Hank Greenberg in Space and AIG in Pieces

by Jerry Gordon and John Haldi (March 2009)


Last October in an NER article, “The AIG Rescue: Does It Portend Re-Regulation of Financial Markets?” we noted this about Hank Greenberg’s role in the looming dissolution of the fabled globe girdling insurance empire he built at AIG over more than three decades.

Witness these comments from a former Wall Streeter:


The concept that keeps coming up is what was done with CIGNA years ago — splitting the firm into a good bank and a bad bank. The good bank is all the insurance operations, International Lease Finance Corporation (ILFC), and the asset management operations. The bad bank is United Guaranty Mortgage and the Financial Services operations plus some other pieces with the toxic subprime exposure. The only problem with this solution is that nobody wants the bad bank. At least when CIGNA was split there was Warren Buffet and Ace, Ltd. willing to take on the asbestos risk. Right now there are no buyers at all for subprime mortgages.
What AIG will end up doing is selling off the good assets, and there will be plenty of buyers for its insurance and ILFC units. What is puzzling is why AIG turned down a bid from German insurance giant Allianz to take over the company one day before the Fed stepped in. The entire Board should be thrown out along with members of management who created this mess.


In a colloquy, we noted:


Haldi: My first response is focused narrowly on AIG, and it is a question to which you might have some insight. Namely, to what extent did AIG get up to its armpits in credit swaps and other derivatives while Hank Greenberg was running the company?  Was it primarily he who led them down that primrose path, or his successors?

Gordon: Purchase of supposedly ‘safe’ senior tranches of collateralized debt and trading in derivatives began in the late 1980’s under Hank Greenberg’s regime at AIG.  However, the big exposure to toxic collateralized debt and credit default swaps rose after his departure. Hank Greenberg’s successors became obsessed yield junkies. AIG’s credit default swap book was huge, over $446 billion (upwards of $80 billion of which were attributable to mortgage backed securities), dramatically impacting the company’s liquidity.    As Warren Buffet said, these credit default swaps are “financial weapons of mass destruction.” AIG’s board and management are now being asked to exit by the government as a result of the company accepting the $85 billion bridge loan.  Hank Greenberg and Eli Broad may attempt to regain control via a proxy fight as they both had criticized what AIG was doing. However, Greenberg in a Charlie Rose interview called the government bailout a “disaster.” The good news is that the government asked Ed Liddy, former CEO of Allstate, to replace Willumsted as CEO at AIG. Liddy has a good track record as a sound and responsible manager, having guided Allstate through the problems occasioned by Hurricane Andrew and Katrina. Hapless Willumsted, a former Citigroup banker, had been CEO for less than three months when this denouement occurred on his watch.   Nonetheless, Liddy has to clear out the tainted senior management at AIG and sell assets to repay the Federal Reserve bridge loan.  The government bridge loan amounts to senior secured debt having priority over existing AIG indebtedness.  


On Monday, Hank Greenberg went on a “Squawk Box” segment on CNBC to reveal that he was launching a financial fraud case against his successors and AIG former management for committing financial fraud. Moreover, he played the victim card by pointing out his $2 billion loss in AIG stock values, given the ownership of a block of controlling shares in offshore entity, C.V. Starr, Inc.  C.V. Starr was the legendary founder of AIG in China in the 1920’s. We frankly found that to be ultimate chutzpah. So did Financial Times analyst, John Gaper in an article entitled “Too long in the Spaceship, Hank.”


Gapper explained the delusions of grandeur that typified the regime of Greenberg as the ‘great helmsman’ at AIG.


He popped up on CNBC to explain why he is suing AIG for allegedly having deceived shareholders about the depth of its problems in 2007. Mr. Greenberg said that things went astray under Martin Sullivan, his immediate successor.

“I keep hearing it is too complicated for someone to run,” he groused. “It is too complicated if you take someone who has been driving a horse and buggy type of company [Edward Liddy, the current chief executive, used to run a motor insurance group] and put him into a spaceship.”

