The American International Group (AIG) of today has no value to its long-term shareholders, according to Maurice R. "Hank" Greenberg, the insurer's former longtime chairman and chief executive. After all, the government owns nearly 80 percent of it.
"Who's going to invest in a company that is 80 percent owned by the government except day traders?" Greenberg asked recently, speaking last week at a private lunch in New York.
The octogenarian is still puzzled over the events that took place a year ago.
In September 2008, severe valuation losses on a super senior multi-sector credit default swap portfolio belonging to AIG Financial Products Corp., a subsidiary of AIG, triggered collateral provisions in the swap contract. This action quickly created a liquidity crisis for its parent company.
A collapse imminent, AIG had two choices at the time: either to file for bankruptcy or receive help from the government.
"My judgment a year ago was that the shareholders would have been a hell of a lot better had the company filed for Chapter 11 bankruptcy protection," said Greenberg. "No shareholder interest was consulted."
The company was bailed out by the government with $85 billion of loans at a 14.5 percent interest rate. The loan cost AIG a two percent fee and 79.9 percent of the company was given to the government. "If that is not unusual, I don't know what is," he said. "The terms were unconscionable."
The loan from the Federal Reserve Bank of New York (FRBNY) helped AIG meet short-term cash needs. It helped avoid severe financial disruptions by providing liquidity to financial institutions and municipalities.
The interest rate for the loan was later lowered while the terms of the loan were changed and extended to three years. In total, the rescue package amounted to $150 billion, including a $60 billion loan, a $40 billion capital investment, and $50 billion more to buy mortgage-linked assets either owned by AIG or guaranteed by it.
"While the terms of the loan were later changed somewhat, they were not changed enough to bring about a renaissance for the company," said Greenberg. "AIG has to renegotiate the terms with the government."
"Is the role of the government to make as much money for the help that it is providing?" asked Greenberg. "Or should the government be paid back with reasonable conditions and get the company to become a taxpayer again? The logical role of the government is not to squeeze value out of a company and force it into liquidation."
Many questions about the events that took place last September linger on for Greenberg. "Questions need to be answered as to why AIG was so-called 'aided' by the government the way that it was," he said. "Why was AIG saddled with such onerous terms? What happened at AIG that made it require the kind of so-called help that it got?"
AIG's problems with credit default swaps and credit default obligation were esoteric, in Greenberg's view. Before he left the company, credit default swaps were not required to have collateral put up, except in rare instances. Contracts for CDS's and CDO's ran into the hundreds of pages. "I speculate that changes were made and no one bothered reading the contracts."
AIG's troubles were made more serious when Lehman Brothers filed for bankruptcy. "This caused a huge amount of fear throughout the financial structures. Everybody was worried about themselves and not thinking about their counter parties.
"There was a lot of shorting going on and a lot of hedging going on, so it is very difficult to piece together what really took place during those fateful days last September," said Greenberg. "When the credit markets froze up, nobody could get loans and banks began pulling in lines of credit."
Since Greenberg's departure in 2005, AIG has been led by no fewer than four chief executives. Currently in the top position is , who took over as chief executive in August. The former chief executive of MetLife, Benmosche oversaw its demutualization and transformation into a publicly traded company in 2000.
"Bob Benmosche is a good man and a good choice for AIG," said Greenberg, who has offered to assist the new chief executive in any way possible.
What troubles Greenberg now is the manner of which the company is selling off many of its assets around the world.
"Clearly, selling off assets at or below book value partly as a way of paying back taxpayers makes no sense," he said. "The liquidation of AIG is what Hank Paulson wanted to do. His plan was designed, without any question, to liquidate and sell off the company in pieces."
"But selling off valuable assets at or below book value in this distressed market makes no sense because no one is paying a premium for any assets today," he said. "It will hardly pay back the U.S. taxpayer. It is pitiful."
The only thing to do is rebuild AIG," said Greenberg. "It can be done and should be done. I think Benmosche will recognize that."