Tag Archives: AIG

AIG’s Hank Greenberg is the Poster Child for the Greed, Arrogance, Hubris and Lack of Shame Exhibited by Many Big Bankers and the Denizens of Wall Street

It is a classic case of megalomaniac superciliousness and brazen hypocrisy. Hank “the snake” Greenberg is suing the U.S. Government for $40 billion. His claim? The government was “unfair” to him and other shareholders when it pumped $184 billion of taxpayer funds into AIG to rescue it from certain bankruptcy.

It may seem like only yesterday when the U.S. was hammered with the worst economic decline since the Great Depression but if you had any delusions that the kind of economic insanity exhibited by bankers, financial gurus and insurance execs who pushed us to the brink of economic annihilation has disappeared, that notion was just shattered by Hank R. Greenberg who has filed a new complaint against Uncle Sam. More about that in a minute.

Greenberg, of course, is the former head of AIG Insurance, and if you don’t remember Hank’s role in this monumental financial firestorm, you’ve probably also forgotten that, not only did Nero play music while his people suffered and Rome burned, but he was a greedy and ineffectual leader in a time of crisis.

The apparent psychotic delusions of Greenberg are so grandiose and in such conflict with the reality of what happened, it is difficult to apply any form of logical sanity to his repugnant action, a fiddling Nero notwithstanding. It is impossible, one could argue, to underestimate the craftiness, deceitfulness and guile of Greenberg and those of his ilk. “Doing the right thing” is the first victim of those like Greenberg who are driven by the testosterone of greed, arrogance and lack of any level of shame or accountability for their actions, no matter how egregious they might be, or how well defined.

gall 1 |gôl|
1 a: brazen boldness coupled with impudent assurance and insolence
1 b:  see temerity or alternately, “Hank Greenberg.”

Greenberg should be in court all right, but he should be the defendant, not a plaintiff. If it were not for the lessons to be learned by dissecting the abhorrent attitude that gives Greenberg the unmitigated gall to take legal action against the government over the AIG bailout, the best thing would be to simply mock him for being so blatantly unscrupulous. But in this latter day immorality play it’s futile to rely on reality and logic when dealing with someone who is so wholly deranged by deep-seated greed and personal hubris.

The Greenberg Lawsuit: a model of fallacious reasoning

The mistakes of history are often repeated when those who made the mistakes are allowed to rewrite the history of those mistakes or when the lessons learned from those mistakes are forgotten by those who were victimized and are allowed to be repeated. It appears that Greenberg is relying on both these factors in his effort to extract more money for himself from the government.

The basis of Greenberg’s litigation is that (1) the government exceeded its constitutional authority by forcing AIG shareholders (of which Greenberg was the largest) to sell 92 percent of their stock to the government for $184 billion. And (2) the terms of loans made to AIG by the government at 14 percent interest were tantamount to “extortion.” By reason of the latter, Greenberg now claims the government (i.e., we taxpayers) owes him $40 billion.

His logic is utter nonsense. As one pundit discussing the lawsuit put it, this is akin to a house fire caused by your own negligence and then, after the fire department saves your home, you sue them for getting your furniture wet. Greenberg’s only hope to be victorious in this lawsuit is that there will be mass amnesia as to the reasons why the government was forced to bail out AIG and its shareholders in the first place.

In September of 2008, AIG, then the largest insurance organization in the world, was on the precipice of bankruptcy. AIG had been pushed to the edge of implosion, because of irrational decisions motivated by the seemingly boundless greed of Hank Greenberg and others at the company. This stupendous lack of good judgment prompted AIG to insure hundreds of billions of dollars in potential losses from toxic mortgage securities sold by virtually every major financial institution in the world. In doing do, Greenberg drove AIG to violate every fundamental insurance law of risk management, all in a self-serving determination to maximize short-term profits and bonuses.

When this mine field of poisonous mortgages began to explode and rip through the economy, AIG found itself saddled with hundreds of billions of dollars in claims that dwarfed the total assets of the company. Not only was AIG insolvent – some say within hours of running out of money and being forced to close its doors – but the companies that had purchased AIG’s “mortgage guarantee insurance” would also face failure. This could have quickly caused the entire American economic structure – if not the global economy –to collapse in panic.

