CEO Gaffe of the Week: AIG & Starr International

Last year, I introduced a weekly series called "CEO Gaffe of the Week." Having come across more than a handful of questionable executive decisions when compiling my list of the worst CEOs of 2011, I thought it could be a learning experience for all of us if I pointed out apparent gaffes as they occur. Trusting your investments begins with trusting the leadership at the top -- and with leaders like these on your side, sometimes you don't need enemies!

This week, I turn my attention to current AIG (NYSE: AIG  ) CEO Robert Benmosche, and former AIG CEO and current Starr International CEO Maurice Greenberg.

The dunce cap
The credit crisis and big recession of 2008-2009 brought the need for massive reform and countless bailouts in the finance, insurance, and even auto industries. General Motors (NYSE: GM  ) needed an injection of $50 billion just to keep its operations running during the height of the recession . Similarly, large money center banks like Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) both received a total of $45 billion in preferred stock investments from the U.S. government in the form of TARP loans .

However, the creme de la creme of bailouts was AIG, which ultimately required $182 billion worth of loans and assistance and saw the U.S. government take up to a 92% direct stake in AIG's stock. Amazingly enough, through asset sales in AIG's mortgage-backed Maiden Lane III portfolio -- which went to financial institutions like Bank of America, Citigroup, and Credit Suisse (NYSE: CS  ) among others -- as well as selling its stake in AIA Group and numerous stock offerings, AIG has freed itself entirely of its debt obligation, all while the U.S. government and taxpayers actually turned a profit!

Instead of the expected gratitude you might expect from a financial insurer that was on the brink of failure and had littered its MBS portfolio with toxic investments, AIG CEO Robert Benmosche earlier this week contemplated joining former CEO Maurice Greenberg in a $25 billion shareholder lawsuit against the hand that once fed it -- the U.S. government.

The reasoning behind the lawsuit was not that AIG didn't need the assistance, because it clearly did, but that the government deprived shareholders of tens of billions of dollars as it charged high interest rates and funneled much of AIG's assets to its competitors. In addition, the lawsuit claims the government violated the Fifth Amendment by taking AIG's assets for public use without compensation. 

Thankfully, Benmosche and AIG's board decided not to join Greenberg and his new company, Starr International, in the lawsuit, but even contemplating the lawsuit may have caused quite a bit of PR damage in the interim. 

To the corner, Mr. Greenberg
The true wag of my finger goes not to current CEO Robert Benmosche, but to his predecessor and still large AIG stakeholder, Maurice Greenberg, who's coercive efforts to get AIG board members to join the shareholders lawsuit seem like nothing more than a bitter attempt to recoup some of his bad investment.

Consider for a moment that some (not all) of AIG's toxic MBSes were purchased under Greenberg's tenure, so he's just as much to blame for AIG's shortcoming as anybody. Instead, the former AIG head is dragging out a lawsuit that could ultimately cost taxpayers millions, if not more. According to The New York Times, Starr International requested 16 million pages of documents from the U.S. Justice Department last year, forcing the agency to put nearly a dozen lawyers on the case and wasting millions of taxpayer's dollars.

If this isn't a case of ingratitude, then I'm not sure what is! Greenberg made some poor decisions as AIG's CEO, and he should live with them, plain and simple. The U.S government's terms weren't out of line considering it lent a whopping $182 billion to AIG, and to even consider suing the hand that fed you seems like a low blow. For shame, Mr. Greenberg.

Do you have a CEO you'd like to nominate for this dubious honor? Shoot me an email and a one- or two-sentence description of why your choice deserves next week's nomination, and you just may see your suggestion in the spotlight. 

Is this a company you can trust?
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 that AIG investors need to watch going forward.. Just click here now for instant access.


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Comments from our Foolish Readers

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  • Report this Comment On January 11, 2013, at 4:00 PM, TEBuddy wrote:

    I dont understand your point, is breaking the law OK just because you have lots of money?

    "The U.S government's terms weren't out of line considering it lent a whopping $182 billion to AIG"

    That seems to be some sticking point, that because it was $182B, the Governemnt is allowed to do whatever they want and make up any rules the like. How stupid does this argument sound to you when presented this way?? It should sound down right dumb of an argument that stupid people keep saying over and over on this coverage.

    I am sure, that this author and most of America have no idea why the lawsuit was brought up in the first place. The Governemnt will lose, and could have avoided it, by just allowing AIG to take legal action, in a court of law, using public evidence, to recoup some of the money it paid out 100% on bogus policies. What insurance company ever pays out without a fight, and 100%? AIG would have recovered $10B from BOA alone, until the US Government blocked AIG's legal right to seek those damages caused by counter parties using false data on the policies to begin with. Oh, and of course the bank probably used most of the data from lies that Americans told to get loans. So whos really at fault?

  • Report this Comment On January 11, 2013, at 4:39 PM, BBRAF wrote:

    Mister Greengerg was sacrificed to the altar of political expediency.

  • Report this Comment On January 11, 2013, at 6:27 PM, NWChgo wrote:

    Seriously? You've got to do much better than this. AIG's board, like all boards, are answerable to shareholders, and AIG's biggest shareholder asked the company to join his lawsuit against the federal government. The AIG board was compelled for very serious legal reasons to listen to his views and other contrary views. I suspect the AIG board was absolutely opposed to joining the lawsuit, but they had to go through the motions anyway.

  • Report this Comment On January 11, 2013, at 6:49 PM, TEBuddy wrote:

    And now, AIG moves to sue the fed for good reason, which will likely save the US from losing Greenberg's case. If AIG seeks damages from the counter parties, which the Government previously blocked, then Greenberg's suit is very weakened.

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