The American Spectator

Bram| 4.29.09 @ 8:21AM

Excellent article. I have argued for months that much of the blame for the destruction of AIG belongs to Elliot Spitzer.

Ironically, I interviewed for a job opportunity at AIG early last year. I tried to convince them that since I would be traveling regularly anyhow, I could work from one of their New Jersey offices without the extra 3 hours of commuting every day, thousands annually in train or bridge fees, and 2 extra layers of income tax. They insisted that I work out of NYC and I declined to continue the process.

Bob| 4.29.09 @ 9:10AM

Tucker -- your article is so full of misstatements and wrong conclusions that it is laughable. I was an executive at AIG until 2004. I'll just point out a few of them. First of all, Hank was not the founder of AIG -- that would be C.V. Starr and he founded the company in Shanghai. Hank did grow the company dramatically, however. Hank was trained as a lawyer, and he ran the company always right on the line of legality. His strength was his personal relationships with world leaders and he was always able to "negotiate", many times with arm twisting, with other company leaders. His relationship with Marsh & McLennan may well have crossed the line, as the CEO of that company was his son, Jeff. Remember that Marsh & McLennan was the largest broker for AIG and some of the deals between the two companies bordered on legality. I personally don't believe that Hank would do anything really illegal, but he would get very close to that line.

There was NEVER any possibility that Hank would have moved the company to Jersey. Hank had an apartment in the main AIG building and was tied very closely to the city. He wanted to be near his contacts. He may have used the threat to get company benefits because that was the way he did business. But he never would have moved the company. Perhaps he would have moved a small division, but not anything major.

Regarding running AIG, it was a very decentralized company. Hank called his divisional CEO's directly, bypassing intermediate management and there were almost 600 divisions. There was no one that could have replaced him because no one could arm twist like he could. He had a lot of dirt on people.

We all knew that Martin was incapable of running the company (although I left before that happened). Martin was not a lawyer, did not have the international relationships, and didn't even have a college degree. He worked his way up the company after joining at the age of 17. The company needed infrastructure after Hank left -- and Martin didn't understand how to put in middle management -- he had never experienced it.

Regarding the Financial Products Group, it was Hank that brought them on board in 2001 or so and more than half of the swaps had been created prior to Hank leaving. So your information is wrong there as well. The thing that sunk that group was the downrating of debt. It forced the ultra high unregulated leverage in the swaps to garner higher capital reserves (by contract), and without being able to get the best debt rating, there was no capital liquidity in the market. In other words, AIG could not get the capital for the reserves. That's what brought the company down and Hank was responsible for the whole swap business being there. Hank was known for taking calculated risks, but he was wrong on this one as he never saw the housing bubble coming.

Next time, Tucker, please do some research before posting. AmSpec -- you should hire a fact checker.

Bob| 4.29.09 @ 9:18AM

One more comment... Hank was perhaps the best company leader I've seen in all of my career. His judgment was excellent and he would constantly call a cadre of associates to make decisions based on a collection of points of view. There certainly has been no insurance executive in our history who was as good as Hank. However, Hank was not a banking executive and that was a different business. All of the AIG insurance businesses remain relatively strong -- it is the banking side of the business like the Financial Products Group and International Banking that are weak. Hank thought about FPG as an insurance operation, but it wasn't. That was his mistake.

Interested Conservative| 4.29.09 @ 9:44AM

Bob - you clearly want to disagree with the article, but the facts in your critique don't really contradict the primary points.

It seems this may have been much more a failure of succession issue than intentional culpability, and both sides of management deserve blame for that. Note though that the point of the article highlights the artificial and external causes of such succession - namely, NY AGs.

Finally, I'm curious about your closing comment that "the banking side of the business"? As I understand it, the FPG was essentially an unregulated insurer (though of financial risk rather than Commercial, Life, P/C, or more traditional lines) much more than an investment bank, hedge fund or commercial trading bank? The article points out the exponential expansion of this area imediately post-Greenberg - is that incorrect.