So here’s the sticker:  If Greenberg’s AIG had been isolated in this financial quagmire, the government would probably have kept hands off and allowed it go bankrupt; just as it had in the case of the Lehman Bros. bankruptcy a few months earlier. But Greenberg had allowed AIG to assume so much risky liability from so many companies, that the government arguably had no choice – specific power or not – but to intercede. The potential economic catastrophe of failing to act as AIG collapsed was just too frightening to risk. It is not hyperbole to suggest that such a result could have challenged the very concept of capitalism.

Keep in mind that had the government allowed AIG to fall into bankruptcy and be dissolved (as happened with Lehman Bros. and numerous other companies) then Hank “the snake” Greenberg and every other shareholder would have found their stock to be totally worthless. As it was, in 2010 Greenberg sold his remaining stock of AIG for $278 million; not a bad “reward” for a guy whose greed helped trigger one of the largest and most painful economic declines in American history.

So what is the basis for the Greenberg suit against the government – really all of us as taxpayers?

Greenberg wants to rewrite history. He wants us to forget the chaos and panic that would have been exacerbated by the failure of AIG. With a straight face and feigned indignation, he argues that the government had no legal authority to “seize” his property by forcing him to sell his stock to the government. If anything, this argument just validates what a total sleaze Greenberg really is. He has no concern for the country or anyone but himself.

This snake Greenberg then compounds what should be our utter revulsion of him by claiming that, even if the government did Aig_logo-2have the power to force the sale of his stock, the price the government paid — $184 billion – was a rip-off and he should have been paid a lot more. When the government stepped in, the market value of AIG was $15 billion; and yet the government paid $184 billion. Just who got ripped-off here? And again, let’s not forget that if AIG had been allowed to fail, Greenberg’s stock would have been worthless!

There is a touch of ironic humor in Greenberg’s suit. (Actually, more than a touch if you follow the likes of political satirist Jon Stewart). Initially the government made an emergency loan to AIG of $40 billion dollars. This quick-shot of capital was critical to keeping AIG functioning while a long-term rescue plan was developed. The government charged AIG 14 percent interest on the loan. Now, in his perverted sense of reality, Greenberg is claiming that the loan terms imposed by the government amounted to “extortion.” This jerk has no shame!

The irony here is that AIG was a subprime borrower. The company was insolvent, unable to pay its bills and about to go out of business. With no other option for capital sufficient to save the company – 14 percent was a cheap rate! Can you imagine what a “private equity” firm would have charged AIG if one had the willingness and capital to bail out AIG? And, just for good measure, remember that even with a good credit record, banks charge individuals 18 percent on credit card debt. Yet, Greenberg has the gall to claim that the government ripped off AIG!

But Here is the Worst Part

It would be one thing if Greenberg were an aberration when it comes to the type of mentality and attitude he brazenly exhibits. He could be dismissed as simply a delusional, demented kook. But unfortunately, when it comes to big banks and corporate tycoons, Greenberg is more the norm than the exception. Remember that Greenberg was just a player, albeit a major player, in the economic meltdown.

Believe it or not, there are a number of investment firms and corporations that are supportive of the Greenberg lawsuit. They seem to feel that if they also get “to big to fail” and are about to, that the government will step in and do to them what it did to AIG. They should be so lucky! And the banks – the incompetent herd of complicit conspirators whose actions triggered the financial meltdown in the first place, are now chafing under the new rules (the old ones that had worked so well for 70 years were repealed) designed to keep them away from sharp knives so they can’t hurt themselves or us again. It is mind-boggling how irrational some can be when they rewrite history in their own minds and have self-imposed amnesia when it comes to their mistakes of the past.

And the Moral of the Story …

In the end, I have only one thing to say to Hank “the snake” Greenberg: Go “#@*&” yourself! And while you are at it, all those you rode in with. Take the hundreds of millions you sucked out of the government (taxpayers) and AIG and go crawl back in your hole. You should be the one sued, not the American people.

