Too Big to Fail

by Andrew Ross Sorkin

  At Robert Hurst’s Fifth Avenue apartment: Ellis, The Partnership, 613.

  Corzine off skiing in Telluride, Colorado: Ibid.

  Thain, longtime lieutenant and friend of Corzine: Ibid. Corzine had long been an ally of Thain’s, helping him secure the chief financial officer job in 1994 and later a spot on the executive committee. They went skiing together in Colorado and dined out with their wives in Manhattan. Thain was the trustee-designate for the Corzines’ children’s trusts. See also Noam Scheiber, “The Brain in Thain,” New York, January 8, 2007.

  Thain was the one to have to break the news to him: Ibid.

  “Jon has decided to relinquish the CEO title”: Ibid.

  accumulating several hundred million dollars in stock from the IPO: After Goldman’s IPO, Thain’s 3.1 million shares were worth about $171 million. Kimberly Seals McDonald, “Goldman’s Bounty—Top Execs Will Pocket Up to $869m in IPO,” New York Post, April 13, 1999; Erica Copulsky, “Goldman Notifies Top Non-partners of Payout Formulas,” Investment Dealers Digest, May 3, 1999.

  he bought a ten-acre property in Rye: Charlie Gasparino, “John Thain’s $87,000 Rug,” The Daily Beast, January 22, 2009.

  determined to take a two-week trip to Vail at Christmastime: Susanne Craig and Dan Fitzpatrick, “Merrill Architects Criticized,” Wall Street Journal, January 20, 2009.

  he took Thain out to dinner: Ellis, The Partnership, 660.

  which he found at the New York Stock Exchange: While Thain’s NYSE appointment was confirmed on December 18, 2003, his first day was not until January 15, 2004. “Recap of Stories on NYSE Naming Goldman’s Thain As CEO,” Dow Jones, December 18, 2003.

  was paid a $15 million signing bonus: Cardiff de Alejo Garcia, “Financial News: Thain to Get Up to $11M from Restricted Shares,” Dow Jones, September 16, 2008.

  raised $12.8 or billion from the sovereign wealth funds: Other investors in this group include Japan’s Mizuho bank group and the Korea Investment Corp. Jed Horowitz, “Merrill Seeks Intl Investments for Itself, Clients: Pres,” Dow Jones, February 6, 2008.

  He also went about slashing costs: Susanne Craig, “The Weekend That Wall Street Died,” Wall Street Journal, December 29, 2008.

  flowers costing Lehman some $200,000: Ibid.

  a signing bonus of $39.4 billion, even though Montag wouldn’t begin work: An SEC filing revealed that in addition to Montag’s $600,000 annual salary, Merrill agreed to pay him a bonus of $39.4 million in cash and stock-based compensation for fiscal year 2008, which he would receive in January 2009. “Merrill Lynch to Pay New EVP Montag $600,000 Salary,” Dow Jones Corporate Filings Alert, May 2, 2008.

  Thain would hire Peter Kraus: Kevin Kingsbury, “Kraus the Latest Ex-Goldman Hire at Merrill,” Dow Jones, May 5, 2008; Heidi N. Moore, “Merrill’s Kraus Gets $25M, Then Leaves,” Dow Jones, December 22, 2008.

  And then there was his office: Charlie Gasparino, “John Thain’s $87,000 Rug,” The Daily Beast, January 22, 2009.

  angling for the Treasury Secretary post if John McCain: Louise Story and Julie Creswell, “Love Was Blind,” New York Times, February 8, 2009.

  “It’s kind of ‘Raise as you go’” Fair Disclosure Wire, June 11, 2008.

  Thain and O’Neal Breakfast: During breakfast between John Thain and Stan O’Neal, Thain pressed him to give him some guidance about his views on the management team. O’Neal replied, “The only person you ought to watch out for is Bob McCann.” McCann was the head of the firm’s brokerage business and the two had a long-standing mutual distrust.

  Merrill’s $27 billion in CDO and subprime: In November 2007, Merrill announced that its total exposure to subprime mortgages and collateralized debt organization was $27.2 billion. UBS analyst Glenn Schorr said that hiring Thain “doesn’t change the fact that Merrill has $27 billion of CDO/subprime exposure and is likely facing further write-downs in the near term.” “Thain to the Rescue,” Investment Dealers Digest, November 19, 2007.

  [O’Neal rise]: John Cassidy, “Subprime Suspect: The Rise and Fall of Wall Street’s First Black C.E.O,” New Yorker, March 31, 2008; David Rynecki, “Can Stan O’Neal Save Merrill?” Fortune, September 30, 2002.

