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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.

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Zachary Karabell
Head of Global Strategies, Envestnet, Inc., Consultant to Investment Committee*

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