Exclusive Interview With Former American International Group Inc (AIG) CEO Hank Greenberg: Black Boxes and Too Big to Fail

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).

American International Group Inc (NYSE:AIG)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.

When I left AIG, in seven months, they wrote more credit default swaps on so-called AAA CDOs, credit default swaps covering them, than we wrote in seven years. They wrote quality that was way below what we would have written, and they didn’t hedge anything. It’s a question of management.

Morgan Housel: When you have a bank that is large enough to be too big to fail, and to cause systemic damage when it does fail, and it’s run by poor managers, which we saw quite a bit of in 2008 with BEAR STEARNS DEPOSITOR INC (NYSE:TZK.CL) and Lehman Brothers Holdings Inc. (PINK:LEHMQ), Citigroup Inc. (NYSE:C), and the same with AIG.

What should regulators do with a company like that?

Hank Greenberg: Well, stop. What were the regulators doing? Take Bear Stearns for example. There were six months between Bear Sterns and Lehman Brothers. What did the regulators do?

Citigroup was overseen by the New York Fed. I chaired the New York Fed for about — I was on the New York Fed board, then vice-chair, then chair — probably all together about eight years. The Fed oversees Citigroup. What were they doing?

Morgan Housel: Not much.

Hank Greenberg: No, obviously.

Morgan Housel: In Hank Paulson’s memoirs, he does say that he pushed for Lehman Brothers to sell itself, in that period. Not successfully, but…

Hank Greenberg: Yeah, but he didn’t go to the aid of Lehman Brothers. They gave a Bank Holding Company license to Goldman Sachs Group, Inc. (NYSE:GS) and to Morgan Stanley (NYSE:MS). They turned down Lehman Brothers.

American International Group Inc (NYSE:AIG) didn’t have a solvency problem. It had a liquidity problem because they were responding to collateral calls from their counter parties. Once they lost the AAA rating after I left the company — almost the next day they were downgraded from AAA to something less — at that point they were required to put up collateral under the agreements.

But if you knew what was going on, there was no price discovery on any of these CDOs, what the value was. There’s no exchange that you could trade them on, so every broker-dealer had a different price for the value of the CDOs. Some had very low prices, which we require more and more collateral.

I wouldn’t have responded … we wouldn’t have been in that position to begin with. We wouldn’t have lost that AAA rating. I wouldn’t have responded, if I were them, to any of the collateral calls.

With different prices, who would you respond to? The highest price? The lowest price? I would say, “I’m not paying anybody. If you don’t like it, the courtroom is around the corner. Five years from now we’ll know who was right.”

For more on American International Group Inc (NYSE:AIG)
After bringing the financial world to its knees, most investors are wary about owning a stake in AIG today. We’ll fill you in on both reasons to buy and reasons to sell AIG, and what areas AIG investors need to watch going forward. Just click here now for instant access.

The article Exclusive Interview With Former AIG CEO Hank Greenberg: Black Boxes and Too Big to Fail originally appeared on Fool.com and is written by Morgan Housel.

Morgan Housel has no position in any stocks mentioned. The Motley Fool recommends American International Group (NYSE:AIG) and Goldman Sachs. The Motley Fool owns shares of American International Group and Citigroup and has the following options: Long Jan 2014 $25 Calls on American International Group.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!