Insurance Companies and Regulators Working in Concert Prove Greed Always Trumps Reason

Insurance companies and regulators are in bed again, but it is the consumer who could get screwed

In a recent front-page article in The New York Times headlined, “Seeking Business, States Loosen Insurance Rules,” writers Mary Walsh and Louise Story effectively brought to light the dark actions of insurance regulators and companies that could lead to financial turmoil in the insurance industry even greater than that experienced in the Great Recession of 2008 and 2009.

The Times article revealed that states – desperate for revenues – are allowing insurance companies to establish “captive subsidiary companies.” With the promise of lighter regulation and less stringent requirements for reserves needed to cover potential losses, these states are allowing (encouraging) the insurance companies to transfer huge risks off the books of the primary company – making them appear more profitable and less risky – and allowing the companies to shield their true financial strength from scrutiny. If that high-risk accounting  strategy seems faintly reminiscent of Enron’s ill-fated “Raptor” and “LJM2” subsidiaries, it should.

As the Times exposé pointed out, “This has given rise to concern that a shadow insurance industry is emerging, with less regulation and more leverage than policyholders know, raising the possibility that in the future, insurance companies might find themselves without enough money to pay claims.” Some of the companies taking advantage of this “look-the-other-way, see-no-evil” type of regulations are the very same companies – MetLife, Hartford Financial, Swiss Re, Aetna and AIG – that found themselves in a precarious financial position or needed government help to survive the last time around.

This collusion among some state regulators and insurance companies is the classic “I scratch your back, you scratch mine” type of mentality that mocks the very concept of state regulation of insurance companies. The states receive a needed boost in revenues based on premium taxes collected on business moved into the state. In exchange insurance companies are allowed to operate in the shadowy world of financial wizardry and tricks. Unfortunately, the ones who could end up paying the price for this abdication of regulatory responsibility and financial chicanery will be those who look to insurance companies to protect them against risk. (That is, if we don’t have another government bailout.)

How Insurance Companies (should) Make Money

Insurance is all about risk, but not the type of risk that most people think. There is the general assumption that insurance companies are in business to assume the risks of others, i.e. dying, being injured, experiencing a fire, but that is an incorrect assumption. Insurance companies are in the business of managing not assuming the risks of others. Insurance companies manage risk by pooling those who face a risk, i.e. getting sick, together in a single group and charging a fee (premium) from each member of the group. These collected premiums are held by the company in a reserve to pay for the costs of those who actually experience a loss.

So, it is not the insurance company that takes the risk. Instead, savvy insurers use their expertise to spread the risk among a large group, so that those at risk of loss share that risk with others. For this service the insurance company earns a fee. If the insurance company manages the risk efficiently and effectively, then the fees collected become their profit.

As we have seen in the past, well-run insurance companies can turn these fees for managing the risks of others into billions of dollars of profit; creating huge financial institutions. However, when insurance companies are poorly run or when greed enters the picture, the risk is that these companies will assume the actual risk and ultimately fail. The result will be real losses for shareholders and those who contracted with the company (policyholders) to effectively manage their risk of loss.

A good, but certainly not the only example of this type of scenario is the American International Group (AIG). For decades AIG was a well-run company that efficiently managed a multiplicity of risks worldwide. For its efforts, AIG earned billions of dollars in profits and became one of the largest and most respected financial institutions in the world. Then greed set in causing AIG to change its business model and violate the most basic precept of insurance by starting to assume, rather than manage risk. Instead of spreading the risk of “credit default” or the risk of mortgage failures, AIG assumed the risks inherent in these activities. In short order this great giant of a company AIG was teetering on the cliff of bankruptcy—only to be saved by a $100 billion dollar lifeline from American taxpayers who wound up owning 80 percent of the company.

A similar bailout occurred when the management of Hartford Financial – seeking to increase sales and bonuses – began to assume the investment risk for customers who had purchased variable annuities from the company. By promising to cover investment loses within the policies, Hartford lost hundreds of millions of dollars. Only a $2.5 billion charitable investment by Allianz SE and $3.4 billion in government TARP funds saved the company from bankruptcy.

The Fatal Flaw of Permissive Regulation

Insurance companies begin to fail when they begin to assume, rather than manage risk. And the most effective counterbalance we have to protecting ourselves from insurance companies that forget that simple formula is effective regulation.

