If you want to understand why Wall Street is leaving New York City as fast as possible, look no further than the saga of AIG.
The rapid disintegration of the country’s largest insurance company into the Recession of 2009’s largest villain has occurred for only one reason — because AIG founder Hank Greenberg didn’t move his company out of New York City.
All this was deliberate. Greenberg, a World War II veteran who founded the company and ran it for 40 years, was a loyal and true New Yorker. (At a 2006 sit-down sponsored by the Council on Foreign Relations, Iranian President Mahmoud Ahmadinejad reiterated his familiar charge that the Holocaust was a lie, at which point Greenberg arose and declared, “Listen, I helped liberate Dachau and it was no lie,” to which Ahmadinejad responded he didn’t think Greenberg was old enough to have liberated Dachau — which proves, one must supposed, that in a land of suicide bombers nobody is expected to live past 40.)
Anyway, while the rest of the insurance industry was fleeing Manhattan, Greenberg built his company’s national headquarters at 72 Wall Street and kept the bulk of his operations in the Financial District. (Part of this decision, it must be admitted, was funded by one of those special New York City deals where AIG got big tax breaks in exchange for keeping 8,500 employees in Manhattan — which, of course, only raises taxes for everyone who doesn’t get such breaks.)
Meanwhile the rest of the insurance industry had fled New York for Jersey City, where Sam LeFrak — another disgruntled Manhattanite — had built his Newport business-and-residential complex easily accessible by ferry. Newport’s high-rise apartments became a Mecca for young Wall Street honchos eager to escape New York’s tax burden and soon businesses followed as well. Even ISO, the industry’s main supplier of data on risk analysis, migrated across the river in the 1990s.
By staying in Manhattan, Greenberg made a fatal mistake. He left himself exposed to the succession of spoiled prep school boys with impeccable family credentials who go by the name of “New York State Attorney General.”
In the earlier part of the decade, this seat of privilege had been inherited by a man name Eliot Spitzer, whose secret proclivities we will not discuss here. Spitzer, the son of a wealthy real estate tycoon, was proving himself a Friend of the People by “beating up on Wall Street.” (Let us pause here a moment to note, this role was pioneered long before by Republican Rudy Giuliani, who as Federal Prosecutor for the Southern District of New York once marched a pair of Wall Street brokers out of their offices in handcuffs for the benefit of newspaper photographers and then failed to bring any charges against them — a bit of agitprop that Wall Street has never quite forgiven.)
Taking office in 1998, Spitzer began by mopping up after the dot-com bust, picking off those convenient scapegoats that the public always demands when such speculative frenzies collapse. These run-of-the-mill prosecutions earned him the medallion, “The Sheriff of Wall Street,” along with all press attention such publications as Time and Newsweek love to shower on such heroes. (Still enchanted, Newsweek ran yet another Spitzer cover story last week in a lugubrious “Why-did-I-ever-do-it?” mock confession.)
Then in 2003, Spitzer ended up facing one Richard Grasso, an Enemy of the People if there ever was one. Grasso, a nobody from Queens, had joined the New York Stock Exchange as a floor clerk in 1968 shortly after coming out of the Army and risen to the remarkable heights of CEO from 1995 to 2003. Upon his retirement, it was revealed that he would be receiving a $140 million deferred compensation package, which of course was deemed unacceptable by all puritanical souls such as Spitzer whose fortune was made in the previous generation. So the Sheriff of Wall Street went after Grasso on the dubious grounds that Grasso had somehow deceived the Stock Exchange’s compensation committee.
On that committee sat Hank Greenberg. Rather than supporting the Attorney General’s very public lawsuit, Greenberg opposed it. Never one to overlook a slight, Spitzer decided to make AIG his next victim. In 2004, AIG had been added to the Dow Jones Industrial Average, a huge feather in the cap of New York City, which has been constantly losing ground to California and London. A year later, however, Spitzer filed a variety of charges, none of them particularly compelling. The most damning was that AIG had deceived its investors by averaging returns over several quarters. Is there any business anywhere that doesn’t do this occasionally?
Anyway, without ever firing a shot, Spitzer achieved his goal. After being named “CEO of the Year” by Chief Executive magazine in 2003, the 80-year-old Greenberg was forced out of his company in 2005 by a rump faction of his own board, led by Frank Zarb, a longtime Greenberg protégé and personal friend who quickly took advantage and betrayed him. Zarb became “acting chairman” and Martin Sullivan, one of his associates, was appointed CEO. Spitzer eventually hit Greenberg with criminal charges although — as surely as the night follows the day — the charges were eventually dropped.
Zarb and Sullivan quickly ran the company downhill. As CNBC correspondent Charles Gasparino reported last week, at his first meeting, Sullivan told his newly liberated fellow executives it was time to have “some fun.” “That last part shocked some in the room — because it was the last thing that Hank Greenberg, who’d ruled the company with an iron fist for 37 years, would ever say,” wrote Gasparino in the New York Post.
One of those executives who decided to have some fun was Joseph Cassano, the son of a Brooklyn cop and former apprentice of Michael Milken who ran the credit swaps division in Connecticut and London. “Greenberg always kept Cassano on a short leash,” says a former AIG executive who lost his job during the conflagration. “When Zarb and Sullivan took over, they were like junior officers taking command of the ship. They lost control over everything.” Over the next two years Cassano’s British office, dubbed the “London casino,” did as many swaps deals as his division had done in the previous seven. In 2008, AIG, staggering under $440 billion in losses from Cassano’s swaps division, asked him to retire — but Cassano still walked away with a $315 million retirement package.
So has New York learned its lesson? Not one bit. The current occupant of the A.G.’s office, son-of-a-former-governor Andrew Cuomo, has maintained bash-Wall-Street tradition with a vengeance. His big contribution was threatening to publish the names and addresses of AIG employees so ACORN and other vigilantes could throw stones at their windows and phone in death threats. Cuomo is widely expected to push son-of-a-former-state-senator David Paterson, the current Governor, out of his seat when Paterson comes up for re-election this year. As lieutenant governor, Paterson fell into the job in 2008 when Spitzer … well, you know all about that. (The only compensation in a Cuomo election will be that at least Spitzer won’t be able to make a comeback.)
In September 2008, in a hugely symbolic gesture, Dow Jones de-listed AIG from its vaunted Industrial Index after only four years. It was a succinct statement about New York City’s future. When the wandering tribes of the financial diaspora start lighting their campfires again, New York will find they have moved to other hunting grounds. Hedge funds have set up in Connecticut, IPO’s have migrated to London because of Sarbanes-Oxley, and the insurance business has long decamped to New Jersey (although even there taxes are getting a little high and many have moved on to North Carolina).
So will that end the tradition of Fighting New York State Attorney Generals Who Bash the Big Guys On Behalf Of The People? Not a chance. In the coming years, New York politicians will continue railing against Wall Street — just as they still blame Walter O’Malley for moving the Dodgers to Los Angeles, even though every bit of scholarship has shown that O’Malley made every effort to relocate the Dodgers in downtown Brooklyn until the politicians finally ran him out of town. (See Michael Shapiro, The Last Good Season.) There’s nothing like a good Punch-and-Judy Show to keep The People happy.
Just think, though, had Hank Greenberg moved his company to Jersey City in 1995, none of this would have ever happened.