Will this crap ever reverse?
'You Couldn't Build an AIG Today'
Insurance titan Hank Greenberg expounds on the dimming of America.
BY KIMBERLEY A. STRASSEL
Saturday, April 15, 2006 12:01 a.m.
NEW YORK--Hank Greenberg is a mere 80 years old. Mere is the operative word, since his great-grandma was still kicking at 108. At this rate, the man who a year ago was unceremoniously forced out of his own insurance creation--American International Group--has ample time to build a bigger, better insurance company. And listening to him from across a table at his shining Park Avenue office--a man unbowed and undeterred--I have no doubt that he could.
But Mr. Greenberg doesn't want to build another AIG, and that is the topic of our discussion today. Rest assured this isn't because his past year of troubles has left him spent. He is still refusing to settle with New York Attorney General Eliot Spitzer, whose political ambition--expressed here in a jihad against Mr. Greenberg--drove the insurance titan from his job. And AIG, acting like some corporate Goneril or Regan, has pummeled its progenitor with lawsuits. Mr. Greenberg is scrapping back, and he appears to be winning. As chairman of two wealthy, private entities once affiliated with AIG--C.V. Starr and Starr International Co. (Sico)--he is still very much the consummate capitalist. "We don't like to lose," he notes, shooting me a very feisty smile.
Mr. Greenberg hasn't dimmed, but he believes America has. "You couldn't build an AIG today," he explains. Overbearing regulators, new corporate governance rules, protectionism, a failing tort system, prosecutors unleashed--these, as he sees them, are the obstacles to corporate greatness. And Mr. Greenberg is uniquely positioned to know.
It isn't just that over 38 years he transformed a tiny operation into a global insurance empire currently valued at $169 billion, a feat that even detractors--and he has many--admit counts as one of the great corporate success stories. It's that Mr. Greenberg was front and center to witness how prosecutors, regulators and lawyers could bring that success to its knees, practically overnight. "Why is it that private equity is growing as fast as it is. . . . Why are public companies not doing as well? Once [a country] gets a reputation that way, once it loses momentum, it takes quite a while to regain it. It doesn't happen overnight," says Mr. Greenberg.
You'd expect Hank Greenberg to be bitter, even a little self-pitying. I certainly expected to see those emotions during our talk. At this time last year, he was running the world's largest business insurer. Then along came Mr. Spitzer, on the prowl for another headline-generating takedown. Mr. Greenberg was certainly a ripe candidate. AIG had been swept into a separate Spitzer probe into illegal bid-rigging, but its bigger liability was that Mr. Greenberg had dared publicly criticize the almighty prosecutor.
Not long after, Mr. Spitzer was alleging accounting irregularities at AIG and, as if to underscore the oddly personal nature of his attack, had threatened AIG with a corporate indictment if it didn't oust Mr. Greenberg. The accounting charges proved flimsy, and Mr. Spitzer later admitted he has nothing that would allow him to bring criminal charges against Mr. Greenberg; but AIG wasn't about to argue. It fired its chief, and later agreed to a $1.6 billion fine.
The company Hank built then went after his other businesses, launching a legal campaign to block C.V. Starr from competing against it, as well as to get its hands on a Sico pot of gold that traditionally compensated AIG employees. Mr. Greenberg has a more direct way of describing AIG's litigation: "They're trying to steal the business." The press has had a field day, peppering stories with tawdry details about Mr. Greenberg's butler, or his battle to recover personal items from his AIG office.
Put it this way: Were it me, I'd be very bitter, and more than a little self-pitying. But the man in the immaculate suit and shiny shoes, sipping a Spartan glass of water, never expresses a hint of any of this in our discussion. (It may help that Mr. Greenberg is not what you'd call an overly humble man. Throughout our chat he wasn't shy about telling me the names of presidential boards he'd sat on and important people he knew.) But he has developed some robust sentiments over the year, which he was happy to voice.
"One of the biggest problems" facing America's competitiveness at the moment "is regulation," he states. He notes the legislative fiasco that flowed out of Enron--Sarbanes-Oxley. "Any time you publish regulations in a crisis mode, you probably do it wrong," he says, and as proof he points to all the companies now listing in London rather than New York. "Friends don't let friends regulate in a crisis," he jokes.
Corporate governance changes alone would make a new AIG impossible. Mr. Greenberg notes that when AIG started, it had almost entirely an "inside" board, made up of senior partners deeply involved in the business. "And we obviously did something right because we became the largest insurance company in history." Today's intense focus on outsiders and independence limits the expertise. "A board of directors can't run a company. They can oversee a strategy, but they can't be involved day to day in a company, otherwise you get nothing done."
The authorities themselves have changed. After Enron, "the regulators became far more aggressive, threatening boards of directors with all kind of dire things if they didn't do certain things. What happens? The board simply takes over. And when that happens you don't have a company that is thinking about innovation or risk-taking. . . . And once you stop thinking about risk and thinking only about compliance, you are no longer going to be a growth company."
