Hank Greenberg stormed the beaches of Normandy, took part in the liberation of the Dachau concentration camp, and returned home to spend five decades building AIG (NYSE:AIG) into the world's largest insurance company. He retired in 2005 as a multi-billionaire.
Three years later, the company collapsed. He says he lost 90% of his net worth.
Few people know as much about the global financial system as Hank Greenberg, and few are as angered about the 2008 Wall Street bailouts (he's suing the government for $25 billion.)
Last week, I sat down with Greenberg to discuss AIG's early days, its rise to power, and its 2008 collapse. Below is the full interview (34 minutes -- transcript follows):
Morgan Housel: Hi, I'm Morgan Housel from Fool.com, and with me today is former Chairman and CEO of AIG, Mr. Hank Greenberg. His new book, The AIG Story, chronicles the rise and growth of AIG, including the fall and bailout in 2008.
Mr. Greenberg, thank you for taking the time to talk to us today.
Hank Greenberg: Thank you.
Morgan Housel: Why now? You left AIG in 2005. AIG's downfall and bailout were more than four years ago. Why now to write this book?
Hank Greenberg: Well, several things. First of all, I was busy fighting a lot of lawsuits with AIG, and that took a lot of time.
Second, getting all of the facts as to what happened in the bailout and why, and getting all that documented so that, as you see in the book, everything is documented. There is no area that we left uncovered -- just our view, not documented what actually happened. It took several years to get that.
Morgan Housel: What I liked about the book is that it spent most of the time on the early days and the growth of AIG during its heyday. I think what's unfortunate is that for a lot of Americans the history of AIG begins in September 2008.
Hank Greenberg: That's exactly right.
Morgan Housel: What was AIG's key to success during its heyday?
Hank Greenberg: Many things. First of all, we had a culture that was quite unique, and I think a lot of it was also when we started. Starr died in 1968. I became the head of the company in '67, and the people around us then, most of us at the very senior level were veterans, had been officers of the military, so there was a separate culture that was just unique; almost a military-like culture of discipline.
We attracted the best and the brightest, people who could live with a very high-powered environment. We were totally committed to building a great company, and we did. It was the largest insurance company in history. The largest in history, in 130-odd countries; it didn't happen by accident. The planning and the execution were great.
Morgan Housel: You talk a lot about the culture of success. What other publicly traded companies today do you admire, that are doing things right?
Hank Greenberg: I think one of the companies now public was a part of AIG called AIA, in Hong Kong. Its market value today is almost that of AIG. It was wholly owned by AIG. I just had lunch with the guy running it, the CEO, yesterday. The company is a replica of what AIG was.
Morgan Housel: You've been in this business for a long time, some 40-50 years. How is the global economy different today from what it was when you were starting and growing AIG, several decades ago?
Hank Greenberg: Much different -- it's a good question. We were first movers in many countries. Trade in services didn't exist when we were building AIG. We traded with other countries for goods, but services they looked askance at you and said, "WTO doesn't cover services."
Banks, insurance companies, credit card companies, had to fight to get into a country and trade. I was on the president's advisory board for trade negotiations. I had to first convince our own government that we ought to be negotiating trade in services.
We finally did. It took a long time, and even then many countries were very stubborn in opening their markets. You had to fight to get into these markets. That was one of the major differences; the amount of time that we had to spend in opening markets.
Then as a first mover, you had an advantage. We could bring things, products, in countries that never had those products before -- insurance products. It was an exciting adventure. Of course, we were very good at product innovation. The world changes all the time; new opportunities arise. If you've got the people and the vision you do well, and we did.
Morgan Housel: If Hank Greenberg was 30 years old today, could he start and grow a new AIG like you did 40-50 years ago?
Hank Greenberg: I'm doing it.
Morgan Housel: You're doing it with your assets at C.V. Starr.
Hank Greenberg: Yeah. Yeah.
Morgan Housel: What's the latest with that?
Hank Greenberg: We're growing very rapidly. We're entering many foreign countries. We're in China -- I can give you a whole list -- and we're throughout the United States, and we're growing faster than the market is growing.
We're smaller, but we're growing. We're bigger today than we were last year. We'll be bigger next year than we are this year. We're growing at much better than double-digit. We started with I suppose about 80 people. We're about 2500 right now, so from 2009 to now we're adding countries and people.
Morgan Housel: You're growing a business today, just like you did with AIG 40 or 50 years ago. What do you know today about running a global business that you wish you knew 50 years ago?
Hank Greenberg: Almost everything.
Morgan Housel: You've made all the mistakes in the past, and now you've learned from those.
Hank Greenberg: Yeah. Yeah. We can do things faster today because we know what we have to do.
Morgan Housel: When did AIG go off track, from being a first-class global organization to where it found itself in 2008?
