Six months
ago, I received an odd phone call from a man named Jake DeSantis at A.I.G.
Financial Products—the infamous unit of the doomed insurance company, staffed
by expensively educated, highly paid traders, whose financial ineptitude is
widely suspected of costing the U.S. taxpayer $182.5 billion and counting. At
the time A.I.G. F.P.’s losses were reported, it became known that a handful of
traders in this curious unit had sold trillions of dollars of credit-default
swaps (essentially unregulated insurance policies) on piles of U.S. subprime mortgages,
but its employees hadn’t yet become the leading examples of Wall Street greed.
And so this was before Jake DeSantis and his colleagues found themselves
suburban-Connecticut outcasts, before their first death threats, before the
House of Representatives passed a bill because of them (taxing 90 percent of
their large bonuses), before New York attorney general Andrew Cuomo announced
he was going after their paychecks, and before Iowa senator Charles Grassley
said that A.I.G.’s leaders should follow the Japanese example and “either do
one of two things, resign or go commit suicide.”DeSantis
turned out to be a friend of a friend. He’d called because he didn’t know
anyone else “in the media.” As a type he was instantly recognizable: a “quant,”
a numbers guy who was allowed to take financial risks because of his superior
math skills, but who had no taste for company politics or public exposure. He’d
grown up in the Midwest, the son of schoolteachers, and discovered Wall Street
as a scholarship student at M.I.T. The previous seven years he’d spent running
A.I.G. F.P.’s profitable stock-market-related trades. He wasn’t looking for me
to write about him or about A.I.G. F.P. He just wanted to know why the public
perception of what had happened inside his unit, and the larger company, was so
different from the private perception of the people inside it, who actually
knew what had happened. The idea that the employees of A.I.G. F.P. had
conspired to maximize their short-term gains at the company’s longer-term expense,
for instance. He and the other traders had been required to defer about half of
their pay for years, and intertwine their long-term interests with their firm’s.
The people who lost the most when A.I.G. F.P. went down were the employees of
A.I.G. F.P.: DeSantis himself had just watched more than half of what he’d made
over the previous nine years vanish. The incentive system at A.I.G. F.P.,
created in the mid-1990s, wasn’t the short-term-oriented racket that helped
doom the Wall Street investment bank as we knew it. It was the very system that
U.S. Treasury secretary Timothy Geithner, among others, had proposed as a solution to the problem of Wall Street pay.Even more
oddly, the public explanation of A.I.G.’s failure focused on the credit-default
swaps sold by traders at A.I.G. F.P., when A.I.G.’s problems were clearly
broader. There was the mortgage-insurance unit in North Carolina, United
Guaranty, that had taken on all sorts of silly risks in the past two years,
lost several billion dollars, and replaced their C.E.O. There were the fund
managers at A.I.G., the parent company, who had blown nearly $50 billion on
trades in subprime mortgages—that is, they had lost more than A.I.G. F.P.,
whose losses stood around $45 billion. And there was a pattern: all of this
stuff had happened since 2005, after an accounting scandal forced C.E.O.
Maurice “Hank” Greenberg to resign. Greenberg, who had headed A.I.G. since
1968, was a bullying, omnipotent ruler—one of those bosses who did not so much
build a company as tailor it to his character and render it incapable of being
run by anyone else. After he was forced out, Greenberg said, “The new
management wanted to prove that they could continue to grow without former
management” and so turned a blind eye to all sorts of risks. So how come most
of the senior management at A.I.G. was left in place by the U.S. Treasury after
the bailout? Why were officials, both public and private, so intent on leading
others to believe all the losses at A.I.G. had been caused by a few dozen
traders in this fringe unit in London and Connecticut?I had no
idea, was busy doing other things, and had no special interest in Jake DeSantis’s
predicament. I listened politely, made my excuses—and went back to whatever it
was I’d been doing. But then, on March 19, the new C.E.O. of A.I.G., Edward
Liddy, went to Washington to testify. The story broke—or, rather, rebroke, as
it had been reported two weeks earlier, without stirring much notice—that
A.I.G. F.P. had just shelled out $450 million in bonuses to the 400 employees
of A.I.G. F.P., including to Jake DeSantis. It must have been an otherwise slow
news day because all hell broke loose, in a way it hadn’t before and hasn’t
since in this financial crisis. The perception was that the very same people
who had made these insane, greed-driven decisions that might cost the U.S.
taxpayer $182.5 billion were still paying themselves big bucks! An exchange
between C.E.O. Liddy and Florida congressman Alan Grayson captured the spirit
of that moment:grayson: Mr.