The purpose of state regulation is to protect the consumer by preventing companies from taking risky and stupid actions, which they seem to have a proclivity to do. One of the primary functions of insurance regulators is to make sure the companies are safely putting aside enough of the collected premiums (called reserves) to pay claims when losses occur. (From the standpoint of the company, the smaller the reserves required to be established, the higher the profits; at least in the short term. Of course, in the long term, to the degree that these reserves are insufficient to pay the claims when they arise, the company will fail.)

For the past decade, as insurance products have become more complex and the financial structure of insurance companies more obscure and convoluted, state regulators have been criticized for lacking the resources and expertise to effectively protect the consumer and determine the financial integrity of insurance companies. Consumer groups have sought to rectify this weakness by proposing federal regulation of insurance companies, but strong lobbying by the National Association of Insurance Commissioners and many of the companies has blocked the proposal.

Now, with states attempting to increase revenue by promising even less regulation of reserves and financial overview for companies that move large blocks of risk into their state via captive companies, the very concept of regulation – not to mention protecting the consumer (most of whom are not in the state accepting the business) – is made a mockery.

This attitude and approach is something that we can expect from the greed of insurance company executives, but for state regulators to get in bed with the insurance companies and sacrifice their responsibilities on the altar of short-term revenues, boarders on criminal. But, what else is new?

And the Moral of the Story …

Insurance companies are in the business of managing not assuming risk. When they stick to their knitting, it is an easy business and they can make enough money to keep most potentates happy. But when enough is not enough and the insurance companies begin to stray from what their business should be, it is the responsibility of regulators to keep them on the straight and narrow.

However, when the line between risk and regulation is blurred or even erased as is happening in the current environment of loosened insurance rules, then a new risk emerges—one is destined to repeat rather than learn from the mistakes of the past.

AIG Board Fails to Meet Its Duty in Power Struggle

By Declining to Back its Chairman, Board Takes a Step Back to the Dark Days of Pre-Sarbanes Oxley

Last month,  Harvey Golub resigned his position as chairman of the board of the besmirched insurance giant AIG. His action brought an end to an ongoing dispute with Chief Executive Robert Benmosche. The crux of the clash between the two men revolved around a fundamental issue faced by corporate management and boards of directors: Who has the power, responsibility and authority – the management or the board – to determine and implement the mission, values and vision of the organization?

It appears that for some time Golub (at right) and Benmosche had been in a power struggle to determine who would set the vision and future direction of AIG. This dispute came to a head over AIG’s need to sell assets to raise cash to repay billions of dollars of government bailout funds. The board approved Benmosche’s plan to sell an AIG unit to UK insurer Prudential PLC for more than $35 billion. However, when the shareholders of Prudential reacted negatively to the transaction, CEO Benmosche pushed to complete the deal at a lower price. The board did not approve the lower price and instead recommended an IPO for the unit to raise cash.

The Golub–Benmosche dust-up is an example of a new type of corporate power struggle. There have always been power struggles among the management of corporations, but seldom have there been such struggles between the board and the management of a company. This type of conflict has been rare, because traditionally the board of directors was made up of friends and associates of the CEO. Indeed, it was accepted practice for the head of the company to be both CEO and chairman of the board. Pampered with status, prestige and healthy pay packages, the board became little more than a cadre of yes-men armed with a rubber stamp for the CEO and his plans.

If we should have learned anything in the past 15 years of exposed corporate fraud, greed and mismanagement, it is that this type of cozy arrangement between the board of directors and management can lead to nothing but problems. Can you imagine the potential for problems and abuse if the President had the power to appoint every member of Congress and they were beholden to him for their job? In essence this is the way the board/CEO relationship operated in the past.

After the abuses caused by the collusive nature of the relationship between the boards and management became obvious, Congress passed the Sarbanes-Oxley bill. The essence of the legislation was to clearly define the responsibilities of the board as representatives of the stakeholders of the company. (Not just shareholders, but everyone who can be affected by the actions of the company.) The legislation made it clear that the CEO and management worked for the board, not vice-versa. Not only were the responsibilities of a director clearly defined, but those directors who shirked their duties were exposed to civil and even criminal repercussions. Directors became legally liable and responsible for the actions of management.

