Book Review: 'Fatal Risk: A Cautionary Tale of AIG's Corporate Suicide'

by: Ira Stoll

Nearly three years on, the "failure" of AIG (NYSE:AIG) and its takeover by the government is both one of the most well known episodes of the financial crisis and one of the worse understood.

Into that paradox steps Roddy Boyd, a former colleague of mine at the New York Sun, with a new book: "Fatal Risk: A Cautionary Tale of AIG's Corporate Suicide."

One of the strengths of the book is the background it provides about some of the personalities involved in AIG, an insurance company that branched out into other financial services. One central character is Maurice "Hank" Greenberg, AIG's longtime chief executive. Mr. Greenberg's father, a cab driver, was killed in an accident when Hank Greenberg was five. Hank went on to land with the Allied army in the invasion of Normandy, fighting his way though Europe and arriving at Dachau within a day of that concentration camp's liberation. Then, in the Korean War, he commanded an infantry platoon.

Another important character is Joseph Cassano, who became head of AIG's financial products division. Mr. Boyd describes him having attended "Brooklyn College on financial aid," the son of a police officer. "In an atmosphere of people who happily worked 12-hour days, Cassano worked 14 to 16 hours, sometimes more." Mr. Cassano had no children, and his wife had breast cancer. "Refusing to use it as an excuse, he would spend time with her and then stay up and work the night around," Mr. Boyd writes.

Mr. Boyd is also acute at describing how the AIG board of directors was stocked with former U.S. government officials, including President Ford's Secretary of Housing and Urban Development, Carla Hills, who was George H.W. Bush's U.S. trade representative; President Clinton's Ambassador to the United Nations, Richard Holbrooke, and Mr. Clinton's defense secretary, William Cohen. The author might also have included Martin Feldstein, an AIG director who was chairman of the Council of Economic Advisers in the Reagan administration.

Another strength is the book is the portrayal of the aggressive tactics used by regulators against AIG. We're reminded that the then-attorney general of New York, Eliot Spitzer, forced out Hank Greenberg, who had a better handle on risk than did his successor. We're reminded, as well, that while going after Maurice Greenberg Mr. Spitzer also forced the ouster of Mr. Greenberg's eldest son, Jeffrey, from his perch running Marsh & McLennan.

But Mr. Boyd doesn't make the error of blaming the entire thing on Mr. Spitzer. The book recounts how the George W. Bush administration's Securities and Exchange Commission provided leaks to reporters for anti-AIG stories like this one in Businessweek based on unnamed "law enforcement sources."

At that point, what the regulators were after AIG for wasn't excessive risk-taking but rather deals it made providing what were referred to in at least one internal document as "income statement smoothing" services to corporations.

Another good thing about the book is its coverage of AIG's compensation practices. The compensation scheme at AIG Financial Products was designed to make employees "think longer term about risk and liquidity." Writes Mr. Boyd, "There may have been no other workplace in finance where employees were more incentivized to avoid short-term risk and to stay at the firm building long-term equity."

The book is less satisfying in its detailing of what role, if any, short-sellers played in AIG's crisis. The narrative includes some generally admiring coverage of James Chanos, who in Spring of 2005 "began selling short what would amount to about 750,000 shares of AIG." Mr. Chanos wound up covering in late spring 2007 and redeploying his capital into a short of Fannie Mae and Freddie Mac, the book says.

The theory that naked short-selling or the combination of short-sellers, the press, and the government were significant or destructive factors in the crisis is dealt with mostly in a dismissive footnote. In the narrative, Mr. Boyd favorably mentions a firm named Gradient Analytics, which makes money by issuing reports to money manager-subscribers about companies facing "looming financial troubles." In a footnote Mr. Boyd acknowledges using the firm's founder and president as a source.

In the acknowledgements to the book, Mr. Boyd mentions another money manger, David Einhorn, who is known for advocating short positions. "I told him I had a book in my head and he emailed [the literary agent who would represent Mr. Boyd] the next day….I'd shared a trench with him on occasion on a few investigative projects I had been involved with."

On the big questions of what happened to AIG and why, Mr. Boyd sheds some useful light: "No one at the Fed seems to have a reason for why Goldman Sachs and Morgan Stanley were allowed to become bank holding companies but AIG was not. Shareholders were wiped out and then had the cornerstones of their remaining franchise — the foreign insurance operations — sold without a matter getting put to vote, a clear violation of Delaware corporate law statutes."

Other times, Mr. Boyd comes tantalizingly close. Mr. Cassano's "crucial mistake," Mr. Boyd writes, was not dwelling on the distinction between economic losses and mark-to-market losses. "No one," Mr. Boyd writes, "was wondering in December 2007" what percentages of the loan pools underlying the CDOs would be irrevocably defaulted.

But what does it say about the context that looking at assets as a long-term investment amounts to a "crucial mistake"? "No one" may have been taking a less-panicked approach in December 2007. But those who eventually bet on a recovery of distressed mortgage-backed assets bought them up cheaply from firms that were being forced to unload them, and made a lot of money.

This book's subtitle is "A Cautionary Tale of AIG's Corporate Suicide." There were some elements of suicide in the AIG story, but there were also some elements of murder. And in some sense it was neither a suicide nor a murder, because AIG is not dead but still in business, as are its parts that have been sold off. Mr. Boyd doesn't totally solve the case, but he turns up a lot of helpful clues.

Disclosure: I was sent a review copy.