'The AIG Story:' Hank Greenberg's New Tell-All Book
Guest Author Blog by Lawrence Cunningham, co-author of "The AIG Story."
Beginning in the late 1960s, Hank Greenberg and a small group of international insurance executives revolutionized the insurance industry and laid the groundwork for globalization. They did this by building a business known for decades abroad as an American icon. In the past few years, the company has come to be seen in the United States as a villain: American International Group, Inc.
Greenberg and what he calls a "band of brothers"—Buck Freeman, Jimmy Manton, John Roberts, Ernie Stempel—built AIG by forging relationships with leaders in business and government worldwide, opening new international markets, investing in developing countries and recruiting the most dedicated workforce in business.
AIG employed nearly 100,000 people, internationalists who took an innovative approach to the insurance business. They offered tailored products, refined risk analysis and expanded the use of reinsurance. They found ways to underwrite coverage for the most unusual and dangerous risks, and worked tirelessly to excel in very competitive markets. The result was a demanding and often-difficult work culture suited for those eager to invest all in their career.
(Read More: CNBC Special Report - The Struggle At AIG)
AIG operated on the profit center model that Greenberg minted, in which every manager had responsibility for all aspects of businesses under his or her control, rather than assigning responsibility according to departmental tasks such as underwriting, budgeting, and claims management. The result was a deep bench full of managers with vast knowledge of the business.
As one of the world's first truly multi-national corporations, AIG boasted hundreds of "mobile overseas personnel," executives willing to relocate at any time to any of the 130 countries where AIG operated.
Greenberg and his colleagues worked with every U.S. president from Nixon to Clinton to promote open markets and free trade, helping to forge the World Trade Organization's watershed global treaty on free trade in services and to bring China into the WTO.
(Read More: AIG Hires Lobbyists After 4-Year Self-Imposed Ban)
The company developed expert international briefing books for the top executives of its largest clients, the heads of most Fortune 500 companies, giving vital up-to-date information about global economic and political trends. A dozen of AIG's senior executives went on to become CEOs of peer financial institutions, putting AIG in the league of larger companies, such as GE and IBM, in grooming impressive managerial leadership.
Many AIG shareholders and executives became rich as the result of the company's phenomenal prosperity, as it grew from a business worth less than $300 million in 1970 to one worth more than $180 billion three decades later.
This energetic and prosperous business was turned upside down, however, when Eliot Spitzer, the attorney general of New York, targeted it in early 2005. Wielding controversial and ethically challenged tactics, Spitzer pressured AIG's board, by then dominated by outside directors, to capitulate to his demands.
Upheaval began with the board asking Greenberg to resign, followed by the revision of several years of accepted accounting treatments to justify that; it continued with a potpourri of governance reforms designed to weaken company management while strengthening the power of outside directors, outside lawyers and outside accountants. These changes, fashioned from the prevailing playbook of "good governance," would produce severe unintended consequences.
But worse ironies and greater costs were yet to come.
(Read More: AIG Seeks Approval to File More Bank Suits.)
"The U.S. Treasury and New York Fed engineered a solution that portrayed AIG as the greatest villain of the crisis."
As AIG's new management lost sight of the fundamentals of the insurance business, especially the rigorous assessment and control of risk, the company began to spin out of control. Spectacularly, in the years after Greenberg's departure, AIG's relatively small financial products division went on a massive betting spree that assumed the global real estate market had no downside.
By mid-2008, AIG's losing financial products bets presented the company with a huge liquidity problem, though it commanded nearly a trillion dollars in assets that made it entirely solvent. The world's largest banks faced both liquidity and solvency problems that threatened a global financial meltdown. Swooping into the maelstrom, the U.S. Treasury and New York Fed engineered a solution that portrayed AIG as the greatest villain of the crisis and its treatment by the government as a rescue of the company.
The truth is more complex and the final chapter of the book explains, in what Kirkus has aptly described, reviewing the book, as "a useful contribution to the ongoing shaping of the story of the recent financial crisis."
Lessons abound in this book, the first half on the foundations of the global financial system and the strategies that work in building a prosperous international business; the second half on some of the downside to corporate governance formalism and cautions about the unfettered exercise of power by government officials in the United States.
Programming Note: Maurice "Hank" Greenberg is scheduled to be a guest on CNBC's "Closing Bell" with Maria Bartiromo January 29th to talk more about this book, "The AIG Story."
Lawrence A. Cunningham is the Henry St. George Tucker III Research Professor at the George Washington University Law School and Director of GW's Center for Law, Economics and Finance (C-LEAF) in New York. He is co-author of "The AIG Story" with Maurice R. Greenberg.