In this day and age, many a time honored adage has been proven untrue, among them that referred to in the title of this post. Against all reason, it appears that Hank Greenberg, the guy who drove AIG into the ground, will be getting a multi-billion dollar payday, because the American government bailed out his company, which would have collapsed without said bailout. It took some judge shopping, but…
…Greenberg is asking the court to award him and other AIG shareholders at least $23 billion from the Treasury. He says that’s to compensate them for the 80 percent of AIG stock that the Federal Reserve demanded as a condition for its bailout. Judge Thomas Wheeler has repeatedly signaled his agreement with Greenberg. A decision is expected any day.
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Hank Greenberg had been forced out as chairman and chief executive in 2005 after state and federal regulators uncovered that the company had been engaged in sham transactions that allowed AIG and its corporate customers to manipulate reported earnings, avoid taxes, evade regulatory requirements and hide risks and liabilities from shareholders. Ever since, Greenberg has been on a mission to restore his reputation and regain control of the company that he had ruled over with an iron hand for 37 years.
Even in exile, Greenberg remained AIG’s most important shareholder, controlling 20 percent of the company’s stock. He successfully sued some AIG executives in court and recruited away others to build his own rival insurance company. He also agreed to pay $15 million to settle civil charges brought against him by the Securities and Exchange Commission, though he refused to acknowledge any wrongdoing.
Greenberg has repeatedly claimed that if he’d still been in charge, AIG would never have gotten into the mess it did. But that is impossible to know.
What is known, however, is that when Greenberg was in charge, he ran the company “as if it were a feudal state .?.?. disdainful of modern concepts of internal controls and regulatory compliance,” according to one person with intimate knowledge of the company’s management. After his firing, AIG paid $1.6 billion to settle multiple counts of accounting fraud brought by the SEC.
What is also known is that the two lines of business that were the source of AIG’s major problems during the 2008 crisis were launched on his watch. He helped to create their risky business models and strategies, which were based on playing one regulator off another and engaging in complex financial arrangements between regulated subsidiaries and a largely unregulated parent company. And both business lines took root in the same clever rules-bending corporate culture that had always been Greenberg’s trademark.
“The AIG which came begging to the Fed’s doorstep was the AIG that Hank Greenberg built,” said James Millstein, the Treasury official who oversaw AIG’s restructuring. “It’s capital structure was opaque, it was heavily dependent on short-term funding, with a highly leveraged financial products subsidiary that had been organized to evade effective regulatory oversight.” Greenberg, he said, “ran the parent company like a hedge fund with a triple A rating.”
As the financial crisis unfolded, AIG’s fundamental flaws were finally exposed. On the same week Lehman Brothers collapsed, desperate executives went to the Treasury and the Federal Reserve looking for a loan. Dozens of Fed officials were dispatched to AIG headquarters on Pine Street in lower Manhattan. Within days, they were convinced that without a substantial cash infusion, AIG would be forced to file for bankruptcy, threatening the solvency of a number of big banks in Europe and the United States.
To avoid such a meltdown, the Fed agreed under its emergency authority to act as a lender of last resort, lending AIG an initial $85 billion. The terms were to be the same as AIG’s investment bankers had offered the previous week, without success, to private lenders — a 14 percent interest rate and ownership of 80 percent of the company. With lawyers sitting in the next room ready to file a bankruptcy petition, AIG directors reluctantly agreed to the terms.
This story has been around for a while, but it’s worth reminding ourselves that this did not have to be. Had we played our cards right, people like Greenberg would either have jumped out of windows or would be dealing with having their mansions foreclosed even as we speak. (Well, we’re not speaking, but you know what I mean.) There were those among us, myself included, who did not buy into the “too big to fail” talk. There were other ways, besides bailouts, to deal with the fallout from the collapse of Wall Street. A bit of creativity would have done the trick. A side benefit: had we let Wall Street collapse, we would more than likely have faced up to the reality of the Depression that is still with us. Since the people like Greenberg that own the government are doing well, thanks to that massive handout, we have, as a nation, simply pretended that the destruction visited on ordinary people didn’t happen, and isn’t continuing. It is, unfortunately, an article of faith on much of the left and the right (always beware of bi-partisan agreement) that we simply had no choice but to rescue the criminals and con men that control our financial system. I’ll always be proud of my Congressman, Joe Courtney, for voting against the bailout. Had his side (and my side) prevailed, Hank Greenberg might not have the money to pay his expensive legal talent to pull off this final heist.
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