“I don’t think it’s worth you getting mugged carrying $14 billion of certificates,” Michael Wiseman from Sullivan & Cromwell advised her over the phone. “We’ll get Fed security to escort you over.”
Ten minutes later, Shannon was carrying an inestimably valuable briefcase across Pine Street, flanked by two armed guards.
Hank Paulson hustled down the stairs and out the side exit of the Treasury building, briskly heading for the White House. He and Ben Bernanke had scheduled a meeting with President Bush to brief him on the extraordinary steps they were about to take.
After passing through security and a brief stay in a waiting room, they were escorted to the Oval Office, where Paulson delicately walked the president through the terms.
As Paulson explained the deal, however, detailing its points in Wall Street jargon, Bush clearly looked perplexed.
Bernanke jumped in and said, “Mr. President, let’s step back for a minute.” Donning his professorial hat, he explained how deeply entwined AIG had become in the banking system. More important, he tried to appeal to the Everyman in Bush, emphasizing how many citizens and small businesses depended on the firm. People used AIG’s life insurance policies to protect their families. They used AIG’s annuities to fund their retirements. AIG also provided surety bonds, a kind of guarantee for construction projects and public works.
The president then posed a question that, in its own way, went directly to the heart of the problem: “An insurance company does all this?”
This one did.
At around 4:00 p.m. that afternoon, the Fed’s offer clattered through an AIG fax machine (which should have been replaced and shipped to the Smithsonian a decade earlier). An army of lawyers on AIG’s eighteenth floor were anxiously awaiting it. After the three-page document finally appeared, a lawyer grabbed it and quickly made copies.
“Well, you finally get your chance to work for the federal government,” Richard Beattie, the lead lawyer for the outside directors on the AIG board, told Willumstad as he scanned the terms.
“What do you mean?” asked Willumstad.
“They own you now,” Beattie replied with a grin.
And they did. The Federal Reserve was providing AIG a credit line of $85 billion—which it hoped would be enough to avert catastrophe and keep it afloat. But in exchange for the loan, the government was taking a large ownership stake—79.9 percent in the form of warrants called “equity participation notes.” It was similar to the proposal that JP Morgan and Goldman had been working on.
If Washington was going to take Wall Street off the hook, the government wanted to make certain that at least the old stakeholders didn’t profit in any untoward fashion. “Paulson is handling this the same way he did Fannie, Freddie, and Bear Stearns—if the government steps in, the shareholders will pay for it,” Cohen observed.
The Fed loan also came with a significant debt burden. AIG would have to pay at a rate based on a complex formula—the London interbank offered rate, a benchmark for short-term loans between banks, which then came to about 3 percent—plus an extra 8.5 percentage points. Based on that day’s rate, the interest the company would have to pay soared to more than 11 percent, which at the time was considered usurious. The loan would be secured by all AIG’s assets, and the government would have the right to veto payments of dividends to both common and preferred shareholders.
In order to pay back the government, AIG would have to sell off assets—and under the circumstances, that meant a fire sale. To AIG loyalists, the loan was proving to be less a bridge to solvency than a plank to an organized breakup.
“This is unbelievable,” Willumstad said, setting aside the document.
The board of AIG was prepared to meet soon for an emergency session. As Willumstad stood and reread the terms in a virtual state of shock, his assistant called out to say that Tim Geithner was on the phone. It was 4:40 p.m.
Willumstad followed Beattie and Cohen into his office and hit the speakerphone button.
“Can you hang on a minute?” Geithner said after greeting him. “Secretary Paulson is going to pick up.”
“Okay,” Willumstad said, adding, “I’ve got Dick Beattie and Rodgin Cohen sitting here with me.”
“So, you’ve seen the new agreement, right?” Geithner asked after Paulson joined in. “We want to know that you are going to accept the terms. We need an answer back from you soon, because trading is going to start in Asia.”
In the back of his own mind, Geithner had a nagging worry: Were the terms too harsh? But he was at least as concerned about potential blowback from the other direction—that Treasury would be criticized for giving AIG a sweetheart deal.
It was no coincidence, though, that the government’s terms had so much in common with what the private sector had been considering. For one thing, they had used many of the same advisers. And in the current political environment, there was safety in being able to say that AIG was only getting what the market had been willing—or almost willing—to offer.
“Obviously, we have a board meeting in fifteen minutes, and I’m prepared to present it there,” Willumstad said.
“Tim, it’s Dick,” Beattie said, jumping in. “I just want to be clear that you know that you shouldn’t assume just because you stepped in that the board will approve this. We’ve got a fiduciary duty to our shareholders, so it is going to be complicated.”
Beattie, playing hardball, had effectively implied a threat that AIG might be better off filing for Chapter 11 bankruptcy than taking the government’s deal.
Geithner didn’t flinch. “This is the only proposal you’re going to get,” he tersely replied, and then added, “There’s one other condition… .”
Paulson, interrupting, said, “The condition is that we’re going to replace you, Bob.”
Beattie and Cohen looked at Willumstad in embarrassed silence.
“O … kay,” Willumstad said. “If that’s what you want.”
“We’re going to bring in a new CEO,” Paulson said matter-of-factly. “He’ll be showing up tomorrow.”
Willumstad had had no illusions that a government rescue would mean anything other than his ouster, but he was stunned by the speed of events. The government had just made its offer moments ago—and it had already completed an executive search to find his successor?
“Should I still be here?” Willumstad asked, confused about how to proceed.
“Yeah, we would appreciate whatever cooperation and help you can offer,” Paulson replied.
“Is it okay if I ask who it is?”
“It’s Ed Liddy,” Paulson said.
For a moment, Willumstad wracked his memory. “Who the hell is Ed Liddy?” Beattie whispered, but Cohen only shrugged his shoulders.
“Ed just retired recently as the CEO of Allstate,” Paulson interjected, realizing they had no idea who he was.
After the call, Willumstad slumped in his chair, sighed, and then looked over at Beattie and laughed.
“Well, you’re wrong,” he said. “I won’t be working for the federal government after all.”
The directors of AIG were already gathered in the boardroom when Willumstad and the advisers made their entrance. Willumstad wasted no time on preliminaries.
“We are faced with two bad choices,” he began. “File for bankruptcy tomorrow morning, or take the Fed’s deal tonight.” He explained the terms of the deal and told them that Blackstone would come in with bankruptcy advisers to discuss the merits of that route.
And then he told them his personal news.
“I’m going to be replaced,” he said quietly. “Ed Liddy is going to take my place.”
“Ed Liddy?” asked Virginia Rometty.
“Yeah, he’s Allstate,” Willumstad explained.