I sat down with former AIG (NYSE:AIG) chairman and CEO Hank Greenberg last week. We talked about everything from AIG's early days, its growth, to its downfall and bailout in 2008.
Something I've thought about a lot since 2008 is whether an inquisitive investor last decade could have known how much risk financial companies were taking, or if it was something only insiders had the full details on. I posed that question to Mr. Greenberg, which led into a conversation about "too big to fail." Here's what he had to say (transcript follows).
Morgan Housel: These risk problems that came up after you left in 2005, were they something that a general public investor, someone just reading the public information, the 10-Ks, could have pieced together, or was the risk taking that was going on inside of AIG something that you needed to be on the inside to recognize?
Hank Greenberg: Probably, although I'm not sure the 10-Ks that they filed were complete. For example, when the auditors made that statement to the Chairman, that the current management was incapable of managing AIG, they went out to the market to raise $30 billion. They don't disclose what the auditors had said to the Chairman.
Morgan Housel: Let's say 2006-07, were you personally aware of the risk taking that was going on inside of AIG? I guess what I'm trying to figure out is, if someone owned AIG stock in 2007, could they, even with hindsight, go back and see, "Oh, look at all this risk that was being taken?"
Hank Greenberg: No, I don't think so. I was a major shareholder of AIG, the largest individual shareholder. I lost about 90% of my net worth. I was in a war with AIG at that time, literally.
Morgan Housel: We hear a lot about the phrase, "too big to fail." Was AIG "too big to manage?"
Hank Greenberg: No. We managed it for 40 years, for God's sakes. You need the right management. Of course it wasn't too big to manage.
After all, the company was doing very well. There was nothing wrong with the company. The year I left -- my last year was 2004 -- I think we earned $11 billion, growing at double-digit. What can I tell you?
Morgan Housel: What should we do about the problem of too big to fail? Or is too big to fail a problem?
Hank Greenberg: It depends on the management. If you've got the right management, why is it too big to fail?
Morgan Housel: With AIG, the amount of risk-taking that was going on in a fairly small portion of AIG ...
Or let's say with JPMorgan. They had, last year, the London Whale transaction. That, some people look at as an issue of, Jamie Dimon is a well-respected manager, but when you have a company that size, with more than 200,000 employees, and you have a few bad apples over here that have the power to make such large bets...
Hank Greenberg: OK, but Jamie Dimon, they caught that. About $8 billion of loss, something like that, out of huge earnings of the company. Yeah, it was an unfortunate loss, but it wasn't fatal. It wasn't even close to that. It was a cold. Like having a cold, not pneumonia, and they're fine.
When I left AIG, in seven months, they wrote more credit default swaps on so-called AAA CDOs, credit default swaps covering them, than we wrote in seven years. They wrote quality that was way below what we would have written, and they didn't hedge anything. It's a question of management.
Morgan Housel: When you have a bank that is large enough to be too big to fail, and to cause systemic damage when it does fail, and it's run by poor managers, which we saw quite a bit of in 2008 with Bear Stearns and Lehman Brothers, Citigroup, and the same with AIG.
What should regulators do with a company like that?
Hank Greenberg: Well, stop. What were the regulators doing? Take Bear Stearns for example. There were six months between Bear Sterns and Lehman Brothers. What did the regulators do?
Citigroup was overseen by the New York Fed. I chaired the New York Fed for about -- I was on the New York Fed board, then vice-chair, then chair -- probably all together about eight years. The Fed oversees Citigroup. What were they doing?
Morgan Housel: Not much.
Hank Greenberg: No, obviously.
Morgan Housel: In Hank Paulson's memoirs, he does say that he pushed for Lehman Brothers to sell itself, in that period. Not successfully, but...
Hank Greenberg: Yeah, but he didn't go to the aid of Lehman Brothers. They gave a Bank Holding Company license to Goldman Sachs and to Morgan Stanley. They turned down Lehman Brothers.
AIG didn't have a solvency problem. It had a liquidity problem because they were responding to collateral calls from their counter parties. Once they lost the AAA rating after I left the company -- almost the next day they were downgraded from AAA to something less -- at that point they were required to put up collateral under the agreements.
But if you knew what was going on, there was no price discovery on any of these CDOs, what the value was. There's no exchange that you could trade them on, so every broker-dealer had a different price for the value of the CDOs. Some had very low prices, which we require more and more collateral.
I wouldn't have responded ... we wouldn't have been in that position to begin with. We wouldn't have lost that AAA rating. I wouldn't have responded, if I were them, to any of the collateral calls.
With different prices, who would you respond to? The highest price? The lowest price? I would say, "I'm not paying anybody. If you don't like it, the courtroom is around the corner. Five years from now we'll know who was right."