If you followed the 2007-2009 subprime crisis you may think that you know most of the story of AIG's collapse. However, as is frequently the case, there is a lot more to the story than the simplified media narrative. "Fatal Risk" is a well-researched and highly readable account of the whole story behind the AIG disaster. The author Roddy Boyd clearly had excellent sources and there is a great deal of information here that you will not find anywhere else. The subprime mortgage affair was such a huge, global crisis (as Roddy Boyd puts it in this book, it was as though "the entire Western world was one big, highly leveraged real estate trade") that books covering the crisis as a whole (such as Michael Lewis's excellent "The Big Short") simply do not have the space for the detailed account of AIG that is "Fatal Risk".
Of course, any book about AIG has to tell the story of the remarkable Maurice "Hank" Greenberg, who was CEO of AIG from 1968 through 2005. Starting with a "far-flung and not terribly profitable" business, Greenberg built AIG into the largest and most respected insurance company in the world. We learn the story of how Greenberg served in World War 2 (landing on Omaha Beach on D-Day and participating in the liberation of the Dachau concentration camp) and in the Korean War, and how three days after his discharge he talked his way into an entry-level insurance job in New York, rose quickly through the ranks, and ended up at AIG a few years later. The book also tells the story of how the capital markets subsidiary AIG Financial Products (AIG-FP) was established in 1987, as a joint venture with the "absurdly intelligent" Howard Sosin, formerly of Drexel. While AIG-FP under Sosin was hugely successful, Greenberg forced Sosin out in 1993 because he was uncomfortable with the risks of some of AIG-FP's transactions. This is the first piece of a great deal of persuasive evidence from Boyd that AIG-FP's CDO losses in 2007-2008 would not have happened if Greenberg had still been the CEO of AIG.
So why was Greenberg not still the CEO in 2007? Boyd explains how this is largely because of the cynical and disgusting behavior of Eliot Spitzer, who at the time was the New York State Attorney General. Spitzer wanted to be elected Governor and his strategy was to prosecute the rich and the powerful, which he believed would be highly popular in the wake of the Enron scandal. Boyd explains how Spitzer's pretext was some questionable AIG transactions in 2000 and 2001. No matter that nobody was ever able to prove that Greenberg had any knowledge of these transactions (which amounted to a minuscule fraction of AIG's earnings), Spitzer was determined to remove Greenberg and threatened AIG with a corporate indictment if they did not fire him. Unfortunately, the AIG board was craven enough to cave in to Spitzer's demand. Spitzer's later conduct caused "utter disbelief" for Greenberg and his legal team. In a "freeform riff" on TV with George Stephanopoulos, Spitzer pronounced Greenberg guilty of fraud; as Boyd puts it, "the most powerful Attorney General in America was simply cutting out the annoying and tedious business of mustering evidence and filing suit, and pronounced Greenberg guilty". Every Spitzer episode leaves a nasty taste in your mouth, from the time Spitzer planned to have Greenberg arrested, to the threat to expand his investigation to the Starr (charitable) Foundation, based upon a summer intern in Spitzer's office misunderstanding some documents. (All of the criminal charges against Greenberg were dropped, and Spitzer has a "stunning record of losses and reversals" in his other high-profile prosecutions).
Spitzer is by far the least sympathetic character in this whole sorry saga. The dogged pursuit of Greenberg by this ambitious politician (who it later transpired was simultaneously prosecuting and patronizing prostitution rings) resulted in Greenberg being replaced by the affable but incompetent Martin Sullivan. Moreover, Spitzer forced AIG to abandon their plan for Greenberg to work with Sullivan during a transition period. So the highly risk-averse Greenberg was abruptly gone; the man who insisted on "detailed contingency plans for AIG's survival in the event of a nuclear attack on New York", and who personally grilled AIG-FP's Tokyo trader about the $10 million loss resulting from the collapse of Barings Bank (due to the unauthorized trading of Nick Leeson) was gone, replaced by Sullivan who apparently had no interest whatsoever in risk management.
