Bob Willumstad: A 'bunker mentality' at AIG

Bob Willumstad, Former CEO of AIG

When Wall Street nearly collapsed

Would panic prevail? That was the question gripping the world in the days surrounding the fall of Lehman Brothers on Sept. 15, 2008. One year after that terrifying Monday, the people who struggled to cope with the financial crisis share what they were thinking as chaos broke out.

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NEW YORK (Fortune) -- It may have been the shortest tenure as CEO of AIG when Bob Willumstad led the insurance giant during the summer of 2008, but oh, what a long three months those were.

Willumstad had joined the company in 2006 as chairman when Hank Greenberg was ousted. As the credit crunch hit AIG in 2008, he jumped in to replace Martin Sullivan as CEO in June.

During those three months, AIG's losses grew in the billions due in large part to risky investments tied to mortgages. The company flirted with bankruptcy before the Federal Reserve stepped in and seized control with an $85 billion loan in September. Willumstad was shown the door, but he walked out with his head held high, declining a $22 million severance package.

Below is his own account of what happened in the weeks leading up to the government's bailout of AIG.

To me Fannie Mae and Freddie Mac, which went into conservatorship the weekend prior, were the seminal event. Lehman was the final straw that broke the camel's back, but everybody assumed that the government would never allow that to happen with Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500).

Their preferred shares and debt were treated like capital at the banks, and everyone owned them. But the Treasury still stepped in and wiped out preferred shareholders, and took out their CEOs and their boards. There was intent for the capital markets to bear the risk and the brunt of this loss, and that was a sea change for the GSEs (government-sponsored enterprises). The real question became, "What will the role of government be going forward?"

Last September myself and the team at AIG (AIG, Fortune 500) were really focused on trying to solve AIG's problems. We didn't know that in just two weeks we would go through an industry-changing, life-changing experience. Remember, AIG had really been going through a series of events for several years. Hank Greenberg was thrown out in 2005 and the company had to restate earnings twice. There was literally a period of several years when the company was under intense scrutiny from the SEC, Eliot Spitzer, and shareholders.

On the one hand it was difficult to maintain morale during the financial crisis, but on the other, a lot of people at AIG were hardened. This felt like just one more event to struggle through. We had a bunker mentality, certainly at the end. A lot of emotion was let out. Carol Loomis captured that in the article she wrote for Fortune.

But through it all, people really worked very hard. The weekend had its ups and downs. We felt we had solved the biggest part of the problem when Eric Dinallo freed up enough collateral from the insurance subsidiaries to provide $20 billion to the holding company. That was what we originally thought was needed.

And then of course there were very low moments each time a private solution to AIG's problem fell apart. By Monday, after Lehman had filed, there was a relatively low expectation that there would be a solution for AIG outside of government aid. Everybody was tired, and to some degree, I think once Monday morning came around we knew that it was only going to be a couple more days before we would either find a government-backed solution or there would be bankruptcy. People worked long hours, working for most of the whole weekend, day and night.

For me, AIG was not necessarily a pleasant or happy experience, but I knew what I was getting into. I thought I was doing the right thing for the shareholders by stepping in and trying to fix the company. I'm sure Ed Liddy probably feels somewhat similar, although he can say he did it for his country.

After I was replaced, I actually was unaware that I was entitled to a $22 million severance package. When I was told two days later that I was entitled to it my first reaction was, "How could I possibly take $22 million for three months worth of work?" I decided not to take it. People assumed that I didn't take it because of the glare of public scrutiny, but I refused the bonus before it was known to the public. I didn't know that I was entitled to it. And I didn't think it was right to take it after all that happened.

I wish I had been able to stay on and help. The business plan that we had crafted after I came on has been the blueprint going forward. Obviously it had to go much broader and much deeper in terms of selling assets, but we had prepared a thoughtful plan to sell assets and de-risk the company. I felt confident that I knew what the problems were and I knew what the solution was.

Had the world not come to an end that weekend, so to speak, I think we could have implemented our plan. That week was tragic for employees who had been at AIG for their whole lives. They built a great company and now financially and emotionally have been devastated.