A Tepid Welcome for AIG's Boss

Bob Willumstad may not be Mr. Right, but some think he's Mr. Right Now
In 2008, AIG's stock has been almost halved, and it faces federal probes Jennifer S. Altman

There was a time when American International Group (AIG) was one of the most revered names on Wall Street. But when Chairman Robert Willumstad held his inaugural conference call as CEO on June 16, he was shown precious little respect.

After Willumstad vowed to review AIG's operations rigorously, one research analyst questioned whether he could realistically deliver a new game plan in 90 days when he didn't have his own chief financial officer. Another asked why investors should believe anything would change. After all, Willumstad had been chairman for nearly two years and failed to rein in a management team that racked up record losses. "Weren't you involved in a lot of these decisions that have occurred?" UBS (UBS) analyst Andrew Kligerman asked the new chief.

Restoration: A Tall Order

If Willumstad thought it would be easy to win over Wall Street when he stepped in to replace CEO Martin J. Sullivan, who was ousted by the board on June 15, he was wrong. Within days of his being named, AIG's stock price—almost halved since the start of the year—fell 2.35% on June 18. "To a certain extent, he's being viewed as more of the same," says someone with knowledge of the company. Already people close to AIG are discussing who could succeed him. But Willumstad himself told reporters that he's "a young 62" and hopes to grow as old in the job as Maurice R. "Hank" Greenberg, who was just shy of 80 when he was kicked out of AIG's top job three years ago following alleged accounting improprieties at the company. Willumstad declined to be interviewed for this story.

To restore faith in AIG, the new chief will need to revive a company that has seen its financial health and employee morale bruised during his tenure as chairman. The $110 billion financial-services giant was an innovative and aggressive global trailblazer during almost four decades of Greenberg's imperial leadership, which came to its abrupt end in 2005. Under Sullivan, a cherubic-looking Brit who joined AIG at 17, the company paid a $1.6 billion settlement to regulators in 2006.

Even as he worked to beef up internal controls, though, Sullivan seemed to have lost touch with the complexity of the business. The most glaring example was his statement in December that AIG's exposure to the residential mortgage market was "very manageable" and that the company had $21 billion in excess capital. Just two months later, AIG revealed that auditor Price­waterhouseCoopers found the company had a material weakness in its financial reporting. As of May, AIG had marked down its portfolio of credit default swaps by $20 billion over two quarters. Even then, Willumstad insisted Sullivan was "the right guy" for the job.

Shareholder Pressure

That quickly changed after AIG confirmed on June 9 that it was once again the subject of federal probes. The Securities & Exchange Commission and the Justice Dept. are looking into whether AIG correctly valued its financial products. Soon after, major shareholders sent a letter asking the board to reach outside the company for a management change. Some viewed the probes as the final straw. "It was like your cancer was in remission and it had come back again," says Thomas Vandeventer of Tocqueville Asset Management.

The challenge was finding someone who could lead a shell-shocked insurance behemoth with two consecutive quarterly losses totaling $13 billion. AIG had a thin management bench under Greenberg's autocratic control. And this problem remains. For example, AIG is looking outside to replace its CFO, who has moved to another position. Moreover, top financial CEO talent is scarcer than ever. Four financial giants have removed their CEOs in the past year alone, and investors are in an unforgiving mood.

Willumstad quickly became the board's choice. After losing out to Chuck Prince to run Citigroup (C), the banking veteran who loves auto racing and keeps an Andy Warhol poster of Formula One cars hanging in his office called running a public company "a longtime personal goal." He was recruited to head AIG's board by Interim Chairman Frank G. Zarb, who had admired his work as president and chief operating officer at Citi. The board later discussed the possibility that Willumstad could step in as CEO if needed, according to an AIG spokesman. With Sullivan flailing, board members discussed seeking outside candidates, according to someone familiar with the matter. Nothing came of it. Willumstad told analysts the board met to discuss AIG's future leadership about a week before naming him.

Mutterings and Missed Targets

Now, he has to come up with a plan to turn around a company that deals in everything from property and casualty insurance to aircraft leases and exotic derivatives. AIG raised about $20 billion in fresh capital from investors last month. But analysts expect the company's earnings to decline by 10% this year, to $8.4 billion, amid signs of trouble in its core businesses. General insurance operating earnings fell 46% year-on-year in the first quarter.

Willumstad also has to raise morale at a company that has been battered by the markets and, some insiders say, has lacked direction since the departure of Greenberg. For all his bombast, the iconic leader was a savvy strategist who understood foreign markets and had a precise command of the intricate details of his company's operations. Willumstad will need to break down long-standing corporate silos and rekindle AIG's entrepreneurial culture. One executive who left six months ago talks about inertia, missed targets, and mutterings that Hank "wouldn't have put up with…."

In fact, Willumstad has suggested that one of his first priorities will be ending the bad blood with Greenberg. He told investors he wants to have a "more interactive relationship" with the ousted leader, who remains AIG's largest shareholder and has been loudly criticizing its management. Indeed, he called Greenberg at home on Father's Day to arrange for a meeting at Greenberg's Park Avenue office on June 19. But Greenberg will likely insist that AIG settle the litigation between it and himself before giving Willumstad support.

The board's persistent backing of Sullivan in recent months won't help Willumstad, either. After AIG revealed the auditor's concerns, the board signed off on a revised severance agreement for Sullivan that the Corporate Library, a watchdog group, estimates is worth $68 million. And it approved a dividend increase as the company was seeking capital, a move some investors called inexplicable and inexcusable. "I'm sure they're all good people, but they don't know what the hell they're doing," says David Schiff, editor of industry newsletter Schiff's Insurance Observer.

Then again, even those who've criticized AIG recognize that Willumstad is probably the best choice at the moment. Shareholder and former board member Eli Broad, who co-wrote letters urging AIG to make a management change, calls Willumstad an "accomplished, experienced financial executive" despite the fact that the board ignored his request to conduct a "formal, thorough, and rigorous" outside search. Sometimes, he concedes, "you don't get everything you want."

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