Meanwhile at FP, Sosin was succeeded by the avuncular and widely respected Tom Savage, who had a well-known aversion to mortgage-related transactions, due to their "unanalyzable credit and unquantifiable risk". Savage had a much better relationship with Greenberg than Sosin had, and made sure to keep him very well informed of the details and risks of all of the transactions at FP. Given Greenberg's gimlet-eyed approach to risk management, and Savage's discomfort with mortgage risk, it is inconceivable that FP would have transacted the swaps that proved to be fatal if either man had remained in place. However, Greenberg was gone because of Spitzer's political ambition, and in 2001 Savage and his family wanted to move to a warmer climate and Savage was succeeded by Joe Cassano, who was much more comfortable taking mortgage risk than Savage had been. Boyd explains how FP's mortgage swap business ballooned under the Sullivan-Cassano regime; they "plugged a handful of variables into a 7-year old computer model; somehow the model always said 'yes' ". In 2005 a couple of AIG-FP traders were prescient enough to realize the growing risks of the subprime mortgage market, and because of this AIG-FP stopped executing these transactions in 2006. (Given that AIG-FP was aware of, and uncomfortable with, the subprime mortgage risk, it is inexplicable that while they stopped doing new transactions, they did not attempt to unwind or hedge the transactions that they had already closed). While AIG was kept informed of these transactions, it is incredible that there was "not a single instance of a New York-based senior manager sending so much as an inquisitive email about a swaps portfolio that amounted to 75 percent of AIG's equity base". It is very safe to say that this would not have been the case had Greenberg still been the CEO.
While most readers will already be familiar with the story of AIG-FP and its subprime swap portfolio, Boyd also describes another shocking reason for AIG's collapse that has received much less publicity. This is the story of the AIG Global Securities Lending program, which was run by AIG's Chief Investment Officer, Win Neuger. Neuger was responsible for investing the policyholder cash coming in from AIG's life insurance subsidiaries. When Greenberg was CEO he ensured that the fund was essentially riskless (Boyd describes one incident of Greenberg being absolutely livid when the fund made a small loss). However, as soon as Greenberg was gone Neuger pounced, quickly removing language from the prospectus that referred to "safety of funds" and "limitations on investment in derivatives", and loading up on subprime mortgage securities in a quest for what he referred to as "Ten Cubed", which was the goal of raising his unit's annual income to $1 billion. When the value of these assets crashed, there was no immediate problem because any redemptions could be funded by new cash that was coming into the program. This may remind you of Bernie Madoff, and for good reason; Boyd points out that Neuger was effectively running a giant Ponzi scheme. Instead of being disgraced and going to prison for life, however, Neuger's "corporate star remained ascendant and he earned $8.78 million for his work". And this all took place in AIG's New York offices under the not-so-watchful eyes of Martin Sullivan and his risk management executives. It is utterly inconceivable that anything like this would have happened under Greenberg.
"Fatal Risk" is a riveting read for anyone who wants to know the story of AIG and AIG Financial Products, the disgusting and undeserved hounding of Hank Greenberg by Eliot Spitzer, and the establishment and horrible consequences of Joe Cassano's swap book and Win Neuger's Ponzi scheme. On the negative side, I hate to nitpick but the book has a somewhat slapdash feel to it due to several spelling and grammatical errors ("This was even aggressive even for Hank", "AIG had just true constituent at that moment", and even the dreaded "seperate"). There are also some small factual errors; it's "Kelley Kirklin", not "Kelly Kirkland", and "Robert Hirst", not "Michael Hurst"; the aquarium in AIG-FP's Westport office was installed for Howard Sosin; and 10 basis points on $1 million is $1000, not $100,000. I noticed only one major error, and that is in the epilogue which states that AIG is "sporting, as of this writing [in January 2011], a stock price north of $54". While strictly speaking this is true, a very important caveat is omitted. Earlier in the book Boyd mentions that the September 2002 stock price was in the low $50s which may lead the reader to believe that in 2011 AIG's stock had risen back to its September 2002 level. However, in 2009 there was a 1-for-20 reverse stock split which means that the January 2011 stock price was effectively 95% below its September 2002 level. AIG has recovered to some degree but not to the extent that Boyd implies.
