Hank Greenberg on AIG's 'Punitive' Bailout

Posted by: Diane Brady on December 1, 2008

Just because someone is angry and clearly motivated by self-interest doesn’t mean he’s wrong.

Former American International Group chief Maurice Greenberg has railed against the Fed’s bailout of the insurer since the deal was struck in early September. The two-year $85 billion plan (since changed to a five-year $60 billion plan) gave AIG access to some much-needed capital from the government in return for an 80% stake in the company. That essentially wiped out the shareholders—the largest of whom is Hank Greenberg.

Greenberg has seen a better way, and it comes in the form of the recent Citigroup bailout. As he argues in a Dec. 2 opinion piece in The Wall Street Journal, “the Citi deal makes sense in many respects”. The government puts in $20 billion and acts as a guarantor of 90% of losses stemming from $306 billion in toxic assets. In return, it gets $27 billion of preferred shares, leading to a potential equity stake of up to 8%. Writes Greenberg: “The Citi board should be congratulated for insisting on a deal that both preserves jobs and benefits taxpayers.”

Whether the Citi deal turns out to be a stroke of genius is, of course, yet to be determined. But Greenberg is right that the terms of AIG’s rescue increasingly look unfair. The pact was struck in the anxious and angry hours after Lehman Brothers’ collapse. Politicians wanted the fat cats of Wall Street to suffer; investors were frightened as the subprime house of cards fell on their heads.

If AIG needed taxpayer support, it would have to cease to exist in its current form. It immediately faced a 14% interest rate—more in line with what one gets from loan sharks these days, than from a bank. The company would have likely been forced to quickly shed core assets.

While some of the terms have eased, the reality is that AIG still faces daunting obstacles in any path to success. The shares are down about 97% this year, now costing less than the average subway fare. Clients are nervous, with some telling us they’re inclined to take their business elsewhere. Staffers are justifiably nervous and demoralized.

Any move to revisit the terms of federal assistance to AIG is sure to please Hank Greenberg. After all, a deal along the lines of what Citi got would likely leave him a much richer man. But it could also leave AIG in a stronger position to woo customers and capital—and remain a global force in insurance.

Reader Comments

Karl

December 2, 2008 10:16 AM

Did everyone 'Google' this Article and read it from earlier this year entitled- FIVE FORMER INSURANCE EXECS FOUND GUILTY OF FRAUD. I wonder if this had anything to do with AIG's demise?????? Oh, I forgot, FRAUD is a crucial part of our corporate system in America! Silly me!!!!!! I appologize.

Kelsey

December 2, 2008 10:34 AM

Unfair, Mr. Greenberg life isn't fair. I'll tell you what isn't fair, that our capitalist society is going by the way side. All because corporations made bad bets on mortgages, and now want the government and the taxpayers to make good for them. If anyone has an argument about fairness its Lehman Brothers. They got what they deserved, but now everyone else is getting a pass. Suck it up Mr. Greenberg, you still have your company, sort of.

Greg

December 2, 2008 11:45 AM

Bravo Kelsey - extremely well put. Your comment should be required reading for everyone in government and business.

Alexandra

December 2, 2008 11:59 AM

This just beats all. If the AIG execs had not WASTED all their revenues on Corporate VACATIONS, then they would not have come to this state in the first place. Greenberg, buddy, if you can't MANAGE your revenues, you can MANAGE the bailout money, either. It's all money, man. I think we taxpayers have given you way more money than you have the sense to handle, anyway. Try scrimping, economizing, and innovating.

musafir

December 2, 2008 1:39 PM


A confederacy of crooks that includes the
so called "watchdog agencies" that allowed the Ponzi schemers to do their thing until the house of cards fell all around them.

No punishment....none, for any of them! White-collar crime pays.

musafir

December 2, 2008 1:47 PM


A confederacy of crooks that includes the
so called "watchdog agencies" that allowed the Ponzi schemers to do their thing until the house of cards fell all around them.

No punishment....none, for any of them! White-collar crime pays.

Patrick

December 2, 2008 1:56 PM

Funny you should mention that a 14% interest rate is equivalent with loan sharking. Since the credit card regulations were loosened with the bankruptcy laws changes this decade credit card companies can boost rates up to 33% with little notice. I recently (September) had BoA boost my rate from 7.99% to 23.99% because they said they looked at my credit report and I had too much short term debt. It's because I had financed some significant home improvements on 0% 12-month terms. Fortunately I can afford to pay off the balances. Most people can't.

I have absolutely no sympathy for AIG so long as credit card companies can get away with loan sharking.

Sean

December 2, 2008 2:17 PM

I wonder if you're not a little embarrassed at carrying the bag for AIG here, Diane. The bailout was designed to help the whole, not to pad down side risk for corrupt or idiotic executives.

