I sat down with former American International Group Inc (NYSE:AIG) chairman and CEO Hank Greenberg last week. We talked about everything from AIG's early days, its growth, to its downfall and bailout in 2008.
Something I've thought about a lot since 2008 is whether an inquisitive investor last decade could have known how much risk financial companies were taking, or if it was something only insiders had the full details on. I posed that question to Mr. Greenberg, which led into a conversation about "too big to fail." Here's what he had to say (transcript follows).
Morgan Housel: These risk problems that came up after you left in 2005, were they something that a general public investor, someone just reading the public information, the 10-Ks, could have pieced together, or was the risk taking that was going on inside of AIG something that you needed to be on the inside to recognize?
Hank Greenberg: Probably, although I'm not sure the 10-Ks that they filed were complete. For example, when the auditors made that statement to the Chairman, that the current management was incapable of managing American International Group Inc (NYSE:AIG), they went out to the market to raise $30 billion. They don't disclose what the auditors had said to the Chairman.
Morgan Housel: Let's say 2006-07, were you personally aware of the risk taking that was going on inside of AIG? I guess what I'm trying to figure out is, if someone owned AIG stock in 2007, could they, even with hindsight, go back and see, "Oh, look at all this risk that was being taken?"
Hank Greenberg: No, I don't think so. I was a major shareholder of AIG, the largest individual shareholder. I lost about 90% of my net worth. I was in a war with AIG at that time, literally.
Morgan Housel: We hear a lot about the phrase, "too big to fail." Was AIG "too big to manage?"
Hank Greenberg: No. We managed it for 40 years, for God's sakes. You need the right management. Of course it wasn't too big to manage.
After all, the company was doing very well. There was nothing wrong with the company. The year I left -- my last year was 2004 -- I think we earned $11 billion, growing at double-digit. What can I tell you?
Morgan Housel: What should we do about the problem of too big to fail? Or is too big to fail a problem?
Hank Greenberg: It depends on the management. If you've got the right management, why is it too big to fail?
Morgan Housel: With AIG, the amount of risk-taking that was going on in a fairly small portion of American International Group Inc (NYSE:AIG) ...
Or let's say with JPMorgan. They had, last year, the London Whale transaction. That, some people look at as an issue of, Jamie Dimon is a well-respected manager, but when you have a company that size, with more than 200,000 employees, and you have a few bad apples over here that have the power to make such large bets...
Hank Greenberg: OK, but Jamie Dimon, they caught that. About $8 billion of loss, something like that, out of huge earnings of the company. Yeah, it was an unfortunate loss, but it wasn't fatal. It wasn't even close to that. It was a cold. Like having a cold, not pneumonia, and they're fine.