Again, it seems you concur with most of this so I wonder about the call for fact checking or the laughability here.

What am I misunderstanding?

2Anglico| 4.29.09 @ 9:51AM

So Bob, you think there are a couple of errors (maybe) in the article, does that mean Spitzer had NOTHING to do with the problems? And the author only said Hank SHOULD have moved, not that he wanted to and did not.
Lastly, if the clown Spitzer had NOT screwed with Hank, do you think AIG could have maintained its credit rating? I know the downgrade came AFTER Spitzer's tactics.
One more thing, Credit Default Swaps ARE insurance, but they did not want to call them that so they would not be subject to state insurance regulations. That is a problem.

Interested Conservative| 4.29.09 @ 10:09AM

One quibble - though Greenberg did not "found" the company, I believe he did take it public, and clearly was the prime mover of its vast expansion and profile. Sound more akin to Ray Kroc than Henry Ford as far as being there at the birth, but it seems a small point considering latter events.

Bob| 4.29.09 @ 10:13AM

IC -- My point was that even Hank could not have stopped FPG from taking down the company and that he was primarily responsible for starting and building this business. It had nothing to do with Hank losing his job or Spitzer. Hank would have run the company better, but FPG still would have failed and brought the company down. While FPG seemed more like insurance, it was based upon guaranteeing derivatives, which are financial instruments. Let me explain it this way. When I insure your life, I have actuaries look at mortality and morbidity tables. Life expectancies for large groups of people are fairly predictable. In other words, I can determine the risk in an insurance policy. However, for swaps, I would need people like actuaries looking at the risk profile of the underlying security -- in this case derivatives. AIG never had the people or computer power to evaluate the risk in these financial instruments. Furthermore, they never looked at things like the housing bubble as that had little to do with the insurance business. AIG could not have evaluated the swaps in any reasonable manner. Have I explained it?

2Anglico -- If you understood the FPG and AIG, you would have realized that even Hank would have gone under -- it is not even a close call. Hank may have recognized the problem sooner, but remember that most of these swaps were done while Hank was still there. Furthermore, you are right that swaps are a form of insurance, and it was Hank who formed the division that way. But again, AIG didn't have the capability to determine the risk of the insured commodity -- and you would never run an insurance company without actuaries.

So the article is just plain wrong in blaming Spitzer if you understand what happened.

Bob| 4.29.09 @ 10:19AM

IC -- I take nothing away from Hank. He was the best executive I've worked for in my life by a long shot. But he did make a mistake -- a big one. And by the way, Hank would not have led the company if C.V. Starr didn't find him and push him up through the company.

Hank's strength was international. He was only able to become strong in the U.S. market through acquisition. Remember, a lot of profits came from airplane leasing -- another acquisition run completely by someone else. This was a way to use insurance reserves to achieve a higher return rate.

Again, this takes NOTHING away from Hank.... He made a mistake -- pure and simple.

2Anglico| 4.29.09 @ 10:58AM

Actually Bob, I understand both FPG and AIG. I was pointing out that YOU said AIG could not get capital to back up its risk and thus went down, And YOU said this was due to AIG losing its rating. Spitzer had everything to with losing their rating because he shafted Hank.

2Anglico| 4.29.09 @ 11:11AM

Oh, and since we're on the insurance/risk/bankruptcy theme, the State of Florida has risk of $500 BILLION with MAYBE $9 billion in reserve. 85-90% of this risk is located in two counties, Dade and Broward, the MOST hurricane prone area in the U.S. What kind of credit rating will Florida need to float bonds to cover $50-80 billion in unreserved losses? What interest rate will Florida have to pay to attract capital? Where will Florida get the money to even pay the INTEREST on those bonds? I guess they will roll the principal from generation to generation just like the Federal Government.
The REAL thieves are in government.

Bob| 4.29.09 @ 11:16AM

2Anglico -- Spitzer had NOTHING to do with AIG losing their rating. Hank could not have prevented it. The rating was based upon the underlying quality of the financial derivatives which weakened because of the burst of the housing bubble. Hank did not understand the downside risk of the housing bubble. Remember that swaps were more highly leveraged than the derivatives because they were the backstop to those derivatives. If you think that Hank could have stopped this, you don't understand what really happened.

