AIG is a victim of discrimination! It was not allowed to participate in the government's affirmative action program for large Wall Street banks, a clear violation of the Fifth Amendment. So claims David Boies, the lawyer who filed the complaint on behalf of shareholder Hank Greenberg. "The government loaned billions of dollars to numerous other financial institutions without taking any ownership and those institutions," he writes. "When the government did take an equity interest, its interest was limited; it loaned billions of dollars to domestic and foreign institutions at interest rates that were a fraction of those charged to AIG; and it guaranteed hundreds of billions of dollars in loans to various institutions, including Citigroup. Inc."
Wow. You can argue at length about the choices made by Hank Paulson during September and October 2008. You can argue forcefully, as I did, that Paulson maneuvered to forestall a private AIG bailout that might have forced Goldman and other banks to take haircuts on their CDO exposures. But to claim that the US bailout violated the constitutional rights of AIG's shareholders? Particularly the shareholder that created one of the biggest disasters in modern capitalism? I don't think there's a word for that kind of grandiose entitlement. Neither "hypocrisy," nor "chutzpah," do justice to the scope of Greenberg's pathology, or his contempt for taxpayers.
And the word "incompetence" doesn't really do justice to the management team assembled by Greenberg. Consider his appointment of Robert E. Lewis , as head of Enterprise Risk Management, who confessed to the FCIC that we really didn't think about liquidity issues when he reviewed the credit default swap arrangements for all those toxic CDOs. That's like the fire warden saying we really didn't think about the risk of fire. When the FCIC asked Alan Frost and Andrew Forster about all those subprime CDO's that they had insured, each guy could remember nothing and said it was the other guy's responsibility. The problem with AIG on September 15, 2008, was that is was still valuing all those toxic CDO's at close to par. It relied on a financial model based on credit ratings instead of cash flows. So for more than a year, top management had been running around in circles, unwilling to face up to the ugly truth, which was that the triple-A CDO ratings they had relied upon were bogus.
Which brings us back to the complaint. To fabricate a narrative that sounded plausible, Boies plays fast and loose with concepts like, "solvency," and "temporary liquidity." He writes:
"In a number of cases, the government provided loan guarantees and access to federal funds. AIG was a particularly good candidate for such liquidity support because its assets substantially exceeded its liabilities; it's problem was not one of solvency but of temporary liquidity."
First of all AIG's liquidity problem was not, "temporary." It wasn't driven by general market skittishness or a well-deserved crisis in confidence. It was driven by management screw-ups. It took funds obtained through its securities lending operations and invested them in long-term subprime bonds that suddenly became illiquid. It also comingled funds owned by different insurance companies, each of which was overseen by a different state regulator who had a fiduciary responsibility to demand the money back ASAP. And the parent owed $20 billion to its insurance subsidiaries that it simply didn't have.
By placing such heavy reliance on the triple-A ratings of the CDOs, AIG ignored the risk of ratings triggers that were embedded within all of AIG's trading operations. After AIG was downgraded on the evening of September 15, 2008, AIG lost $30 billion worth of liquidity, because the downgrades triggered automatic collateral postings, or margin calls. If AIG were downgraded further, to triple-B, it would have lost another $13 billion in liquidity, plus-here's the kicker-$49 billion worth of credit default swaps on toxic CDOs would have been automatically terminated. Under a triple-B scenario, banks like Goldman and Societe Generale would have been automatically entitled to be paid out at 100 cents on the dollar for the toxic CDO tranches insured by AIG. In the weeks that followed the government takeover, the insurance giant kept burning up cash at an extraordinary rate, so that the government was afraid that its $180 billion commitment would not be enough. ($129 billion was still outstanding at 12/31/09.)
The entire disaster is directly traceable
back to the arrogance and mismanagement of Hank Greenberg. The claim implicit
in his complaint, that AIG would not have made those mistakes had he remained
at the helm, belies the travesty of corporate governance under his watch.
Capitalism is about rewarding success and punishing failure. Those who failed most spectacularly remain unpunished and unregenerate, and all too frequently exercise a chokehold on the marketplace of ideas. Maurice Greenberg is one of those failures. He filed a frivolous lawsuit in order to frame a bogus media narrative.
