Sunday, October 26, 2008

Politcal Posturing May Kill AIG

AIG is on its way to being named poster child of the year for egregiously bad public relations. Activities that contribute to the likelihood of winning this award: first, the company throws a $440,000 days-long party on the West Coast about the time that two of the last three ousted CEOs of AIG are trying to explain to a Congressional Oversight Committee that it certainly wasn't their fault that the company got in trouble. Meantime, AIG was planning a second party, also on the West Coast, but the outcry over the first led to its cancellation. Then there was an uproar over the partridge shoot in the English countryside that AIG hosted around the same time.

Leading the list of those downsized at AIG should be the PR team. That department clearly deserves an award for incompetence and mismanagement of core corporate communications. They failed on two counts. First, given the timing, it was terribly dumb to have these parties at this moment in time, since they provide those lawmakers trying to protect the citizens' money a unique opportunity to lambast the company they bailed out. (I suppose you can't use as an excuse that with a company in crisis mode, it is not surprising that nobody remembered to cancel the parties scheduled long ago.) Second, they failed to keep their new key business partner – the Government – in the loop. Yet without these kinds of activities, AIG may not survive. Let me explain.

To show you the absurdity of having to repond to politicians who frankly are grandstanding at this point,
Edward Liddy, AIG GEO, announced that the company would cancel 600 conferences and meetings because they “weren't essential to business”. This was in response to the request of Attorney General Cuomo (an AG beginning to have the tinges of Eliot Spitzer about him as he holds a press conference in front of Federal Hall and announces: "The party is over. No more hunting trips. No more luxury resorts. They are not going to have the party and leave the hangover for taxpayers." How could Cuomo or Liddy possibly know how many of these events were or were not essential to business?

Take the party that caused the original uproar - the $400,000 party at a California resort. It was probably planned at least a year ago. It was not a party for AIG employees but an annual party for highly successful insurance agents of AIG American General, an AIG company. All agents were self-employed. The party was held to reward them for success, keep their spirits high and motivate them to do even better in the next year. Like it or not, that is the way business is done. And the same is true for most of the other events.

Customer and talent retention is even more important now that a weakened AIG is fighting to keep its business from going to competitors, and struggling to keep and motivate employees when the stock is worthless, bonuses are minimal and costs must be kept at a bare minimum. Other ways need be found to keep them happy. Social events work, even if it does appear to the outside eye like Nero fiddling while Rome burned. But if AIG loses large customers and top talent how will it make the money to ever repay the $$$ billions government loan?

And what doesn’t make the headlines, or even the news, is that the events are not financed by taxpayers’ money as they have been so loudly accused. Those funds are coming from the coffers of the hundreds of successful and profitable businesses that operate under the AIG umbrella. Almost all of government money is going to pay for the credit swaps that sunk the company - not for hunting parties.

It is time to cease hectoring AIG and let the company get on with recovering and building a strong business.

Sunday, September 21, 2008

Greenberg Could Have Prevented AIG's Near Bankruptcy

Last week was the most extraordinary week in Wall Street history. This may sound like hyperbole on my part but many financial and economic historians carry it a step farther—it is the most remarkable week in the economic history of the United States.

Lehman Brothers falls, the greatest brokerage firm in the world – Merrill Lynch as well, and not because she received a great offer but because the management, led by former NY Stock Exchange CEO John Thain, fears its very survival. Others, like Morgan Stanley, are scrambling for merger partners so they can survive in some form.

But the granddaddy of them all is not an investment bank, but an insurance company. American International Group, until last week the world’s largest insurance company, the largest airline lessor in the world, and lots of other things, which teetered like Lehman all week. When private investors wouldn’t rescue it, arguments were fierce over whether the government should let it fail or step in to save it because of the dramatic impact virtually everyone agreed its bankruptcy would have around the world. Finally, on Wednesday night, with AIG already having lined up bankruptcy lawyers to get to work the next morning, the Federal Reserve Bank stepped in to save it with an $80 billion loan at an exorbitant interest rate of 12%, and also announced it would issue warrants to own a little less than 80 percent of AIG.

While I liked neither the interest rate nor the government acquiring the company, it was a thousand times better than bankruptcy. Selfish it may be, but as a stockholder there was at least a chance of getting some value back. And sure enough by Friday, the stock had nearly doubled in value.

Other doomsayers were not so happy. Hank Greenberg, who favored the loan, decried the government taking over the company. With the government’s move approaching nationalization in many eyes – Greenberg could not have been pleased since he has had lots of experience with AIG units being nationalized by foreign governments around the world over the years. He was joined by many others.