  Merrill’s beginnings, Wheaties, “Bullish on America”: “Charles Merrill, Broker, Dies, Founder of Merrill Lynch Firm,” New York Times, October 7, 1956; “Advertising: Jackpot,” Time, August 20, 1951; Joseph Nocera, “Charles Merrill,” Time, December 7, 1998; Suzanne Woolley, “A New Bull at Merrill Lynch,” Money, March 1, 2002; Helen Avery, “Merrill Shrugs Off the Herd Mentality,” Euromoney, August 1, 2004.

  “I think this is a great firm”: Charles Gasparino, “Bull by the Horns,” Wall Street Journal, November 2, 2001.

  “Ruthless, O’Neal would tell associates, isn’t always that bad”: David Rynecki, “Putting the Muscle Back in the Bull,” Fortune, April 5, 2004.

  O’Neal’s top management team as “the Taliban” and calling O’Neal “Mullah Omar”: Ibid.

  acquired one of the biggest subprime mortgages in the nation, First Franklin: Erick Bergquist, “Merrill Wins Bidding for First Franklin,” American Banker, September 6, 2006.

  left Merrill in February 2006: Avital Hahn, “Leading CDO Team Breaks into Two; Ricciardi Joins Cohen Brothers as CEO,” Investment Dealers Digest, February 27, 2006.

  “whatever it takes”: Kim, as three people heard and remembered him saying. Serena Ng and Carrick Mollenkamp, “Merrill Takes $8.4 Billion Credit Hit,” Wall Street Journal, October 25, 2007.

  replaced by thirty-nine-year-old executive Osman Semerci: Bradley Keoun, “Merrill Names Semerci, D’Souza to Run FICC, Equities,” Bloomberg, July 25, 2006.

  Kim took home $37 million: SEC filing disclosed a $14.45 million cash bonus and a $22.2 million stock incentive bonus, in addition to his salary of $350,000. See Nicolas Brulliard, “Merrill Lynch Exec VP Fleming Gets $20.4M Stk Bonus,” Dow Jones Corporate Filings Alert, January 24, 2007.

  Semerci, more than $20 million: Louise Story, “Bonuses Soared on Wall Street Even as Earnings Were Starting to Crumble,” New York Times, December 19, 2008.

  Fleming and Fakahany sent a letter to Merrill’s directors: Cassidy, “Subprime Suspect,” New Yorker.

  O’Neal sent an overture to Wachovia about a merger: Jenny Anderson and Landon Thomas Jr., “Merrill’s Chief Is Said to Float a Bid to Merge,” New York Times, October 26, 2007.

  “I wouldn’t hire Stan to wash windows”: Cassidy, “Subprime Suspect,” New Yorker.

  CHAPTER EIGHT

  remained close in the decade since Dimon had been forced out: Regarding Citigroup, Dimon told New York magazine: “I left ten years ago…. No, I didn’t leave, I was fired. I was kicked out of the nest.” Duff McDonald, “The Heist,” New York, March 24, 2008.

  A glass cabinet displayed replicas of two wood-handled pistols: “Replicas of the famous pistols are displayed in the JPMorgan lobby, while the originals—curious icons of the bank’s storied past—are displayed on the executive floor.” Crisafulli, The House of Dimon, 7.

  Like Dimon, Willumstad had been outmaneuvered by Weill: He announced his departure in July but didn’t officially step down until September 5, 2005. David Enrich, “Citigroup Pres Willumstad to Step Down in Sept,” Dow Jones, July 14, 2005.

  His partner, Marge Magner, was another Citi exile: With Citigroup since 1987, Magner had most recently been chairman and CEO of the company’s Global Consumer Group. Mark McSherry and Jonathan Stempel, “Citigroup’s Consumer Chief Magner to Leave,” Reuters, August 22, 2005.

  Brysam Global Partners: Brysam began business at the end of January 2007. “Willumstad and Magner Establish Private Equity Firm that Will Focus on Financial Services Investments in Emerging Markets,” Business Wire, January 22, 2007.

  He was the chairman of the board of American International Group: Willumstad first joined AIG’s board as a director in early 2006. Later that year Frank Zarb, acting as interim chairman, suggested him for the job. Emily Thornton and Jena McGregor, “A Tepid W
elcome for AIG’s New Boss,” BusinessWeek, June 30, 2008.

  Joining Weill two decades ago: Willumstad began at Weill’s Commercial Credit in 1987. Francesco Guerrera, “Quiet Giant Confronts a Colossal Challenge,” Financial Times, September 17, 2008.

