Blog

Greenberg’s Folly

The former CEO wants the government to pay up for saving AIG.

This week, we have witnessed one of the odder lawsuits in recent memory: that of Maurice “Hank” Greenberg, the former CEO and one of the largest shareholders of the American International Group, against the U.S. government. He claims that the 2008 federal bailout of AIG was unnecessarily punitive toward AIG’s shareholders; far from saving the company with more than $180 billion in cash, he argues, the government actually cost AIG shareholders tens of billions of dollars.

The case undoubtedly has entertainment value. A veritable who’s who of the financial crisis are testifying this week, including two former Treasury secretaries (Henry Paulson and Timothy Geithner) and one former Federal Reserve chairman (Ben Bernanke). The case is also tinged with some irony. Against the backdrop of widespread public discontent that no head of any financial company was ever charged with any crime related to the 2008-09 financial crisis, the former head of a gigantic insurance corporation is trying to hold the federal government culpable for grievous harm.

Greenberg is an almost nonagenarian who turned AIG into a global insurance behemoth before he was forced to resign as part of a settlement with Eliot Spitzer, then New York state’s attorney general, in 2005. Greenberg’s management style as CEO could best be described as monarchal. Spitzer’s treatment of him only confirmed Greenberg’s certainty that rather than regulating financial institutions, government actually seeks to hobble them. The 2008 bailout and de facto nationalization of AIG, which saw a dramatic shrinkage of the house that Hank built, only hardened those convictions. Hence the current lawsuit.

Far from seeking compensation, however, Greenberg ought instead to be writing lavishly crafted and handwritten thank-you notes to each of the witnesses being questioned this week by Greenberg’s star lawyer, David Boies.

Before the financial crisis, AIG’s market capitalization routinely exceeded $200 billion; for a period in 2009, that had dwindled to a few billion dollars. Absent government action to prevent the company’s implosion during the great financial unwinding of September 2008 and the failure of Lehman Brothers, the company would have evaporated just as Lehman did. Today, the government has generated a profit on its investment in AIG, and the company is now worth in excess of $70 billion for its shareholders.

The nub of Greenberg’s complaint is that the U.S. government set onerous conditions for loans that AIG needed to stay afloat and then forced the company to settle its contract in full with Wall Street firms such as Goldman Sachs. To put it another way, Greenberg is enraged that AIG saw so much of its value diluted and the government become the largest shareholder while investment banks got off so much more easily.

That charge has some merit. AIG was forced to sell large portions of its business—more than Goldman or Morgan Stanley, though arguably no less than Citigroup—and the government forced AIG to accept less than full value for its derivative contracts.

But as Paulson testified this week, the punitive terms had a purpose. The outstanding value of the derivatives held by AIG could have brought much of the financial system down with it. The point of the bailout wasn’t to benefit AIG’s shareholders; it was to save the American financial system and prevent the insolvency of the nation’s major banks.

AIG was in the business of underwriting vast amounts of global insurance policies. In the few years before 2008, a small division of the company—focused on buying and selling credit default swaps and other derivatives based on mortgage securities—took on massive levels of leverage and muscled into the turf of the investment banks. When the swaps and derivatives that it held plummeted in value in 2008 amid the pop of the housing bubble and the distress of both Bear Stearns and Lehman Brothers, AIG had to mark down those assets, resulting in massive losses on paper.

At no point, however, was AIG’s core business in distress, insofar as its global insurance business had little relation to the financial trading unit and represented the overwhelming majority of its transactions and sales; still, the losses on those derivatives were enough to make the entire company insolvent. And if AIG had collapsed, what had been a banking and financial crisis centered on Wall Street could well have metastasized in a freezing of the global insurance market and a meltdown that no government could have contained.