But why, the novice asks, was AIG in trouble to begin with? Greenberg noted on one of his numerous TV appearances last week that 90 plus percent of the businesses of AIG were solvent, profitable and needed no help. Only one unit was the culprit—AIG Financial Products, the unit based in London that had issued credit swaps relating to real estate, and that ultimately generated billions of dollars of losses. I question whether the credit swap business started after Greenberg left AIG as he claims. But there is no doubt in my mind that if he were still there it wouldn’t have happened.

Martin Sullivan, his protégé and successor had thirty years of deep experience in insurance. But he didn’t really know finance. The next CEO Robert Willumstad knew finance but not insurance. Only Greenberg knew both and understood this complicated company like nobody else. After all, he put much of it together. He would have seen the impending crisis and would have taken steps to avoid or mitigate it. Sure, there would have problems. But not the problems of apocalyptic proportions we faced this week. In short, we desperately needed Hank Greenberg.

Thursday, July 17, 2008

Who is Pulling Strings at AIG?

Barely a month after Eli Broad and two other large shareholders demanded a change in AIG's management and board, we not only have a new CEO in Robert Willumstad but an outstanding new director with considerable financial experience. More striking and puzzling at first glance, however, is the director who suddenly and immediately resigned, offering no explanation.

Suzanne Nora Johnson retired from Goldman Sachs as Vice Chairman after two decades, a period during which she headed the Global Investment Research Division. She is on several corporate boards, including Pfizer and Visa. She will bring much needed financial expertise to AIG.

Much more tantalizing is the sudden resignation of Richard Holbrooke, former U.S. Ambassador to the United Nations. I say this because there are very hostile feelings between Hank Greenberg, the former CEO and Holbrooke, relating to Greenberg's forced retirement. One could speculate--and it is pure speculation--that as part of the olive branch Willumsted held out to Greenberg when he visited him a few days after being elected CEO was that he would get rid of Holbrooke.

This sounds farfetched considering the hostility that has existed between Greenberg and AIG, but Greenberg himself said on television after his meeting with Willumsted that he wanted to be helpful and suggested efforts were underway to resolve one of the two demands I expected Greenberg to make -- the long pending lawsuit between AIG and Starr International over the latter's holding of 12% of AIG stock.

Greenberg probably had bad feelings toward a number of board members but especially, for whatever reason, Holbrooke. And I speculated the second demand was to make some changes in the Board.

If we carry this scenario to its' logical conclusion, then, as part of the Willumsted-Greenberg deal, Greenberg is providing advice on what to do to turn around AIG. That is by far the most valuable help he could give the company and it is in his interest as the largest shareholder. Obviously, it is equally helpful to Willumstad since a revived AIG offers him the guarantee of a long future as AIG CEO.

Wednesday, July 9, 2008

A World Without Spitzer

What I am about to say is not very original. But I have not seen it said anywhere else. Eliot Spitzer singlehandedly is responsible for the upheaval on Wall Street in recent years. Without Spitzer, Hank Greenberg's "foot faults" as he, a tennis player, calls them, would have never come to the fore. This includes the allegation that he was involved in the finite insurance deal with General Reinsurance. Or that he and other CV Starr directors shortchanged the Starr Foundation. Or, more comprehensively, that Greenberg and other top management engaged in many fraudulent business transactions just to prop up AIG's stock price.

Spitzer and Spitzer alone was the only Attorney General, indeed the only public official in the United States with the drive, determination and relentless ruthlessness to unearth these charges and those against many other Wall street players be they Grasso's compensation at the New York Stock Exchange, the charges against CitiGroup of allocating IPOs to favored clients or the conflict of interest between investment banking and research at Merrill Lynch.

That is not to say that all those charged were innocent. That no wrongs were committed on Wall Street. Some undoubtedly were although they might not have been uncovered in the absense of Eliot Spitzer's high-profile accusations. But heads rolled nevertheless, and within a very condensed timeframe the leaders of some of America's most prominent financial service institutions were replaced for fear of what he might do next.

Let's take one company and suggest where it would be today if Spitzer had not been on the scene. Hank Greenberg would no longer be CEO of AIG but he would be a very involved Chairman. Martin Sullivan would probably have been chosen as CEO and would have given his attention to insurance. Greenberg would have worried about everything, as he always has, but would give special attention to finance, derivatives, sub prime mortgages.

And based on my experience working with him, he would have foreseen problems with the subprime mortgage market. He would have taken whatever steps necessary to address this problem. And while he couldn't solve it outright, the losses would have been minimized.

The resulting profile of AIG today would be very different. Far fewer write offs. Smarter business decisions. The stock would be up at least 25 to 30 points. His warnings could have led to similar scenes in other companies. And though the credit crisis would not have been averted altogether – at least it could have been minimized.

But, alas, Attorney General Spitzer very much was on the scene. And we see the results.