  Willumstad’s beginnings: Lynnley Browning, “A Quiet Banker in a Big Shadow,” New York Times, March 10, 2002.

  at a conference in Boca Raton: Gillian Tett, “The Dream Machine,” Financial Times, March 25, 2008.

  blitzkrieg of acquisitions: Commercial Credit acquired Primerica, Shearson, and Travelers in 1993, Aetna’s property and casualty business in 1996, Salomon Brothers in 1997, culminating with Citigroup in 1998. Shawn Tully, “The Jamie Dimon Show,” Fortune, July 22, 2002.

  Removing Sullivan, installing Willumstad: Liam Pleven, Randall Smith, and Monica Langley, “AIG Ousts Sullivan, Taps Willumstad as Losses Mount,” Wall Street Journal, June 16, 2008.

  in a small office in Shanghai: Shelp, Fallen Giant, 17–28, 153–60; Brian Bremner, “AIG’s Asian Connection; Can It Maintain Its Strong Growth in the Region?” BusinessWeek, September 15, 2003.

  market value of $300 million: Carol J. Loomis, “AIG: Aggressive. Inscrutable. Greenberg,” Fortune, April 27, 1998.

  with a market value of just under $80 billion: At the end of AIG’s second quarter (August 2008), it had over $1 trillion in assets and about $78 billion in shareholders equity. Matthew Karnitschnig, Liam Pleven, and Peter Lattman, “AIG Scrambles to Raise Cash, Talks to Fed,” Wall Street Journal, September 15, 2008.

  Greenberg’s upbringing: Reports conflict on Greenberg’s age at the time of his father’s death. This author has chosen to go with the age listed in Shelp, Fallen Giant, 95–96.

  Greenberg talked his way into a job as a $75-a-week insurance underwriting trainee: “On a whim, he wandered into the offices of Continental Casualty in lower Manhattan in 1953 and talked his way into the office of the personnel director. Greenberg thought the man was excessively rude, so he stormed into the office of a vice president and told him that Continental’s personnel director was a ‘jerk.’ He was rewarded with a job as a $75-a-week underwriting trainee. Before the end of the decade, he was Continental’s assistant vice president in charge of accident and health insurance.” See Devin Leonard, “Greenberg & Sons,” Fortune, February 21, 2005.

  CV Starr’s story and AIG: Ibid.; Monica Langley, “Eastern Front: AIG and Fired Chief Greenberg Cross Paths Again—in China.” Wall Street Journal, December 2, 2005; Shelp, Fallen Giant, 95–102.

  “Sit down, Gordon, and shut up”: Shelp, Fallen Giant, 104.

  He drove himself relentlessly: Fortune reported that Greenberg installed a StairMaster on the corporate jet as well, to keep fit in flight. Leonard, “Greenberg & Sons,” Fortune.

  He showed little affection for anyone: As he told Cindy Adams, “You learn fast who your friends are. Some I considered close became a lot less close. They separated quickly. Many you think loyal are suddenly not and you find out during adversity…. But Snowball gives me extra love. She sleeps with me. Puts her head on my shoulder.” Cindy Adams, “Ex-AIG Executive on Friends, Family,” New York Post, October 25, 2005.

  Jeffrey, Evan Greenberg: Albert B. Crenshaw, “Another Son of CEO Leaves AIG,” Washington Post, September 20, 2000; Christopher Oster, “Uneasy Sits the Greenbergs’ Insurance Crown,” Wall Street Journal, October 18, 2004; Diane Brady, “Insurance and the Greenbergs, like Father like Sons,” BusinessWeek, March 1, 1999.

  AIG agreed to pay $10 million: According to an SEC press release: “AIG developed and marketed a so-called ‘non-traditional’ insurance product for the stated purpose of ‘income statement smoothing,’ i.e., enabling a public reporting company to spread the recognition of known and quantified one-time losses over several future reporting periods…. AIG issued the purported insurance policy to Brightpoint for the purpose of assisting Brightpoint to conceal $11.9 million in losses that Brightpoint sustained in 1998.” U.S. Securities and Exchange Commission, “AIG Agrees to Pay $10 Million Civil Penalty,” September 11, 2003. http://www.sec.gov/news/press/2003-111.htm.

  AIG agreed to pay $126 million to settle: “In consenting to settle the Commission’s action and related, criminal charges, AIG has agreed to pay disgorgement, plus prejudgment interest, and penalties totaling $126,366,000.” Securities and Exchange Commission v. American International Group, Inc., Litigation Release No. 18985 / November 30, 2004. See http://www.sec.gov/litigation/litreleases/lr18985.htm.

  “deferred-prosecution agreement”: Pamela H. Bucy, “Trends in Corporate Criminal Prosecutions Symposium: Corporate Criminality: Legal, Ethical, and Managerial Implications,” American Criminal Law Review, September 22, 2007.

