would be mind-boggling. He might be able to charge as much as 500 basis points, or 5 percent, of the entire amount for taking on this level of risk. For a $50 billion loan, that would add up to a $2.5 billion payday in fees.
Lee had even begun assembling a list of the banks to contact to raise the credit line, virtually all of whom had exposure to AIG and were therefore also vulnerable: JPM, GS, Citi, BofA, Barclays, Deutsche, BNP, UBS, ING, HSBC, Santander. He could have come up with many more names but stopped at eleven.
“Okay, okay,” Lee now said to the group and ran through the items on his list.
“I like that. That sounds right to me,” Winkelried chimed in.
The group decided to start their work with a round of basic due diligence, breaking the businesses into a half dozen categories and passing out assignments among themselves.
Before they got into the specifics, Blankfein took advantage of a pause in the discussion to make a beeline for the door. Without Dimon there, this was below his pay grade.
As they all decamped from the Fed and marched back to AIG to start crunching the numbers, Lee’s brain was already doing the math.
“Who is going to buy this shit?” he asked aloud to no one in particular.
That afternoon at 1:30 p.m., Paulson stepped out to the lectern in the White House briefing room. “Good afternoon, everyone. And I hope you all had an enjoyable weekend,” he began, to some awkward laughter. “As you know, we’re working through a difficult period in our financial markets right now, as we work off some of the past excesses.”
He had just gotten back to Washington, rushing first to the Treasury and then across the way to the White House, to take questions from reporters. Jim Wilkinson had coached him on the flight down about how he should approach the issues. “We’ve got to say we’ve drawn a line in the sand,” Wilkinson instructed him and warned him to expect to be asked about why Lehman had been allowed to fail while Bear Stearns was saved. Wilkinson presented it as an opportunity to discuss moral hazard and to make it clear that the U.S. government “is not in the business of bailouts.”
Paulson himself was doubtful that this was quite the time to be dogmatic and challenged Wilkinson on the point, but the fact was, he was dead tired and could not keep his mind from drifting to AIG.
As he finished his remarks, the first question came from the press corps, and it was a softbalclass="underline" “Can you talk about what the federal role should be going forward? Are we likely to see any more federal involvement in rescues like you did with Fannie and Freddie and Bear Stearns?”
Paulson paused for a moment. “Well, the federal role is obviously very important because, as you’ve heard me say before, nothing is more important right now than the stability of our capital markets, and so I think it’s important that regulators remain very vigilant.”
“Should we read that as ‘no more’?” the reporter screamed out.
“Don’t read it as ‘no more,’” Paulson replied, clearing his throat. “Read it as … that I think it’s important for us to maintain the stability and orderliness of our financial system. Moral hazard is something that I don’t take lightly.”
And then came the anticipated question: “Why did you agree to support the bailout of Bear Stearns but not Lehman?”
Paulson paused to gather his thoughts carefully. “The situation in March and the situation and the facts around Bear Stearns were very, very different to the situation that we’re looking at here in September, and I never once considered that it was appropriate to put taxpayer money on the line with … in resolving Lehman Brothers.”
It was an answer that would come back to haunt him. He had parsed his words carefully. Technically, his answer was true, but he knew that if Bank of America or Barclays had decided to buy Lehman he might have used taxpayer money to support a deal, but he wasn’t about to bring that up now.