Hank Greenberg Discusses The Downfall of AIG
It was two years ago today that the US took over AIG and the the debate of "Too Big To Fail" and how the government could pick and choose winners was born.
The markets were in a gut wrenching free-fall at that time and investors were still in shell shock and wringing their hands after the government allowed Lehman Brothers to fail. What came next know one expected. Uncle Sam came flying in wearing his star spangled cape made by the U.S. taxpayer and in a historical bail out, seized control in a $85 billion deal. If only the price tag stayed that price.
Over the course of time, the company received more taxpayer money, finally totaling a $182 billion.
Former AIG CEO Hank Greenberg has been vocal and a guest on the network airing his concerns in the matter in which his beloved company was being broken up into bits and pieces.
You don't have to be an insensitive fool to understand why. Over his 30 year tenure at the company, Greenberg, built AIG into the most admired and largest insurance company in the world.
Greenberg knows those pieces being sold off and he knows their value and how critical they are to the future of AIG. Our conversation started on the company trying to repay the government and the special purpose vehicles designed to dissuade shareholders from selling AIG stock.
HG: When the government goes to 92% they'll start exercising the preferred to equities. Theoretically it should be consolidated on the balance sheet of the Fed or Treasury.
But they (they government) say that they are not going to do that. They are going to set up a special purpose vehicle to keep it off their balance sheet. That's exactly what they criticized companies for doing! That's very nice. I mean, how can they do what they have been criticizing the private sector for doing?
You have a bunch of bureaucrats who are doing this. It doesn't make sense. The terms of the bailout were outrageous. I blame Paulson for that mostly.
You know as well as I do, buying back the CDOs 100 cents on the dollar was a rape. It was made very clear after the Congressional hearings this was a back door bailout. There was no price discovery on the CDO's. Every deal had a different price.
Goldman's price was the lowest on the street. What AIG should have done is they should have told the government we are not going to pay you the collateral, we don't believe your price. We don't like it. The court room is around the corner. Meet you in court. That would have been a better way to solve the problem. They wouldn't have even had to file Chapter 11.
After I left, AIG lost its Triple A rating. All's the Fed had to do was put a guarantee under AIG as they did for Citigroup and Bank of America . And that would have been the end of it. Because all of the values came back in a year or two. It would have been a very simple solution. I think they were confused. Paulson was changing his mind every 20 minutes.
There was no consistency. He was surrounded by Goldman people. Liddy was on the Goldman board. It was just wrong.
LL: Do you think AIG will ever get out from under the government?
HG: Until you renegotiate the terms of the bailout, I don't see how AIG will ever get out of the government's clutches. If they (the government) owns 90% of the equity, how are they ever going to get out?
Bob (Mosche) is a decent guy. I've known him for 20 years or so. I think he's done a better job at least in trying to keep it together and keep morale has high as you can have in that type of situation.
But I disagree with him on his strategy. I think selling off the better assets in Asia, the fastest growing part of the world doesn't make any sense to me. I'd rather have sold off the US life insurance business to a company that wants to have a subsidiary in the US rather than trying to sell AIA for example which is the only foreign company with 100% ownership in China. Everyone else had to have a joint venture.
The world-wide property casualty business is a good business but it has volatility . Everybody knows that.
So what is AIG left with? Instead of stable earnings the company had previously, because it has a great mixture of life and non-life, and a few other type of businesses, some in which have been sold off, the ability to have a stable earnings platform is gone. So I disagree and he knows my feelings on that.
Look, they have sold assets and they have not paid almost a dime back.
AIG sold a building. It was outrageous. They sold a building in Tokyo which was the best real estate in Japan and everyone knew that. When you are forced to sell assets in a very soft market you hardly get what its worth. When they sold that property it killed the morale of the organization. The Japanese who worked for AIG lost face.
LL: Do you believe Mosche has free reign to make decisions on what parts of the company to keep or do you think the government is standing over him?
HG: I think he has a limitation on the motion he can do. You have a board that is all appointed by the Treasury Department, so he is somewhat a captive that way.
LL: Why would an investor own AIG stock?
HG: I don't know. Unless somebody wants to buy into the US market at some point. But if they do buy AIG stock they have to realize, they are dealing with the government which is 90% owner.
LL: What do you think about their new risk management plan? Is it enough?
HG: When I was there, we had a risk management plan that was an enterprise risk management system. There were systems that gathered all the information and it was consolidated where management knew on real time basis what the maximum exposures were. That disappeared when I left the company.
So I don't know what they are doing now. To just have people get together and talk is hardly the way to have a risk management system. You've got to have a system in place that captures all the risk as it is being booked so that the people in charge of risk management know what the risk is in real time and if the risk exceeds the limit they are altered.
You also need to have an internal audit system to make sure things are not overlooked. That's what we had and it worked well for many years.
LL: When you look out five years from now, where do you think AIG will be?
HG: If the government owns say 60% of the company by then, the stock will still be going no place. AIG will be a shadow of itself.
LL: Is AIG a dead stock?
HG: Its going no place. How can it go anywhere when you have the company being disassembled and the government owns 90% of the equity? I can't figure out where AIG is going to go.
LL: You keep in contact with some AIG employees, what do they tell you?
How are things behind closed doors?
HG: There are many people that call me all the time. I see a lot of them. The moral is better under Bob (Mosche). Liddy was a total disaster. Obviously there's anger, that's bottled up. Its no fun working for a company that is being disassembled in front of you.
LL: What is the number one frustration of those employees you speak with when it comes to the government ownership?
HG: The government has a say over compensation. They keep on adding directors. If the company doesn't pay the dividend on the preferred stock the government has the right to add another board of directors.
They're going to have to rent out Yankee Stadium at some point so they can hold their board meeting.
LL: The relationship between the government and business has changed dramatically since the financial crisis. Where do you see it going and how will this further impact the private sector?
HG: Government has expanded dramatically. You don't build the private sector which is the engine of growth in this country through bigger and bigger government. You do it through minimal government. That's always been the driving force in our country.
But not now. Just two laws changed all that: the health care and Dodd-Frank Law. The amount of regulation and government jobs from both of those laws will be staggering. How can you generate private sector jobs with the threat of tax increases and a slowing economy. That's not going to create jobs.
Why are you going to invest if you are going to be taxed for it? It's the wrong model. That's not the model in which our country was built on.
I'm very upset with it. Its not the America I've known. I think the mid-term elections will have a lot of surprises in it. Not just Republican or Democrat, but you're going to have some independents that were fed up with both sides.
LL: How would you characterize the economy?
HG: I would characterize the economy as sitting on the side lines waiting for someone with common sense to say the right things. To encourage new investment and the population that we are not going to stagnate. People are not going to spend any money. They are concerned.
The amount of consumer spending has been restrained. People are concerned about their future. We need a leader that can re-establish confidence. Without that, you're going no place.
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