Members of Congress and former AIG chiefs are playing the blame game during investigations as to what led to the insurer’s downfall.
Greenberg, who ran the insurer for nearly four decades, pointed at heavy reliance during the tenure of his successors Sullivan and Willumstad on credit default swaps, a form of insurance in which holders of mortgage securities are guaranteed payouts even if mortgage holders default. Greenberg told the congressional panel that AIG "wrote as many credit default swaps … in the nine months following my departure as it had written in the entire previous seven years combined."
Sullivan and Willumstad then proceeded to put the blame on AIG’s tumble on "mark-to-market" accounting rules, which forced the insurance company to list its bad mortgage securities as losses on its balance sheet. Willumstad then said the firm had to scramble to find capital. Problems with liquidity then led to a lowered credit rating, after which the bottom fell out on AIG and the Fed came in with the cash.
House Oversight Committee Chairman Rep. Henry Waxman, D-Calif., slammed them. "Both of you seem to be saying that those events had nothing to do with your management, it had to do with a tsunami of activities over which you had no control," he was quoted as saying by the Associated Press.
The congressional hearing comes exactly three weeks after the Federal Reserve gave AIG an $85 billion loan, effectively nationalizing 80 percent of the company. Last week AIG announced plans to sell off subsidiaries to help pay off the loan, and that it already has drawn on some $61 billion of the Fed money.
The insurer received this dash of government liquidity a day after investment bank Lehman Brothers announced bankruptcy. The rationale given for propping up AIG while letting Lehman fend for itself: Lehman had contingency plans in the works, whereas AIG’s fall took them by surprise.
As an insurance company, AIG falls under state, rather than federal regulation. And, in a move to keep the company afloat, New York state had pledged $20 billion in cash to AIG earlier this week. But after the Fed announced its $85 billion bailout, “The asset swap will not now take place,” said David Neustadt, director of public information for the New York State Insurance Department.
As of Sept. 22, AIG was no longer be included in the Dow Jones Industrials Average, replaced by Northfield, Ill.-based conglomerate Kraft.
Observers at home and abroad have perceived incongruities between the laissez-faire economic ideals championed in the United States and its lifelines to AIG and others. “We have the irony of a free-market administration doing things that the most liberal Democratic administration would never have been doing in its wildest dreams,” American financial historian Ron Chernow told The New York Times.
The March emergency Fed loan to Bear Stearns and the government’s subsuming of Fannie Mae and Freddie Mac are not really parallel situations to AIG’s. Fannie and Freddie were already backed by the government, and Bear Stearns was government-regulated. AIG, in addition to offering insurance policies, was also involved in derivatives trading. Those largely fall out of regulators’ scope and are not backed by the FDIC. But, contrary to the justification given for the Fed’s bailout, AIG’s looming financial abyss was in plain sight.
On June 15, AIG announced that CEO Martin Sullivan had resigned and had been succeeded by Robert Willumstad, a former Citigroup executive who has served as Chairman of the Board of Directors of AIG since 2006. The company also appointed Stephen Bollenbach, a current director, as its lead director. Willumstad was forced to step aside on Wednesday in favor of Edward M. Liddy.
Eli Broad, billionaire philanthropist and former director of AIG subsidiary SunAmerica, along with fund managers Bill Miller and Shelby Davis, who together control 100 million shares—or 4 percent—of AIG, sent the insurance conglomerate a letter June 12 demanding that CEO Martin Sullivan be swapped out with a stand-in chair selected from AIG’s board while a search is launched for a permanent replacement.
Exactly two months earlier and two days before AIG’s annual shareholder meeting, those three major shareholders sent a letter to its board of directors that assailed AIG’s financial practices, saying that the company had experienced a “staggering breakdown of risk controls and an unequivocal loss of investor confidence.”
Under Sullivan’s tenure, AIG made $14 billion in profits in 2006. However, in the past two financial quarters, the company has announced $13 billion in losses and $20 billion in write-downs, prompting a need for capital injections—$20.3 billion worth.
But despite the influx of capital, Citigroup analyst Joshua Shanker wrote in a May 27 report that the billions put in may not be enough to keep AIG’s credit rating, which was already downgraded earlier that month, from slumping further.
Maurice “Hank” Greenberg, who was pushed out as CEO three years ago, remains a significant shareholder in the company and has also fiercely criticized its practices. Greenberg himself continues to be under fire, however. In May, the SEC gave him a Wells notice—essentially a warning of a pending indictment—for possible accounting impropriety in dealings between AIG and General Re, a reinsurer owned by Warren Buffett’s conglomerate, Berkshire Hathaway. The transaction in question resulted in an extra $500 million appearing on AIG’s balance sheets.
Earlier this week, the three major credit agencies downgraded AIG’s credit rating: Fitch down two notches from AA-minus to A; Moody’s down two notches to A2 from Aa3; and S&P down three grades to A-minus from AA-minus.
And on the eve of the Fed’s $85 billion cash injection, former AIG chair—as well as, through various holdings, the insurer’s top shareholder—Hank Greenberg filed a 13-D with the SEC stating that the company he chairs, C.V. Starr, may seek control of AIG, put a member on the board of directors, or do a “take-private.” A take-private is when an entity that is not a listed company buys a listed company, often taking its stock off of capital markets. An attorney for Greenberg did not comment.
AIG, despite its name, was founded in China—in Shanghai in 1919, to be exact, by Cornelius VanderStarr—from which Greenberg’s C.V. Starr gets its name. AIG has a large employee base there and owns nearly 20 percent of the stock of state-owned People’s Insurance Company of China. Given that Asian financial holdings have been a fundamental source of foreign direct investment (FDI) in the United States, it makes financial and diplomatic sense to shore up a company that plays a key role in Asian confidence in American companies in general.
“When the dust settles, I think Asia will come out ahead of the U.S.,” Henry Lee, the managing director of a Hong Kong investment advisory firm told The New York Times. Financial analysts see Asian markets bouncing back more quickly from the current economic lull than America’s, for one. China’s 2007 economic expansion of 23 percent in dollar terms is testament to this. True, double-digit growth is common among emerging markets.
But tiger economies are not to be overlooked—especially when they start pulling securities out of developed ones, like those of the United States. According to statistics cited by The New York Times, central banks, many of which were Asian, bought up $18.2 billion of U.S. securities in July, compared to a monthly average of $22.3 billion during first-half 2008. China’s central bank controls some $1.8 billion in reserves, “grew $280.6 billion in the first half of this year—a pace of $64 million an hour,” writes the Times.
Market consternation over AIG fallout has played into a weaker U.S. dollar. As of Wednesday, the greenback had fallen back against the euro, the Swiss franc and the British pound. Forex expert Grace Cheng writes, “Apparently, many people, particularly retail investors, are scared that there might be more worms lurking beneath the carpet.”
Conversely, the weak dollar could also entice FDI into the United States. German insurers Allianz and Munich Re are looking to make inroads into American markets, and cheaper acquisitions may just be the ticket.
“I don’t think you can reach satisfactory growth numbers if you are not a substantial player in the US,” Michael Diekmann, Allianz’s Board of Management Chair, was quoted as saying by German newsmagazine Der Spiegel. “From what I see of some of our competitors in the US, this is not a bad time to look at the US market.”