I find that on these political blogs, people tend to both blame and give credit to politicians for the thrust of the economy. The truth is that politicians have less to do with economic realities than you think. For example, the biggest rise in GDP in the past 50 years came during the Clinton administration (Reagan was about in the middle) but I wouldn't give Clinton the credit for that rise in GDP, would you?

Politics is a minor influence on economics, not a major one.

2Anglico| 4.29.09 @ 11:46AM

Again Bob, I was simply pointing out to you that the credit downgrade came shortly after Spitzer attacked Hank. That is a fact. Hank was GONE when the collapse happened. Could Hank have stopped it? Maybe, maybe not. But he could have maintained the good credit rating, for a while, which would have bought time.
In theory I agree that government, until recently, did not influence our overall economy all that much, THANK GOD! But what is the trend? I also believe congress and the regulators have greater effect than the President.
And government accounting rules forced derivative owners to declare their holdings worthless which had a MAJOR effect on all of this mess. Is their one rule or cut corner or legislator or politician or CEO or company to pin the blame on? Of course not.

2Anglico| 4.29.09 @ 11:52AM

And if Hank is as good as you say, or as good as Ray Kroc, he would have FOUND somebody who DID understand the problem. Maybe that guy could have at least stopped the hemorrage (sp?).

Interested Conservative| 4.29.09 @ 12:01PM

Bob - All that makes sense, and I'm from the life side of the business as well, but it seems the conclusion is that FPG was insuring risks for which itdid not have the actuarial capability. Note that they'e probably not alone, and likely would have been better than others, eventually, had not the bubble burst.

All that means is that it was still an insurance business failure, not a banking failure. I agree that Greenberg likely couldn't have stopped it - either AIG's failure, and certainly not the swap market as a whole, but Tucker's point seems to be that without him there, his successors simply sped up the disaster and compounded it.

The ironic conclusion might be that for all the grandstanding ofthe NY AG's, they were shooting at the wrong targets, and they were the wrong regulators. It should have been the NY Division of Insurance going after the safety and soundness of the "non-insurance" compay subsidiaries such as FPG.

I know Supt. Dinallo was briefly grilled in DC as to why he didn't regulate, and there's been scant follow-up there, probably because it's in nobody's interest to reassert state supremacy here and now on this topic.

All in all, I'm suspicious of a "super" regulator scheme which Sec. Geithner envisions to replace the combined failures we had amongst the Fed/Sec/State DOIs. Seems like that simply concentrates the problem without concentrating the solution - sort of like how Fannie and Freddie turned out.

Bob| 4.29.09 @ 12:14PM

2Anglico -- the credit downgrade came as a result of the burst of the housing bubble and had nothing to do with Spitzer attacking Hank. No one, not even Hank, could have stopped it because it was a function of several years of business and contracts and would have taken several more to correct. Besides, these swaps were not based on AIG's business, they were based on the businesses of Goldman Sachs, Merill, BofA, etc. Hank had nothing to do with those underlying mortgage backed securities. You obviously don't understand that business if you think that Hank could have stopped the credit downgrades. The most he could have done is to stop issuing swaps sooner thereby cutting losses by 20% or so. No one in that business predicted the effect of the housing bubble -- not even the investment houses that created those underlying derivatives. Your position just doesn't make any sense. What you need to do is to run the numbers using the 50-1 leverage ratio. Remember the swap contracts, which were the basis of the reserve status, were already a done deal long before Spitzer raised his ugly head.

If you do understand these instruments, get out your trusty Excel spreadsheet and run some sensitivity analyses and you'll see what I mean. You do have a background in financial analysis, don't you? That's the only way you could come to your conclusion...