Thursday, June 19, 2008

Willumstad Calls on Hank Greenberg

Ah, to be a fly on the wall when Robert Willumstad makes his conciliatory call on Hank Greenberg today. Do sparks fly? Or is this the beginning of a thaw in the icy relationship between Greenberg and AIG? Time will tell. The important thing is that Willumstad reached out to AIG’s long-time CEO. It is exactly the right thing to do. And it could not have happened as long as Martin Sullivan was in charge.

Willumstad has at least one big plus going for him: he was not on the AIG board when it asked for Greenberg's resignation. And maybe he can begin to point the company in a new direction. But Hank Greenberg read my book, Fallen Giant, and even if he hadn't, he must have had his suspicions of what was going on behind closed doors. On page 169, published in 2006 after Willumstad's election to the AIG board, I say: "Greenberg apparently feels (Frank) Zarb's actions were a power grab. There are others at AIG, including a very senior executive, who agree. This executive argues that Zarb has a long-term agenda for AIG....Zarb wants different leadership (than Sullivan), perhaps even the new AIG director from Citibank, Robert Willumstad, who is expected to replace Zarb as chairman."

But Greenberg is a practical, hard-nosed businessman and if Willumstad can improve results, he will listen. Or more than likely, Willumstad will ask for suggestions and Greenberg will have plenty.

But I wonder if Willumstad can really deliver on what I bet are the two most important items Greenberg wants from AIG: l) one or more board seats and 2) for AIG to abandon the lawsuit to gain Starr International's AIG stock (some 12% all told).

Greenberg has made it clear through various maneuvers and statements that he would like some say at AIG through board participation. More so now that the stock has fallen nearly 50 percent in the past year.

It does not necessarily have to be him but it does have to be directors he approves of. Even if he wanted a seat it is debatable that AIG could elect him with two pending legal matters he faces: the pending state civil suit over what happened at AIG when he was there and the possible Wells notice over the same issue.

Greenberg's second demand should be that the AIG law suit be dropped over the $20 billion (the price before AIG plummeted) in stock. That suit was probably bought by AIG to keep stockholders happy since transferring the stock back to AIG would be a real plus. But the board would have to approve dropping the suit and that would be a touchy situation.

Perhaps today's meeting will result in some good will. But it would most benefit AIG shareholders and the organization itself if it yields something more substantive.

Monday, June 16, 2008

The Big Shareholders Get Martin Sullivan

On May 21, I predicted Martin Sullivan had a maximum of six months to turn the giant that is AIG around, assuming no more write offs and a ratchet up in the stock. I was five months too generous but my shortsightedness was only half my fault. One half was inevitable and the other a closely guarded secret. First, until two weeks ago, Hank Greenberg was the only major shareholder loudly complaining, complaints which the company tended to brush aside as more of the same. But I should have guessed others would join the chorus. A group led by Eli Broad, whose company Greenberg bought, and two other large shareholders, made it clear they wanted change in management and in the board. It took this event and the Board's response to bring the Chairman of AIG out of the closet: Robert Willumstad long has held aspirations to be a CEO and he lobbied for the AIG job when the board was considering hiring a headhunter to find a replacement for Sullivan.

The market's lukewarm response suggests it is not persuaded. Only Mr. Broad responded positively even though his original letter to the board said he did not want a CEO from the board. His response was more for the appointment of Mr. Bollenbach, former CEO of Hilton Hotels, as lead director.

Why are Mr. Willumstad's credentials for the AIG job less than sterling as successful as his career at Citigroup has been? First, as Chairman, he has walked hand in hand with Mr. Sullivan much of the way. So some of Sullivan's failings rub off on him. Secondly, a mantra of Hank Greenberg, which his devotees firmly believe, has always been that at AIG you have to know insurance. Willumstad's statement that the insurance divisions reported to him at Citigroup won't cut it. Third, the notion that he will have a plan for the company by Labor Day is not reassuring to shareholders or anyone else. It bespeaks of how complicated the company is and why another insider could do better. Finally, the company has taken a step back in its much praised reform in corporate governance. Willumstad will be Chairman as well as CEO.

Saturday, May 31, 2008

Greenberg's Further Tribulations

A few days after the bombshell from Judge Droney alleged that a phone call from Mr. Greenberg instigated the finite insurance conspiracy, word reached Europe that the Securities and Exchange Commission (SEC) had served a Wells notice on Greenberg. This threatens him with a civil charge primarily for his alleged involvement in the General Re finite insurance case and a situation with Capco Reinsurance Company. Of course, his lawyers--and Greenberg has the best lawyers going--can make a defense against the charges being made. If the SEC staff does not accept this legal refutation, they ask the Commissioners for permission to proceed with the civic proceedings. And very seldom does a Wells notice not go forward.

