Peter Hancock joined AIG in 2010 to manage its risk, including unwinding positions that led to the insurance firm’s $182 billion bailout during the global financial crisis.
Hancock was hired at the recommendation of the New York Federal Reserve and PriceWaterhouse because of his reputation as a risk expert and one of the founders of the modern derivatives markets while at JPMorgan.
AIG’s derivatives exposure had been over $2 trillion at its peak, although that was only one of the issues for Hancock to address.
“It was a liquidity crisis as opposed to a solvency crisis,” he says, “and the liquidity crisis was only partly due to derivatives, because as the company was downgraded its collateral obligations to counterparties went up. But there were other drains on liquidity, from securities lending to the financing businesses, which had long-term assets financed by short-term debt.
“We worked very hard to simplify the balance sheet, and the unwinding of the derivatives book was just one part of the simplification,” he adds.
It was a vital task, nonetheless. Unwinding had begun when Hancock arrived, but he refined the approach to maximize benefits for AIG and its key stakeholders at the time – the Federal Reserve and the US Treasury.
“We were able to map a slightly slower pace of unwinds that made the company slightly less vulnerable to counterparties charging fire-sale prices,” Hancock says.
This did not remove the need for urgency. AIG was threatened by contingent liability of around $20 billion that was temporarily covered by a Federal Reserve line of credit, but that pledge was scheduled to end in January 2011.
“So it was important that we unwound the derivatives that posed the contingent liability, and we were able to do that for the most part by the end of 2010. These were complex swaps, so the orchestration of the counterparties involved a great deal of coordinated effort.”
AIG’s single biggest problem had been unrestrained sales of credit derivative protection on mortgage debt by its financial products group (AIG FP) under Joe Cassano. AIG FP also had exposure to virtually every other type of derivative, however, often in very long-dated trades that were designed to exploit the supposed advantages of the firm’s historically strong credit rating.
“Legal documentation is often asymmetrical, which can come back to bite you,” says Hancock.
“In hindsight the risk management approach of the company took a short cut in thinking of it as a consolidated balance sheet [before the crisis],” says Hancock, who succeeded Bob Benmosche as AIG chief executive in 2014, before resigning in 2017 under pressure from activist investors led by Carl Icahn.
Hancock’s removal was almost a testament to his success in simplifying AIG, which helped the US government to report a positive return of $22.7 billion on its $182 billion bailout commitment. Less than a decade after the crisis, private investors in AIG were impatient enough to push for a new chief executive who would chase revenue growth.