Hank Greenberg: I don't think AIG went off track. We had an Attorney General in New York, now a disgraced Attorney General ...
Morgan Housel: There's actually a quote in your book. I'm going to quote it here. It says, "Eliot Spitzer, an elected public prosecutor in New York, sparked the process that would drive AIG to near destruction."
Hank Greenberg: That's correct.
Morgan Housel: When people think about AIG's downfall, they think of derivatives and leverage and liquidity. They often don't think about Eliot Spitzer. What was his role?
Hank Greenberg: Very simple. I was on a conference call with analysts and one of them asked me, "What's the regulatory environment like today?" This is after Enron and Sarbanes-Oxley.
There was a change in the atmosphere. Boards of directors became less supportive of companies and their management. They were more concerned about their own liability after Enron. When I was asked this question I said, "A foot fault is like a murder charge today," which was a way of trying to dramatize the change that had taken place.
If you read the book, you'll see there's an affidavit by a man called Vacco, who had been the prior Attorney General of New York, and he happened to be in Spitzer's office when one of Spitzer's deputies came in and said, "Did you hear what Greenberg just said on an analyst call?"
He said no. He repeated that I said a foot fault is like a murder charge. Spitzer then said, in front of this prior Attorney General, "I'm going to take Greenberg down." He used some other language which was just a disgrace for him to be saying that. It's in the book.
He used that. He was running for governor. He wanted to take down big names, and he went on a campaign to do that.
He focused on a transaction we did with Warren Buffett's company, General Re, which was our largest reinsurance partner. It was five years old, it had no effect on shareholders' equity or earnings per share -- nothing to do with that. It was a peanut transaction, and he tried to make that into a murder charge, and was successful. The board just gave up supporting the CEO.
Now, I was going to step down as the CEO in May. This was in March of 2005. I was going to step down as CEO, stay as chairman to make sure the transition to a new leadership team would go smoothly, but I stepped down from the whole thing. Spitzer forced me out as CEO and I decided not to stay as chairman.
What happened after that?
The new CEO abandoned all of the risk management controls that we had -- literally abandoned them -- and discontinued the staff meetings that we had on a Monday morning, that brought everyone, the key people, together. We knew exactly what was happening on a daily basis.
They lost control. If you read the book, which you did, there is a statement from the auditors who went to the then-Acting Chairman Bob Willumstad, and said, "The current management can't run the company."
They did nothing about it.
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 Chase. 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."
Morgan Housel: You've recently been involved in a $25 billion lawsuit against the government, specifically the New York Federal Reserve.
Hank Greenberg: Not involved. We have commenced a lawsuit against the U.S. government.
Morgan Housel: Some people, when they hear about the lawsuit after the AIG bailout, they respond with a sense of shock. What was the purpose of that lawsuit?
Hank Greenberg: Several things. First of all, we have a Constitution in the United States, and there's a provision against unlawful taking by the government. You can take anything you want, but you have to pay for it.
If you go back into the book and you see it started with Spitzer, it led to management changes and those management changes led to the company becoming deeper and deeper into the need for liquidity, so they sought liquidity from the New York Fed, from the window. They were turned down.
They tried to get a broker-dealer license, which would give them access to the window. They were turned down.
At the very last moment, Hank Paulson, then Secretary of the Treasury, calls Willumstad, who was then the Chairman of AIG and CEO. He says, "There's only one deal we're going to give you." That was $85 billion at 14.5% interest. At the window, if they were borrowing, it would have been 1.5%.
As an aside, they opened the window to the Arab Bank, which was then 26% owned by Libya when Gaddafi was running it, so Libya could get access to the window, but AIG couldn't.
So "14.5%, $85 billion, and we're taking 79.5% of the equity of the company," and incidentally he tells Willumstad, "You're fired." Here's the Secretary of the Treasury, calling a public company CEO and firing him. Is this America? Does the government fire CEOs? I hadn't heard that before.
He then says to Willumstad, "Sign that agreement" that I just related to you.
He says, "Just fire me. I'm not signing the agreement," so Paulson sends in his replacement, a guy called Ed Liddy who's on the Board of Goldman Sachs. He signs the agreement, still as the director of Goldman Sachs and resigns from Goldman Sachs three days later, retroactively. Very unusual, to say the least.
Of the $85 billion that they lend AIG ... AIG had about $800 billion of assets. They had plenty of collateral. They didn't have to take 79.5% of the equity at the time.
Now you've got the $85 billion; $60 billion goes out the back door almost immediately, $12 billion goes to Goldman Sachs, of the $85 billion. They force AIG to give a complete release to those who got the back-door bailout so AIG can't sue them later on for unlawful pass-through, and they put a gag order on AIG that they can't talk about it.
It took us years to get the information that's in the book, and it's all verified in there. Why are we suing the government? I just told you why.
Morgan Housel: Was there any other option that AIG had in September 2008, in the private market, to stabilize the company?