While the news had a small mention in Europe, it was not really noticed in most of the financial press. Yet there is considerable interest in AIG, more so because of the dramatic drop in the stock and the capital raise. It suggests the focus is on the company not the individual. Whereas in the U.S., Greenberg is such an icon that three years after he resigned, his name and AIG still seem virtually synonymous. Of course, this is true not only because of the high profile legal situation but because he has been aggressive both with AIG and in explaining on televsion and with the print media his views on a variety of matters - from China to the Presidential candidates.

Sunday, May 25, 2008

Hank Greenberg's Trials

My first few days in London was swamped with bad news from the U.S., at least for those who are fans of Hank Greenberg, former CEO of AIG. On Monday, word came at three a.m. London time that the judge presiding over the trial of four General Reinsurance executives and former AIG executive Chris Milton (who now works for C.V. Starr), had issued a long commentary on the trial. U.S. District Judge Christopher F. Droney denied defendants their appeal to overturn their convictions and have a new trial. He also said that there was sufficient evidence that Mr. Greenberg had instigated a telephone call that led to the conspiracy to fradulently boost the financials of AIG. This led to the conviction of the five executives. Greenberg's was named in the trial as an unindicted co-conspirator. Interesting enough, executives in London were not aware of this development.

During the three years since Hank Greenberg left AIG he has never faced a trial. I, for one, do not think this time will be any different. Consider the history: first, Greenberg was called a criminal on TV by then Attorney General Eliot Spitzer. And when Spitzer did bring charges against Greenberg and former AIG CFO Howard Smith, as well as separately against AIG, these were civil charges--not criminal. So the very allegation that cost Greenberg his job was not raised again until three years later when Judge Droney made his accusation. True the federal authorities talked about doing something with that charge from time to time. But they did not.

Even though the prosecutor said something after winning the trial about "working up the ladder", I am not convinced they have a scintilla of evidence that would lead them to do so and gain a conviction. Hopefully, this will put this matter to bed once and for all.

Wednesday, May 21, 2008

Meetings with the London Press

On my second day in London I met with the insurance correspondent for the Financial Times and the London editor for A.M. Best Europe and did a book signing at that most venerable of booksellers--Waterstone's in Leadenhall Market.

Among the top or almost the top question of these journalists: how is Martin Sullivan, AIG's English born CEO, doing and will he survive. My response: He had done exceptionally well in managing the enterprise during a time of difficult transition taking over from an extraordinary CEO that served 37 years. Be it keeping up the morale of employees to assuaging investors to consoling his board to that most important piece of business--settling with the authorities and getting them off AIG's back, he has performed exemplary.

But managing and growing the enterprise is another matter. Generally, he can blame his predecessor for problems for one year, maybe two, but surely not three. The write off of about thirteen billion dollars over the past year, the weakness in the core business and the nearly 50 percent stock drop in the last year to the lowest price in a decade is unacceptable. He can blame Greenberg or extraneous circumstances but stockholders who have lost their shirt won't accept it. In fact, many would like Greenberg back. While the board stands behind him for the moment, there is clearly some uneasiness on that board. One more big write off will end his tenure. And if the stock doesn't turn around with six months, he will be forced out.

And that in itself is a dilemma because an outsider could not run AIG, unless it is broken up. It would take years to understand the complexity of perhaps the world's most complex company. So an insider is absolutely needed. I have a recommendation on who that should be to discuss another day.

Tuesday, May 20, 2008

Dinner with Financial Industry Executives

Yesterday on my first day in London I spoke at dinner before a group of executives who work in the Canary Wharf Financial Center. While others here say they are not very familiar with AIG or Hank Greenberg, that is certainly not the case with this group. They know AIG well and are fascinated by Greenberg. It was a telling time to meet with them since on that very day a number had closed out their firm's participation in AIG's $20 billion capital raising effort.

This effort, which far exceeded the original goal of $12 billion, was phenomenally successful. When I asked these executives why they participated they said AIG had paid above premium on the placement and they had total confidence in the future of the company.

Ironically, AIG CEO Martin Sullivan is in town as well speaking at a Lehman Brothers Financial Services Conference. But our paths have not yet crossed.

Thursday, May 15, 2008

Welcome to my blog

In a few days I will be off to London, Paris and Amsterdam to share stories from my book, "Fallen Giant: The Amazing Story of Hank Greenberg and the History of AIG" with business audiences and book lovers. It will be interesting to hear POVs from European executives on AIG's misfortunes since Greenberg was forced to resign in 2005. I'll also be discussing the future of New York and London as global financial centers - a topic of special interest to both cities.

Join me in this journey. Post questions and observations and I will do my best to bring you answers and insights from markets outside the US.