Generation of Denial

There seems to be a sad pattern developing among the formerly august financial figures of the passing generation. We’ve seen Alan Greenspan and Robert Rubin twist themselves into verbal pretzels in order to deny any responsibility for the current state of the financial system. Now, Maurice “Hank” Greenberg joins the fraternity of former titans unwilling to accept that they were present at the creation of our current destruction. From today’s Wall Street Journal we have this gem:

“I don’t feel any responsibility at all” for AIG’s problems, Mr. Greenberg said in the interview. “How can I be responsible for something that occurred when I’m not there?”

Mr. Greenberg remains a major shareholder in AIG, though the value of his holdings has declined by hundreds of millions of dollars since the start of 2008. Mr. Greenberg, who also controls a company that is AIG’s largest private shareholder, played down the impact of the stock’s slide on him personally.

“Of course, I lost considerable net worth,” said Mr. Greenberg, who also heads another firm, C.V. Starr & Co. “But I’m working. My life is not materially changed.”

Nice to hear that Greenberg hasn’t been inconvenienced. And it would be comforting to accept his version of events where the only problem with AIG was the lack of his steady hand on the tiller. See, this what you get for chasing him out of office and giving the job to a back-bencher like Martin Sullivan.

But Noam Scheiber does an excellent job of explaining two facets of Greenberg’s culpability. The first is that Greenberg presided over the growth and metamorphosis of AIG-FP into the dangerous threat that it would become after he left. It was Greenberg, after all, who put the infamous Cassano in charge of the division knowing that he required exceptional oversight.

But the second line of responsibility is more indirect. Cassano went of the rails when AIG lost its triple A credit rating eventually racking up huge bets on suprime mortgages to replace the easy money he was making exploiting AIG’s ratings arbitrage. One of the reasons Cassano was able to get so far off the reservation was that AIG’s management was pre-occupied with putting out the fires created by Greenberg’s aggressive actions, the ones that led to Spitzer’s pressure for Greenberg to step down. Here’s Scheiber:

in March 2005, Greenberg resigned from AIG amid allegations of accounting improprieties. Within three weeks, AIG saw its precious triple-A credit rating downgraded. This was a body blow to AIG-FP, which relied on the rating to secure favorable terms for the contracts it signed. Many were so-called credit-default swaps (CDS)–essentially insurance for bonds that investors had purchased. The weaker its credit rating, the more AIG had to pledge in collateral to grease the deals–money it would have to fork over if the bonds suddenly depreciated. In general, the downgrade made AIG-FP less attractive to customers, who relied on the company’s credit rating as a guarantee it would pay up if the insurance were needed.

Between March, when Greenberg left AIG, and the end of 2005, Cassano’s division issued more than $40 billion in credit-default swaps (essentially insurance) for portfolios of securities backed by subprime mortgages. This was more than half of all the insurance of this type the company had on its books.

Worse, in contrast with the Greenberg era, there was now effectively a vacuum at the top of AIG. Greenberg’s successor, Martin Sullivan, was a traditional, meat-and-potatoes insurance man who “didn’t have the ability to figure out what was going on there,” says another former AIG official. And, even if he’d been able to scrutinize it, Sullivan didn’t consider AIG-FP a priority. “He saw his role as going around, meeting every state regulator in the country, and saying, ‘We intend to cooperate fully with all investigations of [the] company,'” says this person. For his part, chief financial officer Steve Bensinger found himself completely preoccupied with AIG’s accounting statements, whose revision it fell to him to oversee.

Something similar seems to have happened at Citibank where Chuck Prince was brought in to clean up Sandy Weill’s own reputational mis-steps. In retrospect, Prince and Sullivan were disastrous for their firms. But let’s remember that they were considered appropriated CEOs to deal with the specific problems left behind by the “builders” Weill and Greenberg.

Those “builders” bear more than a little responsibility for what happened next. Yes, their egos won’t allow them to admit it but that shouldn’t prevent us from measuring them by the proper yardstick. Success as a CEO is not only judged by what happens upon your watch. Success comes from vouchsafing the firm to others.

Greenspan, Rubin, Weill and Greenberg deserve great admiration for their enormous talents and vision and intelligence. But they cannot escape the judgment of history which lies not in remembering what you did but in marvelling at what you left behind.

AIG Not My Fault, Says Greenberg; Testifies Today
Wall Street Journal; April 2, 2009

Top Down
A New Theory of the AIG Catastrophe
The New Republic; March 31, 2009

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