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.