Ken Wilson, his special adviser, raised an issue they had yet to consider: “Hank, how the hell can we put $85 billion into this entity without new management?”—a euphemism for asking how the government could fund this amount of money without firing the current CEO and installing its own. Without a new CEO, it would seem as if the government was backing the same inept management that had created this mess.
“You’re right. You’ve got to find me a CEO. Drop every other thing you’re doing,” Paulson told him. “Get me a CEO.”
Wilson got back to his office and started scrolling though his computer’s address book. After years as a financial institutions banker at Goldman Sachs, he knew the top people in the industry. Before even getting to the B’s, a name popped into his brain: Ed Liddy, the former CEO of Allstate and a Goldman board member. He was a perfect candidate, currently “on the beach” without a job and someone who would welcome the challenge. Liddy also knew AIG: He was the Goldman board member to whom everyone turned for advice whenever they discussed whether the firm should acquire it.
But Wilson didn’t have his phone number. So he called Chris Cole at Goldman Sachs, who had been at AIG all weekend and had attended the meeting at the Fed on Monday, who gladly retrieved the number for him.
There was no time for small talk when Wilson reached Liddy, and he immediately explained why he was calling.
“Do you have time to take a call from Hank?” Wilson asked, and Liddy assented enthusiastically.
“You have to hang up,” Wilson told Paulson, who was on the phone when he appeared in his boss’s office door. “I’ve got your CEO.”
AIG’s stock had fallen below $2 a share when Willumstad’s assistant stepped into his office and handed him a fax from Hank Greenberg. Willumstad had heard earlier that Greenberg was out telling the press that he planned to mount a proxy contest or a takeover of the company.
“Do I have to read it?” he asked warily, and was not surprised at what he saw:
Dear Bob,
We have been discussing for several weeks my offer to assist the company, in any way that you and the Board desired. Throughout those discussions, you have told me and David Boies that you believed my assistance was important to the company. The only concern that you have expressed to me is the fear that if I were to become an advisor to the company that I would overshadow you. I respectfully suggest to you, and to the Board, that the continuing refusal to work together to save this great company is far more important than any concern over personal positions or perceptions.
I do not know whether or not it is now too late to save AIG. However, we owe it to AIG’s shareholders, creditors and our country to try.
Since you became Chairman of AIG, you and the Board have presided over the virtual destruction of shareholder value built up over 35 years. It is not my intention to try to point fingers or be critical. My only point is that under the circumstance, I am truly bewildered at the unwillingness of you and the Board to accept my help.
Geithner began to prepare in his office for a conference call with Bernanke. We’re going to do this, he thought. We’re really going to do this.
Jester and Norton were poring over all the terms. They had just learned that Ed Liddy had tentatively accepted the job of AIG’s CEO and was planning to fly to New York from Chicago that night.
To draft a rescue deal on such short notice, the government needed help, preferably from someone who already understood AIG and its extraordinary circumstances. Jester knew just the man: Marshall Huebner, the co-head of insolvency and restructuring at Davis Polk & Wardwell, who was already working on AIG for JP Morgan and who happened to be just downstairs.
Meanwhile, Bob Scully of Morgan Stanley, whom Geithner had hired to advise the Fed, wanted to make sure he was aware of all the risks ahead of the call. As Scully continued to study the rapid deterioration in the markets, he became increasingly anxious about whether AIG would be able to maintain its payments on a government loan. What had looked like a steal before might still be a tough sell.
“I want to be clear that there’s a real risk you may not be made whole on this loan,” he warned as Geithner dialed into the conference call.
While Bernanke said that he had decided to back the deal, he nevertheless wanted to take a straw poll among the participants in the call. He was clearly anxious, asking, “Are you sure we’re doing the right thing?”
But with his implicit support—and Geithner’s insistence that this was the only way to avert a financial Armageddon—the vote was 5-0. There was no longer any discussion of moral hazard, and no talk of Lehman Brothers.
Before Wiseman and Gamble had gotten far after being escorted by security guards from the NY Fed, they were surprised to suddenly find themselves being invited back in. There had been a mix-up, they were told, and they were taken to a table in the dining room.
“This isn’t the cool kids’ table,” Gamble remarked, looking over at another table at the other end of the enormous space, where JP Morgan and Goldman bankers were waiting.
“One thing is for certain,” Wiseman said, “they are not doing a private deal. They’d never look this relaxed.”
While they waited, Gamble took a call about two new issues: Insurance regulators in Texas, where AIG had a major life insurance business, were starting to panic. Even worse, JP Morgan had just pulled a line of collateral in Japan, which was AIG’s largest market outside the United States. Gamble couldn’t believe it: JP Morgan, AIG’s adviser just twenty-four hours earlier, was now only exacerbating the problem, however prudent it might have been to do so.
Twenty minutes later, Eric Dinallo, superintendent of the New York State Insurance Department, came over to a relieved Wiseman and Gamble’s table. “I can’t tell you much,” Dinallo said, “but don’t do anything precipitous.”
“Eric,” a frustrated Gamble replied, “we’re happy to hold tight, but our securities lending business is in trouble.” Then he pointed at the JP Morgan and Goldman Sachs contingent. “The guys over there are creating this problem. Go talk to those guys.”
“I think we’re about to be out of cash!” John Studzinski announced at the teetering insurance giant’s headquarters. It was nearly 1:00 p.m., and if Studzinski’s math was correct, AIG was minutes away from bankruptcy.
Just then, Willumstad walked out of his office with something that hadn’t been seen in some time in the building: a smile.
“They blinked,” he said.
He had just gotten off the phone with Geithner, who told him about the bailout plan: The Fed would extend to AIG a $14 billion loan to keep the firm in business through the rest of the trading day. But Geithner added that AIG would have to immediately post collateral before it could receive the loan. Officially, it was called a “demand note.”
While clearly relieved, Willumstad understandably wondered how they were supposed to come up with $14 billion in the next several minutes. Then it dawned on one of them: the unofficial vaults. The bankers ran downstairs and found a room with a lock and a cluster of cabinets containing stock certificates for AIG’s insurance units—tens of billions of dollars’ worth, dating mostly from the Greenberg era. They began rifling through the drawers, picking through fistfuls of securities that they guessed had gone untouched for years. In an electronic age, the idea of keeping physical certificates on hand was a disconcerting but welcome throwback.
AIG’s senior vice president and secretary, Kathleen Shannon, stacked the bonds up on the table and put them in a briefcase.