Hence the bailout, which stabilized AIG as a key player in the insurance market and, in time, stabilized the company in its current position as a substantial albeit diminished actor. A new CEO and an overhauled board have slowly transformed the company into a sober entity no longer in Greenberg’s imperious shadow. Recognizing that a government bailout and temporary ownership was all that stood between the company and the abyss, AIG ran a series of ads in late 2012 saying “Thank you, America.” If he had a modicum of perspective, Greenberg would do the same.

The bailout was messy, of course. AIG was forced to sell productive arms of its business in order to pay back the government and return to independence. Shareholders lost lots of money. On the flip side, the bailout caused widespread public outcry that the government was rescuing financial companies while millions of Americans lost jobs and homes. As for Greenberg’s charge that the Wall Street investment firms other than Lehman and Bear not only escaped penalty but somehow got the government to make them whole—well, that may have the most merit of any of his complaints. But the fact that Goldman et al may have achieved favored status does not mean that AIG shareholders got ripped off. The American taxpayer, maybe. But not AIG.

Greenberg is likely to lose his case, and for good reason. Perhaps he hopes the trial will shine an unwelcome light on the investment banks, which always had a cachet and political influence that he envied and resented. But as with all dysfunctional families, the fact that his distant cousins managed to warp the system to their advantage does not entitle him to $40 billion of payback. That he now demands such “justice” goes a long way to explaining why the company he helped shape ended up nearly collapsing under the weight of its own overreach.

This article first appeared on Slate.

