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.
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.
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.
“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.
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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