When I watched Hank Greenberg, the famously pugnacious former CEO of AIG, testify before the House Oversight and Government Reform committee yesterday, I was reminded that I’d heard all of this before. In the early fall of 2007, Greenberg sat down with me for an interview, and made the following observations:
• AIG’s management wasn’t up to the task of running what was then one of the world’s largest companies.
• They were slowly, but surely running the company into the ground.
• The company he built nearly from scratch would either be sold or broken up because of the mismanagement.
Anyone listening to Greenberg (who was regarded as a deranged, bitter old man by some in the media) since 2005 would have known to treat AIG stock like the plague.
Greenberg made those statements about a year before his former company literally fell into insolvency, wiping out shareholders, and becoming a poster child for all that was wrong with corporate America. At the time, Greenberg was speaking to me about his plan to possibly launch a proxy fight with AIG’s management and change the company’s direction. He was the company’s largest single shareholder, both through his personal holdings and through shares held by the separate insurance company he controls.
Greenberg told me he didn’t want to run AIG anymore; he just wanted to change things. Make management more efficient by bringing in new board members. Expand the company’s insurance business by making it more competitive—“the place is run by a bunch of lawyers”—he told me at one point. But most of all, he wanted to put in place competent management, which meant the removal of his successor, the new CEO Martin Sullivan, a longtime executive who Greenberg eagerly pointed out didn’t graduate from college but had worked mainly as an insurance salesman.
He said he had had been elevated above his abilities (which he echoed yesterday), or, as only the sharp-tempered Greenberg could put it, Sullivan is "Irish and good with insurance brokers…he has little education … I thought he had street smarts." (Later, an AIG spokesman reminded me that Sullivan "is not Irish but English" and while confirming he didn’t go to college, he pointed out that Sullivan held many jobs at AIG during his 34-plus years at the company and was regularly promoted by Greenberg.)
There’s more than a little sour grapes reflected in those statements, and for obvious reasons. Two years earlier, Greenberg had been ousted from the company he had built over nearly 40 years, when former New York Attorney General Eliot Spitzer and the SEC launched inquiries into an alleged accounting fraud that bolstered AIG’s balance sheet. Greenberg signed off on the “gimmick,” but he denied he did anything wrong. Even so he was forced from his job (he’s still fighting civil charges), replaced by Sullivan by board members, many of whom he had considered friends, but he didn’t go quietly.
Nearly from the moment he left AIG, Greenberg was sounding the alarm bells about the company and its management. Much has been made about whether the press did enough to alert investors about problems at the big banks and other institutions that imploded during the financial crisis. Anyone listening to Greenberg (who was regarded as a deranged, bitter old man by some in the media) since 2005 would have known to treat AIG stock like the plague. Believe me, if anyone sounded the alarm bells on the AIG, it was Hank Greenberg.
So it kind of astonishes me to see that Greenberg has become the latest target for attack by our wonderful lawmakers, some of the same lawmakers who refused to rein in Fannie Mae and Freddie Mac. The same lawmakers who agreed to take over AIG in September, when it became clear the firm might not be able to make good on its credit-default swaps, threatening the entire financial system. As Greenberg testified yesterday about AIG, it was clear the 83 year old was having none of it. "When I left the company, it was a healthy company," Greenberg told Congress. "AIG's business model did not fail; its management did." He went on to criticize the current management that accepted bonuses, and the bailout plan itself: "The goal of government should not be to liquidate large companies that have demonstrated they can succeed if properly managed," he said. "It should be to restore them so that they can be employers and taxpayers."
As part of the rescue, the government has dumped $182.5 billion into AIG. Much of that money covered so-called counterparty losses. Big banks like Goldman Sachs had bought AIG credit-default swaps, which are essentially insurance policies that a company wouldn’t default on its debt. When the financial crisis went from napalm carpet-bombing levels to nuclear wasteland levels following the Lehman Brothers bankruptcy, AIG suddenly found itself on the hook for billions of dollars in liabilities stemming from its CDS sales, and the government came to the rescue.
Goldman was one of those rescued; some say that the government’s bailout of AIG stuffed as much as $18 billion back into the pockets of Goldman and its partners. Goldman denies that level of exposure, but doesn’t deny that it benefited from the government takeover of AIG. Goldman also can’t deny that its risk-taking business model, built on the concept of borrowing huge sums of money and then using the money to make bets in the market, helped doom the financial system last year. Goldman received $10 billion in bailout money from the feds, which means it was essentially bailed out twice.
Greenberg’s idea is to have the firms like Goldman, which have been protected and saved from losing countless billions by taxpayers, give a little back to taxpayers by pooling their resources, and buying back AIG from the government, thus preserving its plain-vanilla insurance businesses, many of which make money. I’d say at least someone is talking a little sense these days on Capitol Hill.
Which brings me back to Greenberg and his culpability for AIG’s demise, one of the hot bottom issues at yesterday’s hearings. Here’s what we know: The structured-finance group, which sold the credit-default swaps that led to AIG’s demise, was created when Greenberg was still CEO. The group sold tens of billions of dollars in the product. Here what we also know: The company sold tens of billions more after he left. AIG lost its triple-A rating the day after Greenberg got the boot because of ratings agencies' concern over its balance sheet, so Greenberg has some responsibility for the company’s deteriorating financial condition. But you have to ask yourself: Why would the company continue to crank out credit-default swaps, which are inherently risky and aren’t readily disclosed to shareholders, when its finances were slipping?
Then there’s the intangible of management. It’s pretty clear that Greenberg understands the insurance business, probably better than anyone, and its pretty clear that the guys who replaced him—many of them well-meaning men—were elevated beyond their skill set, something he pointed to again and again, to the point that he was actively considering going to shareholders to have the whole group removed or, at the very least, gain representation on the AIG board.
I can’t tell you whether Greenberg would have put a cap on the CDS business the minute AIG lost its triple-A rating; no one can. Likewise no one can tell you that Greenberg, a legendary micromanager, wouldn’t have reined in the risk when he had to.But what I can tell you is that if you listened to Greenberg a few years ago, you wouldn’t have been one of the investors burned when the government bailed out the company, and in so doing destroyed nearly all the shareholder wealth associated with AIG, Greenberg’s included. So when Hank Greenberg tells Congress that its rescue plan has failed, I’m inclined to believe him.
Charles Gasparino is CNBC's On-Air Editor and appears as a daily member of CNBC's ensemble. He is a columnist for the Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His forthcoming book about the financial crisis, The Sellout, is scheduled to be published later in 2009.