Hank Greenberg: There were a lot of things they could have done. First of all, I wouldn't have responded, as I indicated, to the collateral calls because who knows what you're responding to? There's no price discovery. I wouldn't have done that.
Of course we wouldn't have been in that position to begin with. AIG got in that position for failing to do just the common-sense things that we always did. We knew what risk management was. We had the only enterprise risk management system in the insurance industry at that time. We had both credit risk and market risk. We knew exactly how to run a company.
Morgan Housel: These aren't arguments that I'm defending, but I want to put forth what the people who led that bailout respond, to that criticism.
They say that if AIG had gone bankrupt in September 2008 it would have caused larger systemic problems, and that since there were no private market solutions ... because in the weeks previous, AIG did try to do some private market solutions. They tried to sell the P&C business to Warren Buffett, there were some possible deals with J.C. Flowers, none of which fell through, and here we are at the precipice.
This needs to be fixed right now -- it's Tuesday night and the Asian markets are opening in one hour, we've got to get this done now -- so they put forth this bailout for AIG. The terms were quite onerous, but those terms were, within weeks, restructured down considerably.
Hank Greenberg: No they weren't.
Morgan Housel: Please do correct me if I'm wrong, but the first interest rate was Libor plus 8.5%, and then that was restructured down to Libor plus 3, correct?
Hank Greenberg: Oh, now. That really was months and months later. Months and months later.
I went down to see Geithner -- I knew Tim Geithner for a long time from my service on the Fed board -- and he was very uneasy in talking to me about what they were doing. I asked, since we were the largest shareholder, to attend a meeting on a Sunday that was determining the fate of AIG.
He said, "I hear you," but I never had an invitation to attend the meeting. There were a lot of things I would have suggested to be done. They did all they could to keep me away from that.
I would not have responded to collateral calls.
Morgan Housel: If AIG did not respond to the collateral calls, could its counterparties have forced it into bankruptcy?
Hank Greenberg: No. We'd have been in court deciding that.
Morgan Housel: That was one of the other issues with the $60 billion backdoor bailout for paying 100 cents on the dollar.
The argument that gets put forth is that there were two French banks whose regulators said that if these were not paid at 100 cents on the dollar, that they were not able to negotiate with AIG. That they had an obligation to ask for 100 cents on the dollar.
Hank Greenberg: What do you expect them to say? At that point, since there was no price discovery, you could have any price you want. There were some who would take less. There was one that came out and said, "Yeah, we would take a discount," but since there's no price discovery obviously you have to negotiate.
But that's secondary. I wouldn't have responded.
Morgan Housel: How should Paulson, Bernanke and Tim Geithner have responded in September 2008?
Hank Greenberg: They had their mind made up. They wanted to use AIG as a backdoor bailout. You had Goldman Sachs, you had Morgan Stanley, you had many institutions who were using AIG to get them funds, and they did.
Now, they could have had access to the window, and they ultimately got access to the window, but they would have gotten a lot more access to the window. Their debt would have been much greater. This eliminated a lot of debt that they otherwise would have had to come up with.
Morgan Housel: What did you think about the terms and the validity of the other bailouts that were given to companies like Citigroup, Bank of America, Goldman Sachs?
Hank Greenberg: The Fed guaranteed -- Citi and a number of others -- guaranteed a lot of their assets at a fraction of the cost. If the Fed, as an example, had guaranteed AIG FB for whatever; 100 or 200 basis points ...
Morgan Housel: That was the Financial Products division of AIG that was running the derivatives?
Hank Greenberg: Yeah. It all would have been over. AIG would have regained its AAA rating, and there would have been no collateral calls necessary, and a lot of those assets came back. In fact, AIG was buying some of them last year. Buying them out of the Fed, so clearly if they hadn't lost their nerve and they'd done it the right way, it all would have been over.
Morgan Housel: Hank Paulson talks in his book about how, in hindsight, it's easy to say, "We should have done this. We did this wrong. We should have ..." and they admit that they did things wrong, in hindsight, but they had such short time constraints -- some of these bailouts they had to put together in literally hours -- that when you're under those constraints you're going to make big mistakes that are only visible in hindsight.
What's your response to that?
Hank Greenberg: Well, I think that's an easy statement to make. They were looking after some firms and didn't care about other firms. It's very simple.
AIG was used. Let's face it, AIG was used. The government didn't do badly. They made about $23 billion on AIG.
Morgan Housel: Your lawsuit is for $25 billion, based on the terms of the deal.
Hank Greenberg: Correct.
Morgan Housel: That goes to C.V. Starr? That goes to AIG shareholders?
Hank Greenberg: It goes to shareholders after deducting, obviously, the expense of the lawsuit.
Morgan Housel: Do you think we've learned anything over the past five years, or do you think we're doomed to keep making these mistakes again?