Mr. Greenberg lost a lot of money on AIG’s failure – some $2bn – as its largest private shareholder. Plenty of the damage also occurred after he left, when, even according to AIG, its portfolio of credit default swaps on subprime mortgage securities doubled from $40bn to $80bn.

But 35 years in his spaceship have sapped Mr. Greenberg’s sense of perspective. For most of his working life, he not only led but moulded AIG. The idea that all was well in March 2005 yet, by the end of that year, it had turned into a rogue organisation primed to bring down the global economy beggars belief.

Mr. Greenberg’s most plausible defence is the one he explicitly rejects – that he had constructed such an enormous, complex and opaque organisation that only he could keep it in check. By the time he left, his company employed 92,000 people and operated in 130 countries.

AIG was built around the whims of its chief executive. A multitude of operating units were placed under a holding company that Mr. Greenberg ran. He encouraged them to compete aggressively but balanced this by looking over their shoulders, and sometimes instructing them.

He exploited the loophole-filled US regulatory regime by electing to have the holding company regulated by the Office of Thrift Supervision, an odd side-effect of AIG’s happening to own a small savings bank.

Although he disputes it, some of AIG’s failings stem from its having been designed to be run by Mr. Greenberg. As soon as its domineering chief executive was shown the door, it was difficult for anyone to get a grip on what was going on.


From close experience in regulatory and reinsurance dealings with Hank and his minions at AIG, we know their disdain for state insurance regulators if they thwarted their plans.


Back in the early 1980’s, I had a gubernatorial appointment as a special deputy commissioner in the New Jersey Insurance Department.  In 1980, when I met Hank Greenberg, he was presiding over a glittering Pierre hotel dinner for a NAIC convention in Manhattan. The man struck me as being imperious and in control of all of the levers that affected his giant empire at AIG. Later, I was tasked to deregulate commercial lines insurance in New Jersey to permit large customers to cut deals with groups like AIG on the basis of the ‘big boys theory’- meaning big customers ought to know what their loss experience is and thus could drive a hard bargain in negotiating premiums. We had drafted legislation to establish a competitive ‘free trade zone’ for commercial insurance that Hank and his staff at AIG thought they had a monopoly over in New York across the Hudson. I found myself one day in the pinnacle private dining room at AIG’s headquarters at 70 Pine Street with AIG’s general counsel and chief lobbyist in such matters. The table talk was why we needed to do ‘that’ in New Jersey, when the New York ‘free trade zone’ did that nationally. We listened politely and said that they missed the point. Deregulating commercial insurance for large buyers ultimately would enable AIG and other major commercial insurers to move their back office operations to New Jersey because of tax incentives. They harrumphed and blustered, but the State legislature passed the Commercial Lines Deregulation Act in 1982, AIG succumbed. 


Fast forward to this week, and we witnessed Hank Greenberg as a forlorn figure, victimized by his own arrogance, invincibly ignorant of his responsibility in this mess for which the taxpayers will pick up the tab.


We now have the government scrambling to try and salvage the AIG ‘bridge loan too far’- a send up on the WWII era movie about the failure of Operation Market Garden to achieve an early end to the war.


As Gapper notes in his Financial Times article:


Ben Bernanke said this week that, of all the indigent institutions the US has rescued, American International Group most angers him: AIG “made huge numbers of irresponsible bets, took huge losses, [and] there was no regulatory oversight because there was a gap in the system”.

The Federal Reserve chairman confessed this to Congress after AIG announced a $62bn (€49bn, £44bn) loss for the last quarter of 2008, a further $30bn injection from the
government and a plan to break itself up.
But this is all futile. I queried the former Wall Streeter who had such brilliant insights into the unraveling of AIG in the wake of the CDS meltdown last fall. The comment indicated that the AIG assets have essentially begun walking out the door:

I wonder why it took so long to separate the insurance operations from the toxic holding company.  The insurance operations have been solid but have been cutting rates to keep the business.  However, the business is leaving along with the best employees as there is low morale and little incentive to stay.  For years, AIG tried to take business from its competitors and now its payback time.



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