  “Dr. Strangelove of Derivatives”: Lynnley Browning, “AIG’s House of Cards,” Portfolio, September 28, 2008.

  Warren Buffett called them weapons of mass destruction: In the past he had referred to them as “time bombs” and “financial weapons of mass destruction.” Clare Gascoigne, “A Two-Faced Form of Investment—the Culture of Derivatives,” Financial Times, May 3, 2003.

  Sosin fleeing to A.I.G: Sosin signed a joint venture agreement with AIG on January 27, 1987, and shortly recruited the ten men who would join his team, which already included Drexel’s Randy Rackson and Barry Goldman as partners. See Robert O’Harrow Jr. and Brady Dennis, “The Beautiful Machine,” Washington Post, December 29, 2008.

  traders got to keep some 38 percent of the profits: Ibid. AIGFP reportedly kept 38 percent of the profits, with AIG retaining 62 percent. The Washington Post noted that Greenberg later said his figure was 65 percent.

  “You guys up at FP ever do anything to my Triple-A rating”: Ibid.

  Greenberg’s “shadow group”: Ibid. Randall Smith, Amir Efrati, and Liam Pleven, “AIG Group Tied to Swaps Draws Focus Of Probes,” Wall Street Journal, June 13, 2008.

  BISTRO and J.P. Morgan: Gillian Tett, “The Dream Machine,” Financial Times, March 24, 2006; Jesse Eisinger, “The $58 Trillion Elephant in the Room,” Portfolio, November 2008.

  “How could we possibly be doing so many deals?”: Brady Dennis and Robert O’Harrow Jr., “Downgrades and Downfall,” Washington Post, December 31, 2008.

  “It is hard for us, without being flippant.”: Ibid.

  “does not rely on asset-backed commercial paper”: “American International Group Investor Meeting—Final,” Fair Disclosure, December 5, 2007.

  In 2007 one of its biggest clients, Goldman Sachs, demanded: Serena Ng, “Goldman Confirms $6 Billion AIG Bets,” Wall Street Journal, March 21, 2009.

  “It means the market’s a little screwed up”: AIG investor meeting, Fair Disclosure Wire, December 5, 2007.

  “We have, from time to time, gotten collateral calls from people”: Ibid.

  Greenberg’s forced resignation, Spitzer’s criminal threat: According to the Wall Street Journal, Spitzer threatened AIG’s board with criminal charges unless it dismissed Greenberg. He was forced out as chairman and CEO on March 14, 2005. Spitzer filed a civil fraud suit against the firm in May, accusing AIG of “sham transactions.” James Freeman, “Eliot Spitzer and the Decline of AIG,” Wall Street Journal, May 16, 2008; Daniel Kadlec, “Down…But Not Out,” Time, June 20, 2005.

  AIG’s $500 million boost: James Bandler, “Hank’s Last Stand,” Fortune, October 13, 2008.

  He immediately contacted PricewaterhouseCoopers: Theo Francis and Diya Gullapalli, “Insurance Hazard: Pricewaterhouse’s Squeeze Play,” Wall Street Journal, May 3, 2005.

  consulting contract, at the rate of $1 million a month: Gretchen Morgenson, “Behind Biggest Insurer’s Crisis, a Blind Eye to a Web of Risk,” New York Times, September 28, 2008; Carrick Mollenkamp, Serena Ng, Liam Pleven, and Randall Smith, “Behind AIG’s Fall, Risk Models Failed to Pass Real-World Test,” Wall Street Journal, November 3, 2008.

  a 7.8 billion loss: Liam Pleven, “AIG Posts Record Loss, As Crisis Continues Taking Toll,” Wall Street Journal, May 9, 2008.

/>   International Lease Finance Corp. considering split: J. Lynn Lunsford and Liam Pleven, “AIG Leasing Unit Mulls Split-Up,” Wall Street Journal, May 12, 2008.

  “I am as concerned as millions of other investors”: Liam Pleven and Randall Smith, “Financial Rebels With a Cause: AIG—Hank Greenberg, Who Built the Giant Insurer, Steps Up His Attack,” Wall Street Journal, May 13, 2008.

  “steps that can be taken to improve”: Liam Pleven and Randall Smith, “Big Shareholders Rebel at AIG—Letter to the Board Cites Problems With Senior Management,” Wall Street Journal, June 9, 2008.

  to meet with the three investors: Ibid. Francesco Guerrera and Julie MacIntosh, “AIG removes Sullivan as chief executive,” Financial Times, June 15, 2008.

  The company had paid Manchester United $100 million: “Manchester United Signs Shirt Deal with American Insurance Giant,” Associated Press, April 6, 2006.