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

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.

CHAPTER NINE

On Friday, June 27, 2008, Lloyd Blankfein, exhausted after a nine-hour flight to Russia, took a stroll around the square outside his hotel in St. Petersburg. He had just arrived in the city on a Gulfstream, along with his wife, Laura, and Gary D. Cohn, Goldman’s president and chief operating officer. A history buff, Blank fein had finished David Fromkin’s A Peace to End All Peace: The Fall of the Ottoman Empire and the Creation of the Modern Middle East during the flight.

The other members of the Goldman board weren’t due to land for several hours, so Blankfein had some time to himself. It was a pleasantly warm afternoon, so he decided to take in the sights. Towering above him across the square, the gold dome of St. Isaac’s Cathedral was radiant against the overcast sky. That night the Goldman board and their spouses would be treated to a private tour of the State Hermitage Museum, which was housed in six buildings of the former imperial palace along the Neva River.

If all around him the financial world was in a state of chaos, Blankfein had reason to feel contented about Goldman on the eve of its board meeting. The firm was once again proving itself to be the best on Wall Street, weathering—so far, at least—the toughest market anyone could remember.

And what better place to be gathering than in Russia? What China was to manufacturing, Russia was to commodities, and commodities were king at the moment. Oil, most crucially, was going for $140 a barrel, and Russia was pumping out millions of barrels a day. For a moment, it could make anyone forget about the problems back in the United States.

Every year the board of Goldman took a four-day working trip abroad, and since being handed the reins of the firm from Hank Paulson two years earlier, Blankfein had insisted that they meet in one of the new emerging economic giants, one of the BRIC nations: Brazil, Russia, India, or China. It seemed only appropriate: It had been one of Goldman’s economists who had coined the appellation for those four economies, to which the world’s wealth and power were now shifting. To Blankfein it was a matter of walking the talk.

St. Petersburg was only the first part of the trip, where they’d be given an update on the firm’s finances and have a strategy-review session; it would be followed by two days in Moscow. Goldman’s chief of staff, John F. W. Rogers, had used his pull to set up the board meeting with Russia’s tough prime minister, Vladimir Putin, whose anticapitalist ideology made it clear that he would be no patsy to the United States.

As Blankfein ambled back to the Hotel Astoria, past the massive equestrian monument to Nicholas I, he pondered his fears: What if oil prices were to slide, say, to $70 a barrel? What then? And what about Goldman itself? Despite his proven success, Blankfein admitted to being “paranoid,” as he often described himself.