Notes from Hank Greenberg’s Guest Lecture at Yale in 2010

Notes and quotes from Robert Shiller’s Econ 252: Financial Markets, guest lectured by Hank Greenberg

http://oyc.yale.edu/economics/econ-252-11/lecture-14

Corporate Culture:

“You have to surround yourself with people, who share the same values, the same aspirations that you do. You have to have a team that works hand in glove, and we did. The senior management of AIG was like a band of brothers. We saw things alike. We work well together. I mean, there wasn’t ever a palace revolution, anything like that. It was a great organization.”

“But we also had some basic principles. We would never, never be involved in a bribe. Anybody in our company that got involved in anything like that would be fired instantly. We understood what the Foreign Corrupt Practices Act meant, before they even had such a Corrupt Foreign Practices Act.”

“Our overseas people, we had what we called an MOP, Mobile Overseas Personnel. It was like our own state department. You can be working in Nigeria today as a manager, and then six months later you might be in Singapore, or some other country. And so, you have to be mobile, and you have to be prepared to move, and not be reluctant because of one thing or another. And becoming an MOP was a very high honor. Everybody couldn’t get that designation. You had to earn it. And it was a great group of people.”

“Nobody could earn more than $1 million in salary. I put that rule in. Two, nobody would have a contract. You stayed in AIG because you loved it, and you didn’t have to have a contract. And I refused a contract any number of times. But you got bonuses based on performance, and performance was fairly rigid. We tried to grow our business close to 15% a year, and for many, many years we achieved that growth.”

“At the end of every two years, if we hit the goals that we had established, they’d have a certain number of AIG shares [I think he means CV Starr shares here] set aside for them that they would get at retirement. So, it was golden handcuffs. If you left the company, you left behind the shares that were set-aside for you. And these were worth an awful lot of money. Very few people left the company. I can assure you that it was a great incentive to stay. The people we wanted to stay are the ones that got allocated shares obviously. It cost AIG nothing. The public shareholders of AIG had no cost allocated to that, so the shareholders of AIG benefited from that, and, obviously, the company overall benefited because they did so well. So, it was a great organization.”

Getting AIG into China:

“China, it took me from 1975, the first time I visited China, to 1992, to get the first life insurance license ever granted to a foreign company. Moreover, while other foreign companies afterwards could only get a license where they could only own 49%, we owned 100%. And to date, still, it’s the only foreign company in China, a life insurance company,that owns 100% of the company. It wasn’t easy. As I say, it took from ’75 to ’92. And I visited China every year, a couple of times a year, to make that happen. But we did a lot of things for China. At the same time, we helped China. I lobbied very hard for China’s entry into WTO, which was very important for our country and for China, and really for the world.”

Reasons for the Bubble:

Clinton admin pushing home ownership via Fannie/Freddie, “whether you could afford it or not”, increasing leverage to 40x from normal 5, and creation of products [abstracted from reality.]

Also criticized Robert Rubin as Treasury Secretary: “That was, strangely enough, during the Clinton administration, the Treasury Department, then run by Bob Rubin, turned down the question of having an exchange and regulating credit default swaps.”

Spitzer & the AIG board

“…On the other hand, when Spitzer threatened the company, many of them just folded. Not Carla Hills and not Bill Cohen, but many others.”  I remember Ken Langone coming to AIG’s defense and John Whitehead (in two editorials, April 22, 2005 and December 22, 2005) but the mention of these two board members is intriguing.

On Goldman and others v. AIG in the crisis Greenberg gives a nudge to the vampire squid theory of history:

[In addition, consider that Rubin was also ex-Goldman] “Goldman Sachs and Morgan Stanley, both of which were going to have a problem, were given a bank holding company license. That gave them access to the Fed window, and they could borrow money at virtually no costs at all, practically. The Hartford Insurance Company, here in Hartford, a medium-sized company, was also given a bank holding company license. And AIG was denied one. So, AIG was left to really find a solution. So, they went to the Fed, the New York Fed, which I had chaired, incidentally, for about seven years before. So, I knew the people in the Fed quite well.

They borrowed $85 billion from the New York Fed at 14.5% interest. And the Fed took 79.9% of the equity of the company. So, they essentially nationalized the company. Now, the money that AIG got, the $85 billion, at these terms, which is outrageous, they then had to pay the CDOs that you couldn’t tell what the real price was, because there was no price discovery. You could have negotiated the value of those at about 40 to 60 cents on the dollar, but the Fed made them pay 100 cents on the dollar.

So, AIG borrowed the money, paid Goldman Sachs and others 100 cents on the dollar, and had to pay that money back to the Fed. So, things began to unravel very quickly after that.

…The real story of what happened has not been printed yet. After all, it’s very common knowledge that Paulson, who was then Treasury Secretary, was surrounded by Goldman Sachs people. I’m not making that up. That happens to be a fact. And so, how objective were they in what they were deciding to do and not to?”

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