By Maurice R. (“Hank”) Greenberg & Lawrence A. Cunningham
The AIG Story is a business thriller, chronicling the adventures of the executives of American International Group (AIG) as they built the largest insurance company in world history. From the late 1960s through 2005, these builders, led by Hank Greenberg, helped pave the way for globalization by promoting international trade, economic prosperity and U.S. leadership. Without overshadowing that saga, the book is also a cautionary tale about corporate governance and regulatory zeal. It explains how an overzealous politician/prosecutor, Eliot Spitzer, weakened AIG’s governance in 2005, leading AIG to the center of 2008’s financial crisis. The book’s final chapters reveal the truth about how U.S. officials seized control of AIG in order to flood the market with capital in a series of secret moves that have misled the public about their real purposes.
Characterized by an entrepreneurial culture dedicated to opening new markets and pioneering insurance products for high-risk commercial ventures, AIG combined the spirit of a nimble private enterprise with the discipline of a public company. With roots in companies created in 1919 by Cornelius Vander Starr in Shanghai, by the 1960s the business was a loose affiliation of diverse insurance outfits around the world, worth about $300 million. During the Cold War, AIG consolidated and expanded these operations, pushing to open insurance markets behind the Iron Curtain, as well as inside Communist China, and drove new markets and products across the globe, from Latin America to the Far East.
Greenberg and other AIG executives forged close relationships with the world’s most influential business and governmental leaders to help develop mutual understanding and promote the values of international relationships. They educated an expanding population of American financial services executives about the best strategies for pursuing international business and navigating related political and financial perils. AIG was known for creating innovative insurance coverage for new and unusual risks. It revolutionized the process of underwriting insurance, leading the industry to adopt rigorous analysis of risk by in-house analysts.
AIG introduced vital concepts to the field of international trade, particularly “trade in services.” This refers to the sector, representing 70% of the U.S. economy, encompassing businesses as diverse such as consulting, engineering, software development, tourism and travel, as well as insurance. During the 1980s and 1990s, AIG led a coalition of service industries to put trade in services on the international trade agenda, resulting in victory when the World Trade Organization (WTO) forged the historic financial services agreement.
AIG was aided by presidents of the United States from Nixon to Bush (the elder) to Clinton for insight into matters of trade and diplomacy which AIG used, in turn, to promote American values worldwide. It played a steady role in reconnecting the Chinese economy to the rest of the world, initiating business in that country in 1975 that opened the way for expanding commerce and trade in all fields. Throughout the late 1990s, AIG championed China’s successful admission to membership in the WTO.
In defending the value of open markets, AIG fought against nationalistic impulses of countries around the world. It insisted on obtaining reparations for the expropriation of the assets of private enterprises. These efforts resulted in landmark international cases on behalf of itself and its customers in many countries, including Iran, Pakistan, Peru, Nigeria and Vietnam.
By 2005, a small band of internationally-minded insurance executives had formed a company with operations in 130 countries, a market value of $180 billion, 92,000 employees worldwide, 64 million customers protected from all imaginable hazards and legions of stockholders. AIG consisted of prominent insurance companies first brought together in the 1960s, such as AIA, ALICO, American Home, National Union, Lexington Insurance and Transatlantic Reinsurance; it included companies acquired later, such as Hartford Steam Boiler, International Lease Finance Corporation, Sun America and American General.
Despite AIG’s status as an international defender of American values, an overzealous state attorney general, Eliot Spitzer, concocted allegations about accounting matters and blew them out of proportion. In mounting a media smear campaign over these, Spitzer in March 2005 pressured AIG’s board into agreeing to various corporate governance reforms, including the forced resignation of Greenberg. Those changes would prove costly to AIG and to the world economy, as the weakened company lost control of itself.
After Greenberg’s departure, AIG’s financial products division (FP) ramped up its exposure to credit default swaps. FP signed contracts requiring AIG to post increasing amounts of collateral if designated pools of real estate mortgages lost value. During the 2008 financial crisis, plummeting real estate prices and freezing capital markets prompted two dozen financial firms to claim payment under these contracts, putting AIG at the vortex of an illiquid global capital market.
Without exhausting alternatives, such as temporary guarantees, the U.S. government then seized control of AIG, at a time when its assets were worth $1 trillion. Directed by U.S. Treasury Secretary Henry Paulson, the government commandeered 79.9% of AIG’s equity in exchange for a loan of $85 billion with a 14.5% interest rate, without conducting a valuation or consulting shareholders. The government then used that money and additional loans in a clandestine rescue not of AIG, but of its counterparties, including Wall Street investment banks and foreign commercial banks. The next step was to significantly dismantle what remained of the former AIG, selling for a song many of the iconic businesses Greenberg and AIG’s other founding executives had built while paving the road to globalization.
The seizure and dismantling of AIG were paradoxical, as the U.S. government furtively nationalized a company that had, for decades, fought nationalization abroad, stood for the principles of free and fair markets, and partnered with the U.S. government in many aspects of its foreign policy. Intended as a page-turner, The AIG Story regales readers with scores of first-hand stories from the trenches of globalization. They all carry important lessons for anyone interested in the rule of law, good government, open markets, free trade and corporate well-being.
Maurice R. Greenberg is Chairman and CEO of C.V. Starr & Co., Inc. He joined C.V. Starr & Co., Inc. as Vice President in 1960 and was given the additional responsibilities of President of American Home Assurance Company in 1962. He was elected Director of C.V. Starr & Co., Inc. in 1965, Chairman and CEO in 1968 and continues in that role. Mr. Greenberg retired as Chairman and CEO of American International Group, Inc. (AIG) in March 2005, after serving as Chief Executive Officer from 1967. Under his leadership, AIG became the largest insurance company in the world and generated unprecedented value for AIG shareholders. During the nearly forty years of his leadership, AIG's market value grew from $300 million to $180 billion.
Lawrence Cunningham: the Henry St. George Tucker III Research Professor at George Washington University Law School and Director of GW's Center for Law, Economics and Finance (C-LEAF) in New York. He is the author of numerous books including The Essays of Warren Buffett: Lessons for Corporate America, The AIG Story (written with Hank Greenberg) and Contracts in the Real World: Stories of Popular Contracts and Why They Matter. His research appears in leading university journals, including those published by Columbia, Cornell, Harvard, Michigan, Vanderbilt and Virginia; op-eds have run in newspapers such as the New York Times and the Financial Times.