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.