Liddy, you said before that there’s 20 or 25 people who were involved in the
credit default business. What are their names, please?liddy: I
don’t have their names at my disposal, sir.grayson: Well, I’m sure you
remember a few of the names. I mean, they did cause your company to crash.liddy: You
know, I’ve been at the company, as you know, for six months. I don’t know all
the people that were in AIG F.P., and many of them are gone.grayson: Well,
there or gone, it doesn’t really matter. I want to know who they are. Names,
please.…liddy: If
it’s possible to provide you the names, we will. We will cooperate with you.grayson: That’s
good, but I want to know the names that you know right now.liddy: I
don’t know them, sir.grayson: Not
a single one. You’re talking about a group, a small group of people who caused
your company to lose $100 billion, as you sit here today, you can’t give me one
single name.liddy: The
single name I would give you is Joseph Cassano, who ran …grayson: That’s
a good start. You already gave that name. Give me another name.liddy: I
just don’t know them. I do not know those names. I don’t have them all at my
command.grayson: Well,
how can you propose to solve the problems of the company that you’re now
running if you don’t know the names of the people who caused that problem? … I
would expect you’d at least know more than one name. How about two names? Give
us one more name.liddy: I’m
just not going to do that, sir, because that will provide—that’ll be the—that
could be a list of people that we could do—individuals who want to do damage to
them could do that. It’s just not …grayson: Well,
listen, these same people could now be working right now today at Citibank. Is
it more important to protect them, the ones who caused the $100 billion loss,
or protect us? Which is more important to you right now?For a
brief moment you had a glimpse of how harshly financial people might be treated
if Wall Street ever lost its political influence. Just days before, Larry
Summers had gone on the morning talk shows to explain that a contract is a
contract and the government couldn’t just go in and void it and take back
A.I.G.’s paychecks, but that “every legal step possible to limit those bonuses
is being taken by Secretary Geithner and by the Federal Reserve System.” Then
Obama himself went out of his way to denounce the greed at A.I.G. F.P. and say
he was looking for a way to get the bonus money back—and even that failed to
slake the public anger. “On A.I.G.,” a journalist asked Obama at a press
conference, “why did you wait—why did you wait days to come out and express
that outrage? It seems like the action is coming out of New York and the attorney
general’s office. It took you days to come public with Secretary Geithner and
say, Look, we’re outraged. Why did it take so long?”“It took
us a couple of days because I like to know what I’m talking about before I
speak,” Obama said testily. “All right?”It’s unlikely that he actually did
know what he was talking about, except in the broadest outlines. Nor, for that
matter, did the people who had engineered the bailout. How could they? At no
point did anyone from the U.S. Treasury or the U.S. Congress, or any of the
various New York State authorities that had gotten involved, call them up, much
less visit A.I.G. F.P.—as, say, someone might who was genuinely curious to know
what, exactly, had happened there. Not even A.I.G. C.E.O. Ed Liddy had bothered
to make the drive from Manhattan to Wilton, Connecticut, where many of the
offending trades had been done, and most of the offending bonuses were being
paid, to ask questions of the people still on the scene—people who could have
told him a great deal about what had happened and why. Everyone seemed to be
operating on whatever they read in the newspapers—and the people inside A.I.G.
F.P., who had the best view of the action, did not appear to be talking to
reporters. Depending on which account you read, you thought they had lost $40
billion, or $100 billion, or $152 billion. They had done this by selling
credit-default swaps on subprime-mortgage bonds—which is to say they had
insured Goldman Sachs, Deutsche Bank, Merrill Lynch, and the rest against
Americans with weak credit histories defaulting on their mortgages. But why?
Apparently, because they were greedy: the premiums they took in from the
insurance allowed them to pay themselves big bonuses, which they’d grown so
accustomed to that they now were reduced to stealing from the U.S. taxpayer.
And that, it seemed, was that.