AIG head’s $3M in Goldman stock raises apparent conflict of interest

I received a couple of interesting items c/o my friends at Competitive Enterprise Institute you may not have seen. First is an item from Tim Carney in the Washington Examiner:

“Edward Liddy, CEO of government-run AIG, still owns more than $3 million of stock in Goldman Sachs, which has pocketed $13 billion or more of the $170 billion federal officials have spent bailing out the ailing Wall Street insurance giant.”

Find this article at:
http://www.washingtonexaminer.com/opinion/columns/TimothyCarney/AIG-heads-3M-in-Goldman-stock-raises-apparent-conflict-of-interest-42779802.html

Second is an item by John Berlau on the same issue:

AIG CEO Liddy owns millions in stock in bailout beneficiary Goldman — Tim Carney blockbuster in DC Examiner
by John Berlau (www.cei.org)

April 10, 2009

Everyone should read the blockbuster exclusive in today’s Washington Examiner in which Timothy P. Carney confirms that American International Group CEO Edward Liddy — appointed to his position at the behest of Hank Paulson and Tim Geithner after the government takeover of AIG in September — still owns more than $3 million in stock in Goldman Sachs, one of the biggest beneficiaries of the AIG bailout.

I am privileged to be quoted in this article that both breaks news and puts it into an informative policy context. The dogged investigative reporting conducted for this piece by Carney, a former Warren T. Brookes Journalism Fellow at CEI, should be enough to garner him several awards, and in my opinion this piece and likely follow-ups may be Pulitzer Prize-worthy material.

A couple weeks ago, after the brouhaha about the “retention” bonuses paid to the AIG Financial Products employees, Liddy’s calm demeanor before Congress and the media helped diffuse the situation. He emphasized that he was making a nominal $1-a-year salary and argued he was doing the CEO stint merely as a public service. Liddy wrote in a recent Washington Post op-ed that “my annual salary is $1. My only stake is my reputation.”

But Carney found that Liddy was not telling the whole story about his real stake in the AIG bailout. Namely that Liddy, as Carney notes, has “an acute financial stake in one of AIG’s counterparties—namely, his $3.2 million personal investment in Goldman Sachs.” And under Liddy’s direction, AIG disbursed nearly $13 billion from the taxpayer bailout money to Goldman, in a move many say is more disturbing than the employee bonuses that were the source of the recent controversey.

Everyone from former AIG CEO Maurice “Hank” Greenberg to liberal Rep. Brad Sherman, D-Calif., have expressed outrage that Goldman and other banks were compensated at full value for their derivative contracts. Goldman had bought billions in credit deafalt swaps from AIG. Had AIG gone into bankruptcy, Goldman and other counterparties would have almost certainly had to take a “haircut” on the contracts due to declining market conditions.

In the article, Carney generously writes that “there is no reason to believe Liddy is influencing AIG actions to unfairly benefit Goldman.” Yet Liddy had to be aware that many were saying Goldman may not have survived the hit if AIG substantially reduced payment. He resigned his position from Goldman’s board of directors when he became CEO of AIG, ostensibly to avoid conflict of interest, but has not seen fit yet to sell his more than 27,000 shares in Goldman stock, which he is listed as holding in the firm’s 2008 proxy statement. Carney reports that “an AIG spokeswoman confirmed for the Examiner that Liddy still owns all these shares.”

Carney points out the paradox of “strange public-private chimeras like AIG spawned in this age of bailouts.” When it bailed out the firm, the government took an 79.9 percent stake in AIG, making AIG in one sense a government entity. Yet, as Carney points out, this “situation represents a potential conflict of interest that would never be allowed in a government agency.”

It also likely wouldn’t fly in a purely private company, where directors and shareholders are on guard against executives’ “related party transactions” that aren’t in the company’s best interest. Yet, because he is running a public-private hybrid, Liddy lacks accountability to both to private shareholders and government ethics rules

Former Treasury Secretary Paulson, himself a former Goldman Sachs CEO, has a lot to answer for in forcing out AIG CEO Robert Willumstad and bringing on Liddy to replace him. So does Geithner, who was heavily involved in the AIG bailout as president of the Federal Reserve Bank of New York. Why did they not insist that Liddy divest his holdings or find someone who didn’t have this conflict?

Above all, this shatters the illusion that the government can magaically take over a company, fire the CEO, and run it more efficiently for the taxpayers. I have written before on Open Market that Obama’s firing of Rick Wagoner was not the first time the government forced out a CEO. Even before Paulson ousted Willumstad after the bailout, then- New York Attorney General Eliot Spitzer effectively forced out longtime

AIG CEO Greenberg on baseless charges that have almost all been dropped. Greenberg built up AIG successful 35-year tenure, and has testified that the issuance housing-related credit defaut swaps at the center of the firm’s problem exploded in the months after he left.

As I tell Carney in concluding paragraph of the story, “The whole AIG experience demonstrates the fallacy that the government can efficiently sack CEOs and replace them.”