Bob| 4.29.09 @ 12:32PM

IC -- I had the opportunity to be on the life side, P&C side, and financial guarantees. AIG was NOT better at assessing risk on financial guarantees as it didn't have any experience in creating CDO's. When I joined AIG, I was amazed at the quality of their life and P&C actuaries, and appalled at how little they knew about banking. The actuaries had computers and loads of tables and statistics. They ran mathematical models. You know what I mean. None of that existed on the financial side.

Again, as an insurance guy, you know the importance of having a diversified sample to spread the risk. That's fairly easy to do in life. In P&C, however, you want to spread the risk across industries and geographies. For example, you would not just insure Florida for hurricanes/floods. One big one would wipe you out. Therefore, you insure areas across the country to spread the risk. In swaps, this risk was not spread -- if the underlying housing market fell, you were in trouble. Therefore, it violated the principles of true insurance -- one catastrophic event would not put you under. Since Hank was responsible for creating this business, it shows that he didn't understand the underlying risk and how it differed from true insurance.

I totally agree with you on what the AG's should have pursued. But, given the rise of the national banks, you cannot have state regulation of non-bank entities and thus need some national regulation.

Interested Conservative| 4.29.09 @ 1:08PM

Bob - it's your conclusion that I disagree with, but with a qualification.

Practically, I'm afraid you're correct - we'll have federal regulation here, either of the Geithner stripe or some lesser compromise. However, the states (really through NAIC) have successfully regulated the rise of the national life and P/C industries, and if anything, the Cal. and Fl. catastrophe scenarios bear this out - most players see the risks and are adapting accordingly. How those two state governments react is another matter. Cal. actually seems to have done well on the building code side, but the department under Garamendi was little more than a social welfare agency, like most of the rest of the current state government.

As for Florida, they do well on "seniors" regulation, but the hurricane pool they're building may be a house of cards which the private sector won't want to touch.

The states could do the same for financial risk insurers, but they have to want to, and aside from NY, most don't. NY really has the only capacity to do so, and they don't seem to interested, for similar reasons which Tucker's article points out.

All this is interesting, given the state's self-interest in retaining the financial sector, which Mayor Bloomberg, if none of the other elected officers, seems to understand.

I suppose we'll see if fragmenting or shrinking GM works, but I'd argue it would be much more efficient to do that in financial services - i.e. break up Citi and probably BOA - JPM seems to be able to survive intact. But eliminating the market for derivatives, or folding it into a single politically vulnerable federal regulator, seems worse than the unregulated monopoly which led us to this mess. It was a nascent market which failed, but that doesn't mean all markets failed, or that other market solutions are impossible.

Still, I'd prefer if the states' could expand or clarify their definition of "insurance" to cover what is clearly an insurance marketplace and leave the feds with Finance and Investment regulations.

Bob| 4.29.09 @ 2:45PM

IC -- state regulation of insurance works because it is based upon data that can be reviewed by easily by people who are mediocre. Regulation is so severe in insurance, that there is little opportunity for "creativity". Additionally, there are no overriding catastrophic factors effecting insurance. Most insurers are afraid of moving to a national regulatory scheme because they would make products more competitive and profits would drop. We both know that is true as I suspect you've created new insurance products as I have and have moved through the regulatory process.

State level people do not have either the equipment or knowledge to regulate sophisticated financial markets and it would cost way to much to do so. It is a totally different business.

I've analyzed both insurance products and financial guarantees, and the risk analyses you use are not even related. It doesn't look like you've had much experience with financial guarantee products.

By the way, derivatives are not bad products and our financial markets cannot function without securitization as that loosens up credit availability. Regulation does not have to be onerous. First, you need realistic capital requirements (for which there are none right now). Secondly, you must have debt originators keep a portion of the risk. If you let them securitize their entire portfolio, then there is no impetus to originate good debt. Lastly, you must improve the transparency of CDO's so they can be valuated effectively.

Again, default swaps are not the same as the insurance you know. They are very different in behavior.

pete the mediocre| 4.29.09 @ 2:53PM

Bob,
You might want to try explaining to the people of Russia, Cuba and China how "politics is a minor influence on economics."