The recent power struggle between the board and the CEO of AIG shows that old habits die hard and that both company managements and boards are struggling to come to grips with the new environment.

CEO Benmosche was obviously chaffing under the concept that he worked for the board and not the other way around. As Paul Hodgson, senior research associate at the Corporate Library, was quoted as saying in a Market Watch (July 18, 2010) report, “The relationship between an independent chairman and a CEO is supposed to be cooperative. But the point of having an independent chairman is that they can stand up to and change the mind of the CEO if they need to. I am not sure U.S. CEOs, particularly CEOs like Benmosche, have got that piece of the theory yet.”

Unfortunately, Chairman Golub and the other AIG directors did not live up to their responsibilities either. Golub offered the lame excuse for abdicating his duty as an independent chairman of the board by writing, “…it is easier to replace a chairman than a CEO.” The remainder of the board also demonstrated their lack of understanding or courage to exercise their rights and responsibilities as directors. It is believed that Benmosche (at left) went behind the chairman’s back and told the board that he could not work with Golub. It was a pure, old-fashioned power play. And as Hodgson noted, “The next thing we hear is that the chairman is stepping down. It is strange that the board would ask the chairman to step down rather than backing him up. The chairman is in charge of the board.”

It is important for the board and management to have a collaborative and cooperative relationship, but the AIG’s board abdication of their specific responsibility to “advise and consent” on the actions of management is a step back to the old ways and sets a bad precedent. As Gary Wolfer, senior vice president and chief economist at Univest Wealth Management, was quoted by Bloomberg (July 14, 2010) as saying, “Having a clearer field, it’s going to be the Benmosche Show going forward.” That is not the way it should be and could lead us back to the problems of the past.

So, what is the best relationship between a board and management?

One could list all the organization obligations of the board, i.e. select management, ensure effective planning, determine and monitor company progress, etc, but, there is a more subtle function of the board. The board should lead the way in fostering an environment of interaction, cooperation, support and parallel interests between the board and management. But that said, the directors should never lose sight of that fact that management works for the board, not the other way around.

Of course it is not the duty of the board to manage the company, but it is the duty of the board to manage the managers of the company. The board hires management and should give them the power to manage. Management’s duty is to develop the mission and vision of the company and the plan to achieve such. The board should use the combined experiences of board members to review, advise and approve the vision and plans of management. Once the board has approved the vision and plans, then management must be fully empowered to implement them without interference from the board.

The board’s responsibility then switches to monitoring, measuring and holding management accountable for the plans they themselves developed. If the environment in which the plans were developed and approved changes or if management wants to make fundamental adjustments to the plans, then these should be taken back to the board for advice and approval.

Using this type of structure, general board meetings should be a fairly simple exercise. The management reports on actions taken and results achieved to date. In addition, management lists those activities planned prior to the next board meeting.

Taking this approach to the board responsibility will create a positive, cooperative attitude that will enable both management and the board to be on the same page. Something that AIG management and the board were not able to achieve.

And the Moral of the Story is …

It is a new world of corporate governance for both the management and directors of a company. Serving as a corporate director has, for the past decades, been not much more than a cap on a career and good times with good buddies, but that has changed.

After what has been a century of little more than lip service to the obligation of the board of directors to represent the interests of stakeholders, Congress has codified the responsibilities of the board of directors. Not only are the responsibilities of the board clearly defined, but they are backed up with specific liabilities and penalties (some even criminal) for board members who fail to fulfill their obligations.

The corporate governance legislation brings reality (or should) to what has been theory, but not practice—that the board of directors is in charge of the company. The management works for the board, not the other way around. It is now clear – backed up by law – that the board’s duty is retain qualified management and then to approve, review and oversee the plans and activities developed by management. The board does not (and should not) manage the company, but in the new world the CEO is appointed by and beholden to the board.

This is a better way to protect the interests of stakeholders, but it is a lesson that apparently the board and CEO of AIG have not yet learned. Shame on both!