Featuring

Articles By This Author

The Envestnet Edge, May/June 2018 Video: Five (Investing) Rules To Live By The Envestnet Edge, March/April 2018 Video: Buy The Dips Video: No Place Like Home? Market Bias Perceptions and Realities The Envestnet Edge, February 2018 The Envestnet Edge, January 2018 Video: Raging or Aging: How Much Longer Will the Bull Last? Webinar Replay: 2018 Market Outlook The Envestnet Edge, December 2017 Video: Bitcoin, Bubbles, and the Bigger Picture The Envestnet Edge, November 2017 Video: Taxes are certain, but don't obsess about tax reform The Envestnet Edge, October 2017 Video: Time to stock up on growth or value? The Envestnet Edge, September 2017 Video: Time To Take A (Measured) Risk? The Envestnet Edge, July/August 2017 Video: Bitcoin: Buy Or Buyer Beware? The Envestnet Edge, June 2017 Video: FANG, FAAMG: Too Big a Bite of the Market? The Envestnet Edge, May 2017 Video: Invest "As If" The Envestnet Edge, April 2017 Video: What To Do In Quiet Markets The Envestnet Edge, March 2017 Video: Bull Or Bear: Should Investors Still Care? PMC Weekly Review - March 10, 2017 The Envestnet Edge, February 2017 Video: Separating markets from politics, is it really a "Trump rally"? The Envestnet Edge, January 2017 Video: Investing in Trump’s Economy? Proceed With Caution The Envestnet Edge, December 2016 Video: Have We Only Just Begun? The Envestnet Edge, November 2016 Video: Rotations, Reversals, Rising Rates: A Time to Reposition Post-Election, Will Markets and Portfolios Emerge Winners or Losers? Webinar Replay: Post-Election Winners and Losers The Envestnet Edge, October 2016 Video: In a 2-2-2 world, look for modest economic growth and expansion PMC Weekly Review - September 16, 2016 The Envestnet Edge, September 2016 Video: Diversification is working in 2016 (so far) The Envestnet Edge, July/August 2016 Video: Valuations: it's all relative Brexit: Plunging into the Unknown? The Envestnet Edge, June 2016 Video: Equity valuations and bond yields: reach no further PMC Weekly Review - June 17, 2016 The Envestnet Edge, May 2016 Video: Hitting singles: a measured approach for this investing season The Envestnet Edge, April 2016 Video: Investing with impact: increasingly a matter-of-fact Video: In this election cycle, will investors be winners or losers? The Envestnet Edge, March 2016 PMC Weekly Review - March 11, 2016 Video: In a low-growth world, less could be more The Envestnet Edge, February 2016 The Envestnet Edge, January 2016 Video: Markets are a mess, but don't jump to conclusions yet A Most Challenging Year Video: Interest Rates and Energy: The Highs and Lows of Year-End The Envestnet Edge, December 2015 The Envestnet Edge, November 2015 Video: We'll always have Paris The Envestnet Edge, October 2015 Video: Politics and the markets: déjà vu all over again? Video: China, Commodities, and Crisis: What's Next for Emerging Markets? The Envestnet Edge, September 2015 PMC Weekly Review - September 11, 2015 Is This The Big One (Financially Speaking)? Probably Not. The Envestnet Edge, August 2015 Video: In a "meh" market, look again at U.S. stocks The Envestnet Edge, July 2015 Video: Is this the Big One? What to do in a financial crisis Don't Worry About China Don’t Believe the Hype About Greece The Greek Catastrophe Is Finally Here (Unless It Isn’t) The Envestnet Edge, May/June 2015 Video: When Following the Herd is Risky, Where is the Safety? The Envestnet Edge, April 2015 Video: The End of Short-Termism is Long Overdue PMC Weekly Review - April 24, 2015 Video: Keep Your Friends Close and Your Robo-Advisor Closer The Envestnet Edge, March 2015 The Envestnet Edge, February 2015 Video: The Return of the Comeback: Is 2015 the Year for International Stocks? PMC Weekly Review - February 13, 2015 Why the Jobs Report Means Diddly Don’t Turn America Into Europe PMC Weekly Review - January 23, 2015 Video: Active and Passive: The Yin and Yang of Investing The Envestnet Edge, January 2015 Will Politics in 2015 Catch Up with the Economy? Video: Our Perspective on 2015: Maintain Yours The Envestnet Edge, December 2014 PMC Market Commentary: December 12, 2014 No, This Is NOT the '90s Economy Again PMC Market Commentary: November 14, 2014 The Envestnet Edge, November 2014 Video: 2014 U.S. Midterms: A Win for Stocks? Whose Economy Will It Be in 2016? PMC Market Commentary: October 17, 2014 Video: Special Video Commentary: Market Volatility and Fundamentals The Envestnet Edge, October 2014 Video: You Know What’s Not Sustainable? Ignoring the Opportunity in Impact Investing Don’t Panic! PMC Market Commentary: October 10, 2014 Greenberg’s Folly Naomi Klein Is Wrong PMC Market Commentary: September 26, 2014 Subprime Loans Are Back! Video: When it Comes to Interest Rates, Who Says What Comes Down Must Go Up? The Envestnet Edge, September 2014 PMC Market Commentary: September 12, 2014 Why Indie Bookstores Are on the Rise Again The Fed Is Not As Powerful As We Think PMC Market Commentary: August 22, 2014 Americans' Sour Mood on the Economy Doesn't Square with the Fact The Envestnet Edge, August 2014 Video: The World is in Crisis... the Markets are not PMC Market Commentary: August 8, 2014 PMC Market Commentary: July 25, 2014 Punitive Damages Video: Market Valuations and The Theory of Relativity The Envestnet Edge, July 2014 Don’t Kill the Export-Import Bank. Clone It. How India’s Economic Rise Could Bolster America’s Economy Video: Separating Risk from Reality PMC Market Commentary: June 27, 2014 No Sex Please, We're French PMC Market Commentary: June 13, 2014 The Envestnet Edge, June 2014 PMC Weekly Market Review, May 23, 2014 The Envestnet Edge, May 2014 Don't Bet on Rising Wages PMC Market Commentary: May 9, 2014 The Sharing Economy: Why Are So Many So Afraid? PMC Market Commentary: April 25, 2014 The Obsession with CEO Pay Won't Help the Middle Class PMC Market Commentary: April 11, 2014 Time to Face Reality: Our Unemployment Problems Are Structural PMC Market Commentary: March 28, 2014 In Defense of Relentless Optimism The "Made in China" Fallacy Forget GDP - Use Big Data