If the discussion is to be about fairness, let's write some articles about the multitudes who now own less because we "managed" (thanks Alexandra) our affairs. We object, who are now to put up part of what we safely secured in order to bail out those who are already richer for our loss - and even if they're not thank you.

Diane

December 2, 2008 2:55 PM

Sean,
I don't feel I'm carrying the bag for AIG on this one (and I've been very critical of Greenberg's management in the past).

The issue here is that the terms struck in the frantic early days of this crisis were draconian when compared with what followed. Many observers now say it was a mistake to let Lehman fail. It was arguably a mistake, too, to offer a punitive loan to AIG in return for wiping out shareholders.

Sean

December 2, 2008 4:02 PM

Fair enough Diane. I don't mean to be contemptuous, but you're writing on a sore wound that has millions of us very angry. Of course, you know the problems pervade well beyond AIG. And, AIG is not getting the sweetheart deal that many other bad companies are.

But,it's my belief, and I'm not alone here, that our economic system won't work well without clear risk assessment and significant (punitive?) costs associated with failure. Many observers think it's a mistake to focus all of our resources on saving poorly operated, and heavily leveraged companies that engaged in what can AT BEST be described as negligent accoungting practices.

If companies like AIG and Citi fail, their value will be consumed somewhere. Perhapse the consumer will get a steal. Good on 'em, I say. They'll have a big jump on the way out of this mess. Perhaps, rather than fixing the bad companies, we should bolster the good ones. Personally, I'd rather spend energy later breaking monopolies than spending energy now reanimating dead behemoths.

Lastly, on a fundamental matter of stock values; where shareholders are bailed out, pressure is relieved from the irresponsible executives and accountants who mismanaged their businesses. Corporate executives, for too long, have been allowed by investors to misstate risk and conduct fiat elections for top execs. With a lot of luck, and noise, perhapse we can make some headway here.

Gentlemutt

December 2, 2008 4:09 PM

Diane,

Maybe Phil Gramm had a point about too many whiners. To understand today WSJ piece you need to understand the longstanding relationship between Hank Greenberg and the folks at the Journal. They are buddies and the WSJ has been doing Hank's whining for him until today. You fell for it and are officially part of the mainstream media echo chamber, in this case for some brazen corporate-welfare queens. Why use Citi as the supposed 'new standard?' Why not use Lehman, Bear Stearns, or WaMu? Why not use Enron and throw the crooks in jail?

And look on the bright side: the great thing about wiping out Hanky's stake in AIG may be that, for once, a powerful and deeply connected stockholder will eventually come to understand how easy it is for management to abuse the owners of the company. Wouldn't it be ironic if the Hank Greenbergs of the world come to champion real stockholder rights as a way to prevent future AIGs?

To top it off, neither AIG nor the US Treasury has deigned to inform the taxpayer just who is on the other side of all those AIG CDS losses, to the point where your competitor Bloomberg is suing to find out under the FOIA. So we taxpayers are propping up the corpse and can't even be told what other corpses are at risk of toppling over.

Linda

December 2, 2008 5:32 PM

Why does AIG not have to present a detailed plan to the "powers that be" on how they are going to use the 60 billion taxpayer dollars they are getting? The auto execs are being made to eat humble pie, why not investment, insurance, financial, real estates execs that are being "bailed" out? They are still employed...what have they lost? Strange scenario? In the real world, bad business decisions mean you close your doors.

Trent Tucker

December 3, 2008 6:52 PM

Mr. Greenberg might like to review the structure of the Brady Plan implemented in 1989 to resolve the defaulting debt of Latin America.(Go to Wikepedia, Brady Bonds) The funds were raised by the brokerage firms, the principal guaranteed by Treasuries, and Brady bonds were the best paying high interest investments of the nineties. So good the bonds began trading at premiums. Mr. Greenberg, the same plan would keep the government and the debt off your balance sheets, just like it did for Latin America and the IMF.
Trent Tucker
author Wall Street Dancers
http://www.strategicbookpublishing.com/TheWallStreetDancers.html.

Bob

December 4, 2008 5:09 PM

Hank, buddy. Pull up your jammies and wipe that slobber from around your mouth. You as much as anyone caused the demise of AIG. In your deep 84 yr old dementia, you must have for gotten that. It's ok. It ice cream day at the home. If you hurry, you can pick your flavor.

JR Management

October 18, 2009 4:54 PM

I wonder if you're not a little embarrassed at carrying the bag for AIG here, Diane. The bailout was designed to help the whole, not to pad down side risk for corrupt or idiotic executives.

If the discussion is to be about fairness, let's write some articles about the multitudes who now own less because we "managed" (thanks Alexandra) our affairs. We object, who are now to put up part of what we safely secured in order to bail out those who are already richer for our loss - and even if they're not thank you.

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