Hank Greenberg: I think the pendulum sometimes runs too far in one direction, has to come back to the middle. That's the way we've always been, unfortunately. Are we going to make the same mistake next time around?
Depends when next time around is. Is it going to be next month? I think we've learned. If it's about 5-10 years from now, I'm not sure we've learned.
Morgan Housel: Do you think the global financial system is safer today than it was in 2007?
Hank Greenberg: It's now so tight you can't do anything.
Morgan Housel: That's an interesting point of view. It might be as dangerous, but there's not much we can do about it?
Hank Greenberg: I think that, if you look at the regulators that we have, and had at the time, how did all this start in housing? It started with the government.
When our Governor was the head of HUD, they loosened the reins. The decision by the administration was, "We want more Americans to own their homes." They dropped the qualifications for getting mortgages, and people who couldn't afford a home got a home.
Morgan Housel: The mortgages are being purchased by Fannie and Freddie, right?
Hank Greenberg: Yeah.
Morgan Housel: But a tremendous amount, virtually all of the subprime that was being done in 2005-06 was all in the private market, correct?
Hank Greenberg: Yeah.
Morgan Housel: It wasn't until 2007 that Fannie and Freddie started getting into subprime.
Hank Greenberg: No, I understand that. I understand that, but they fed on it. Once you start down that road, it became a little easier next time, to the next one, the next one, and the next one.
Then you go beyond that. The SEC, where were they when the investment banks were leveraging the capital 40 to 1? Did you hear anybody say anything?
The blame is widespread. I think if you look at some other countries -- a city-state like Singapore -- a tiny state but very well run and the regulators are terrific. They get paid as much as they would if they were in the private sector, or maybe more. They're intelligent, smart.
We need to change the dynamics here in the regulatory structure.
Morgan Housel: You were the CEO of one of the world's largest companies for several decades. You're still very active in the business today. Just from a broad overview, how does the global economy look to you today?
Hank Greenberg: Not robust. Europe has still got tremendous problems. Are they going to work their way out of it? I hope so, but it's going to take time.
You can't spend more than you earn, whether it's your family or a country. You can wait it out in a country for any number of years, but sooner or later it comes home to roost. So you have that.
Latin America is a mixed bag. Brazil is up and down. Argentina's got political problems. Colombia is much better than it used to be. Mexico is much better.
Canada looks very good here.
Our own economy is coming back slowly. The housing market seems to be improving, but it's early days on that. We still have high unemployment, we still have -- the stock market made an all-time high yesterday and is doing reasonably well today -- but we have a lot of problems economically here, yet. We're on a spending path that is unsustainable.
In Asia, China just has a new administration coming in, actually this week. They're doing OK. They're going to grow 7.5% this year, and probably the next several years. Down from about 10%, but still 7.5% is a pretty good growth rate. A huge country; they have opportunities and problems, the same as anybody else would have.
Southeast Asia, the ASEAN region, is doing quite well.
There are a lot of things that need to be done. We as a country need to have more trade agreements. We have difficulty getting them done because unions oppose trade agreements in the United States, so we're outside of that orbit.
I've urged for years that we negotiate a free trade agreement with China. That's a heck of a lot better than having a trade war. We'll see.
Morgan Housel: Do you feel as good about the next 50 years as you did about the previous 50 years?
Hank Greenberg: That's a long horizon.
Morgan Housel: [laughs] That's too much.
Hank Greenberg: That's too long a horizon.
Morgan Housel: Let's say the next decade, then.
Hank Greenberg: I think it depends on who we have in Washington. I do not believe that you can run a country or a company or a family by spending more than you take in. I think you have to have some discipline, and we have to be realistic about what we can afford and what we can't.
Government-created jobs are not the same as private sector jobs. It's the private sector that builds an economy, not government-controlled jobs. They're not the jobs that built our economy in the past, and they won't be in the future.
It's got to be the private sector that has incentive in order to build the economy.
Morgan Housel: What's next for you?
Hank Greenberg: Keep doing what I'm doing.
Morgan Housel: Which is working for C.V. Starr?
Hank Greenberg: Yeah.
Morgan Housel: Philanthropies, you're on the board of several organizations?
Hank Greenberg: Yeah.
Morgan Housel: Just keep on going. No stop for you?
Hank Greenberg: I love what I'm doing. I'm doing everything I've always done. I play tennis, I ski, I work out daily.
Morgan Housel: My final question, what's the best advice you've ever received?
Hank Greenberg: The best advice I ever received. Well, that's a hard question to answer. I think the best advice I ever got was, "If you're going to do something, if you believe in it, then do it 100% of your time. Don't procrastinate and vacillate. Be committed."
Morgan Housel: Thank you very much. I appreciate it.
Hank Greenberg: Thanks for having me.
Morgan Housel: Thank you.