The ensuing chapters recount a saga worth summarizing at the outset. In less than four years, from February 2005 to September 2008, AIG sailed from being an American icon, with nearly $1 trillion in assets and worth $180 billion, to the verge of destruction. It was saved only by the loyalty and tenacity of its valiant workforce.
In February 2005, at a time when financial scandals such as Enron made many citizens skeptical of big business, Eliot Spitzer, an elected public prosecutor in New York, sparked the process that would drive AIG to near destruction. After some examples of Spitzer’s tactics, including airing allegations in the media where targets cannot defend themselves as they can in court, you will read how Spitzer turned his sword on AIG and Greenberg.
Without investigation, Spitzer rapidly raised the heat on AIG’s outside directors so high that they, advised by lawyers with close connections to Spitzer, asked Greenberg to resign as CEO in March 2005, just months before his planned retirement. Even AIG’s outside auditor, PricewaterhouseCoopers (PwC), faced such pressure that it decided to repudiate five years of its own certifications, threatening the directors by withholding a renewed certification unless they sought Greenberg’s resignation. All these threats were made based on conjectures that an investigation, done afterward, would prove empty.
We cannot be certain why the outside directors, lawyers, and auditors behaved as they did, and our reflecting on this saga sometimes make us feel as if we have as many questions as answers: why did the outside directors knuckle under so quickly; why did the outside lawyers facilitate such upheaval; and what pressures did the auditors face that would make them repudiate their consistent certifications, knowing that such a position would wreak havoc? Did Spitzer’s threats overwhelm the judgment of the outside lawyers, or did the outside lawyers welcome his threats in order to advance goals they had already set?
Whatever the reasons, with AIG’s corporate governance apparatus under prosecutorial control, Spitzer staked out a bold position about what he thought his case targeting AIG would show. Having tasted triumph when Greenberg resigned, he felt confident enough to go on national television in April 2005 to boast of having fingered a great fraud—yet the facts revealed by late May that the assertions were not even close to correct.
After scores of accountants and lawyers scoured AIG’s accounting records worldwide, all they could come up with was a set of highly contestable changes to the five previous years’ books that reduced net income and owners’ equity by 2 to 3 percent. That is not the kind of thing that warrants a board’s asking a CEO to resign.
Indeed, the accounting restatement that PwC and these lawyers concocted, along with Greenberg’s departure, cost AIG and its shareholders a huge drop in market value, a slashed credit rating, and huge payments to settle numerous lawsuits. Although it remains difficult to fathom why people succumbed to the pressures leading to Greenberg’s resignation, it is easier to pinpoint the reason they pushed so hard to change the accounting, though they came up short: to justify their decision.
Greenberg’s separation from AIG was more than a typical CEO departure. He had been the face of the company since founding it and leading its expansion over four decades. He and the Starr Companies had provided additional support, especially through the Starr International Company (SICO) compensation plan. That priceless resource of SICO’s, with access to up to $20 billion worth of AIG shares, enabled AIG to attract and retain the best workforce in the industry.
The separation erupted into civil war that added costs to the board’s prosecution-stimulated resignation request. Commercial disputes dragged out for more than a year, through 2006, as animosity deepened and a rising sense of defensiveness seemed to pervade the company’s senior leadership and outside advisers.
Legal battles would last many more years. In a naked show of animosity, the board made a 180-degree about face in a shareholders’ lawsuit against certain directors. In 2003, based on a thorough outside legal investigation, the board had unanimously recommended that the case be thrown out. Citing “new strategic considerations,” however, in 2006, they recommend going forward with it against Greenberg. In a striking example of defensiveness, AIG, reeling from the loss of the SICO compensation plan, whose significance the board had apparently failed to appreciate, waged a desperate but doomed legal action to wrest the shares from SICO.
Finally, as new leadership joined AIG’s senior ranks, the animosity and defensiveness began to dissipate and the two resolved all their disputes. In laying down the hatchets, AIG paid Greenberg’s legal fees up to $150 million—revealing at last where the equities fell.
While Greenberg fought the civil war against AIG on one front, he battled Spitzer on another. In May 2005, still boasting publicly about the strength of his case against Greenberg, Spitzer tried to bludgeon him into submission by offering to settle on any charges Greenberg wished to admit to. Greenberg rejected the blackmail out of hand and Spitzer soon began to see his case unravel. A civil suit that Spitzer had drummed up and advertised to the media with great fanfare looked increasingly weak and, by Thanksgiving 2005, he quietly acknowledged that there was no criminal case.
His attack unraveling, Spitzer found a new target to hound in the media: the Starr Foundation. This foundation, which Starr had begun and Greenberg nurtured over the decades into one of the five largest charitable foundations in the United States, owned assets worth more than $3 billion. As with Spitzer’s other assaults, this one would fail, though not before Spitzer saturated the media with wild statements that the Starr Foundation had to defend in the press rather than in court.
Back at AIG, during 2005 and early 2006, Spitzer had stimulated a variety of changes in corporate governance that would soon backfire, too. The man charged with making recommendations, a friend of the lead outside director, endorsed a set of off-the-rack changes without studying what made AIG tick and what kinds of governance would be most effective for it. These cosmetic changes put form over substance, stressing the motions of governance rather than the management of business risk.
As AIG’s new management team mired themselves in the forms and talk of corporate governance, they lost control of the company. From mid-2005 through late 2007, the company accumulated $80 billion worth of risky financial bets without hedging its exposure. When the financial crisis of 2008 erupted, these deals were among those at the heart of it, requiring AIG to come up with enormous amounts of cash it simply did not have.
In September 2008, AIG thus faced a severe liquidity crisis at a time when its management and controls were in disarray. Sensing weakness, the U.S. government intervened on punishing terms not imposed on any other company facing similar problems. The government both loaned AIG money, $182 billion in all, meaning AIG had to repay it, and took ownership control of AIG’s stock. The deal was akin to one in which your bank lends you $182,000 to buy a home, which you must repay, while the bank takes full title to the house.
More audaciously yet, the government then transferred $63 billion of those funds to other financial institutions instead of letting AIG use the money. Those companies thus avoided being tagged as recipients of “taxpayer bailouts,” the pejorative label given to AIG during this national meltdown. Instead, to repay the “loan,” the government put AIG on a selling spree, divesting on the cheap many of the prized assets that Greenberg and AIG’s employees had toiled so hard to develop over the previous four decades.
The U.S. government would not have been able to exploit AIG in this way but for the disarray that plagued the company, which followed as a direct and foreseeable result of the unfounded claims that Spitzer first broadcast to the media in February 2005. The only reason AIG has not been utterly destroyed is that its loyal employees working in the lines it retains are so talented. Thanks to them, AIG may survive despite this extraordinary adversity visited on it by its own government.