Bob| 4.29.09 @ 2:59PM

pete -- you might want to learn the difference between central control of an economy and capitalism. Besides, China's economy is controlled mostly by us since they buy our treasuries and produce our goods. Their politics play less of an effect than you think.

Also, perhaps you'd prefer the centralized control they have in China. They are growing at a faster rate than us, you know.

So, mediocre, what is your point? Your statement makes absolutely no sense.

2Anglico| 4.29.09 @ 3:01PM

Bob, my point was that the turmoil and uncertainty created by Hank Greenberg being forced out did play into the downgrade. I read the articles back then. I lost business due to this so I know as much as was available to the public. This whole mess is due to a combination of loss of confidence and government accounting rules. There is no way defaults on already identified "sub-prime" mortgages (less than 10% of all mortgages) could have caused this WITHOUT loss of confidence.
Did AIG only guarantee "sub-prime" mortgages? I don't think anybody realized how poisoned the derivatives were. Combine that with accounting rules forcing the asset values down and you have a storm nobody foresaw.
Now, you point out the swaps were based on contracts that would have taken several years to correct. That is exactly what I am talking about, with Hank at the rudder, he could have, at the VERY least, kept confidence up, which MIGHT have bought him/AIG a few years. Or he might have caught wind of this sooner and put someone onto the problem if he himself was unable.
I STILL say those derivatives have SOME value, but if you have to sell today under government coersion, they will look worthless. The horse is out of the barn on this anyway.

2Anglico| 4.29.09 @ 3:20PM

Bob, a closer reading of one of you posts makes me think of something; from an insurance angle, if EVERY vehicle AIG insures for $1,000,000 of liability kills a kid on a bike, on the same day, you might see a similar collapse. But that won't happen. So I see your point about risk assessment, in instruments unheard of 20 years ago. However.... I still maintain if cooler heads had prevailed......

Bob| 4.29.09 @ 3:46PM

2Anglico -- I don't believe it was Hank being forced out that contributed to the downgrade, but the fact that some of the stuff he did with his son at M&M was probably illegal and thus would have some financial ramification. He probably did cross the line with M&M. That's why Hank staying at the company would not have made a difference since it was related to past actions and not management ability.

You cannot look at derivatives and look for a direct relationship to the mortgage market. These were slices of tranches of CDO's formulated for a specific level of risk thereby increasing return. When you have a 50-1 leverage ratio with the swaps, it takes just a 2% default rate increase to make the specific derivative practically worthless. Leverage is great on the upside but also increases your risk on the downside. To convince yourself of this, get out Excel and create a spread sheet with 100 mortgages. Now put your investment in those mortgages at 1/50th -- or 2% of that total. If 2 mortgages fail, you lose your entire investment. If 4 mortgages fail, your loss is equal to twice your entire investment even though 96 of those 100 mortgages are good. That was the situation at AIG. Do the math, you'll be amazed at the effect of leverage on losses.

Now take that example and realize there was no transparency on the underlying derivative so you couldn't have even made that calculation.

Bram| 4.29.09 @ 4:45PM

I don't know the details but Spitzer and his successors sure have failed to prove any wrongdoing on the part of the Greenberg’s (and Grasso).

Millions wasted in frivolous prosecutions and civil lawsuits. The only thing achieved through it all was to get a lowlife elected Governor.

eric brown| 4.30.09 @ 12:51AM

So here is an interesting question. If AIG made some insurance policies to shelter risk on highly rated bonds "AAA" and then many of these bonds defaulted. Why is AIG paying rather than suing as they were insuring fraudulent securities. That were sold as AAA yet were junk. The second question is why is everyone going along with using AIG as a blind or a front - to push money through to other firms - that are really getting the money.

This is from my perspective the big Ponzi Scheme being conducted. And the beneficiaries are the companies that created the fraudulent securities.

Best,

Eric

franc| 6.20.09 @ 8:57PM

yeah yeah if my mom had wheels it would be a ...
grasso, greenbberg, and assc are and were gangsters and spitzer want to put an end to their arrogance to bad his out of the picture due to a set up...

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