That's particularly a problem for the insurance industry, which is entirely "about risk." Of this, in particular, Mr. Greenberg knows of what he speaks. The accounting errors that Mr. Spitzer threw at AIG were related to finite risk insurance. Such products are a modern innovation, and play a vital role in managing risk and stabilizing balance sheets. Yet the rules were always murky as to how to account for the transactions. So what regulators and prosecutors may have allowed in a non-scandal era became fraud post-Enron. That sort of uncertainty is deadly for companies. Today, "everybody is playing it close to their vest, and don't do anything. If you do something, you get slapped down, so why do it?"
Mr. Greenberg's own suggestion is that some outfit start ranking the states based on their regulatory environments, the way the Chamber of Commerce ranks states based on their tort systems. "You'd want to look at, does it create jobs or lose jobs, does it enhance shareholder value or lose shareholder value, does it attract new companies or repel them. Isn't that the bottom line?" I ask him which state would get the highest marks in his book. He pauses, grins, flicks a look out the big Manhattan windows and replies. "I know who'd get the worst."
Speaking of New York, Mr. Greenberg declined to comment on Mr. Spitzer. His ongoing legal fight with the AG says it all anyway. In January the Greenberg team began seeking testimony and internal documents from Mr. Spitzer, with the goal of turning a spotlight on the AG's own suspect tactics. But Mr. Greenberg does note that New York has been worse than most at allowing a climate where prosecutors create law, rather than just enforce it. The overall legal climate, and basic system of due process, "has changed dramatically. We're living in an environment now . . . in a public company, who do you talk to? Do you talk to yourself? You can't talk to anybody. [The prosecutors] will have to start subpoenaing your thoughts."
He has plenty more to say about a "Congress that has become far more protectionist for political reasons" and a "crazy" tort system that is still about "lottery" justice. On this latter point, Mr. Greenberg can fairly claim to be an expert, having spent years publicly fighting trial lawyers, particularly asbestos scammers. It might further explain Mr. Spitzer's animosity, friend as the AG is of the tort bar.
You can't help but think that, in a perverse way, Mr. Greenberg must take some pride in his current legal battles with AIG. Journalists have uniformly portrayed him as out to crush his old firm, which plays more to drama than financial reality. After all, Mr. Greenberg still directs more than $20 billion in AIG shares via his personal holdings and Sico; crushing AIG would only hurt his bank account.
The AIG lawsuit has its roots in the late 1960s, when a series of complicated financial transactions resulted in a public AIG. The original stockholders, whom Mr. Greenberg fondly describes as a "band of brothers," made a crucial decision. Rather than personally profit, "we took the difference between the book value and market value of the shares . . . and we put them into a blocked account" at Sico. The account was there to build the businesses, and the rules were that if anybody tried to take the money for personal use, the whole lot would go to charity. "I believed we shouldn't take it all for ourselves because people came before us, and they would come after us," Mr. Greenberg explains. The original $110 million has grown to a whopping $19 billion.
Over the years, the founders--most of whom were directors at both AIG and Sico--used the Sico account to, among other things, fund a deferred compensation program for AIG employees. In retrospect, the idea was brilliant. The compensation plan allowed the fledgling AIG to retain top-flight talent, turning it into a powerhouse. AIG shareholders were thrilled, as the company wasn't shoveling out expensive stock or options that diluted shares. And the men who'd made the decision became far wealthier in soaring AIG stock than they ever would have if they'd taken the original sums and run. "The only way we would do well is if the company did well. Everything was tied to that," he says.
Yet despite close business ties with AIG, Sico was always an independent company with its own board and shareholders. And after Mr. Greenberg was forced to resign, AIG cut all ties and the deferred compensation program came to an end. Now stuck with the prospect of shelling out $100 million a year for its own plan, AIG has launched a feeble lawsuit claiming the Sico money belongs to it. On the merits it seems unlikely to prevail. As Mr. Greenberg notes, there was never any contract, and the history demonstrates that the money was always "for managers at Sico to decide how to use it. Sico was never an asset of AIG--and it never will be."
At least for now, Mr. Greenberg is sticking with his private companies, which he calls "more fun," since they allow him to "invest in the next generation of opportunities." He's eyeing China, which has a historical symmetry: Cornelius Vander Starr, his mentor, started his first insurance agency there in 1919. Mr. Greenberg just returned from a trip, "encouraged" by Beijing's new plans to boost per capita income (i.e., more people able to buy insurance) and set up a "social safety net." Anyone who believes "China will become an irritant or a problem in the international arena lacks an understanding of the immense issues they have to deal with at home." He also has a fondness for China, since "it's nice to go to a country where they don't pay as much attention to the headlines." Only, it seems, to the bottom line.
At the opening of our interview, I made a younger person's gaffe, asking Mr. Greenberg to describe for me how the business world had changed over the past, say . . . 60 years. "Sixty years?! I haven't been doing this for 60 years! Do I look old today?" he shot back. Hank Greenberg most certainly does not look old. He looks, and sounds, like a man just getting started. |
