A Cautionary Tale of AIG's Corporate Suicide
By Roddy Boyd
Wiley; 349pp; $27.95
As he drove home from his meeting with Hank Greenberg, Gary Davis recalled the hours he'd just spent with one of the world's most powerful chief executives. At Greenberg's behest, the two men had niggled ad nauseam over the software costs and secretarial salaries for Davis's unit. And while the commodity-trading division was only a sliver of mammoth American International Group (AIG), this was 1997, and nothing moved at the world's largest insurer without Greenberg's relentless nitpicking. "[Davis] couldn't decide whether it was the smartest thing he had ever encountered," Roddy Boyd writes, "or the silliest."
It was probably both, but Fatal Risk makes a persuasive case that Greenberg's obsession with minimizing risk amounted to a rare form of genius. The financial swami had grown up in the Depression, lost his father in a car accident, and stormed Normandy on D-Day. Davis's insight, among others, separates Fatal Risk from the irrepressible catalog of financial crisis thrillers that have preceded it. Experienced market watchers craving something deeper than an indictment of greedy bankers will welcome Boyd's evenhanded approach. Rather than turning the meltdown into a heroic battle of virtuous outsiders vs. mercenary insiders, Boyd depicts with exactitude the conflicting forces tugging at each player. No one emerges without at least a little blood on his hands.
From the moment Greenberg took over AIG in 1968, the risk-averse CEO probed for any hazard or detail that could threaten the company's triple-A credit rating. He would regularly interrogate executives in his office—all while nibbling on fish and steamed vegetables—and carry on conversations with several at once. If dissatisfied by a detail, he'd simply pick up the phone and call a mid-level manager, who, usually terrified, told the boss what he needed to know. During the 1970s and '80s, AIG gobbled up rivals and expanded into Japan and Eastern Europe.
In the 1980s, Greenberg carefully branched out beyond insurance to satisfy the stock market's hunger for growth. In 1987, AIG entered the expanding area of financial derivatives and launched AIG Financial Products (AIGFP), a partnership with academic-turned- investment-banker Howard Sosin, who aimed to create investment vehicles that would take advantage of market mispricings. Just to be safe, Greenberg also created an offshore company as an escape hatch in the event of a nuclear disaster.
Boyd shows the extraordinary degree to which the behemoth depended on its one-man risk-control unit—until, unfortunately for AIG, he wasn't. While Greenberg's frenetic, hands-on style worked when AIG was a smaller company, Boyd writes that it failed miserably as he tried to keep up with the sprawling conglomerate. By 1993, Greenberg grew tired of Sosin's gigantic pay package and grating ego, severed the association, and began searching for other growth opportunities. In a desperate attempt to diversify, AIG started to strike deals that seemed less about insurance and more about providing ways for companies to hide shortfalls and dress up their balance sheets.
In 1998, AIG sold an insurance policy to Brightpoint, a wireless device company, to retroactively cover its larger-than-reported losses. Of course, this amounted to falsifying financial statements, and the Securities and Exchange Commission hit AIG with a $10 million penalty. In 2005, after a much costlier fraudulent transaction with reinsurance giant General Re came to light, the near-80-year-old Greenberg was ousted by his handpicked board. "There is an excellent chance that Greenberg gave the General Re issues—which cost him his job, his honor, his status, and perhaps over $1 billion in personal wealth—all of five minutes of consideration," Boyd writes.
Without Greenberg, risk control at AIG plunged from spotty to negligent. AIGFP became a huge player in credit default swaps that insured against losses on mortgage-backed debt. Greenberg's successor, Martin Sullivan, was a master salesman but no financial guru. In a scandalous lapse, Boyd explains, neither Sullivan nor anyone else at AIG appeared to fully understand the agreements in the way a younger Greenberg would have required. The credit support annexes attached to the swaps obligated AIG to put up cash under certain conditions. When the housing market collapsed in 2008 and Goldman Sachs (GS) demanded its money, AIG was toast.
Nearly three years after the federal government's $85 billion defibrillator, Boyd notes that almost everyone connected with the AIG fiasco is back at work—some with even more responsibility than before. The problem Boyd depicts so well remains unsolved: How do you get Wall Street to value safety when the penalties for ignoring risk prove so slight? Especially when there are very few Hank Greenbergs.