Did the U.S. government break the law when it seized control of American International Group during the financial crisis of 2008? In "The AIG Story," the man who built the giant insurer says that the answer is yes and explains his reasoning. Former AIG chief executive Maurice R. "Hank" Greenberg—along with his co-author, Lawrence A. Cunningham—also offers a fascinating company history and an account of how, after Mr. Greenberg's ouster in 2005, AIG made the disastrous mortgage bets that drove it into the arms of the feds.
The AIG Story
By Maurice R. Greenberg And Lawrence A. Cunningham
(Wiley, 328 pages, $29.95)
The firm that would become AIG, the authors tell us, was begun by Cornelius Vander Starr in Shanghai in 1919. Though a Californian, Starr built profitable insurance businesses all over Asia. The AIG way was to invest in infrastructure projects in each country where it operated as an insurer, to demonstrate its value to the local economy. It eventually created insurance markets in many parts of the world and insured against everything from property damage to kidnapping. During the Vietnam War, one of the firms under the corporate umbrella insured shipping on the Mekong River. Another covered a CIA mission to retrieve a sunken Soviet submarine from the floor of the Pacific Ocean: The outfit ready to do the job was owned by Howard Hughes, who wasn't crazy enough to attempt it without insurance. So Mr. Greenberg agreed to provide it.
AIG's custom of being the first to embrace markets and products that other insurers wouldn't touch did have its limits. While searching for business in dictator Idi Amin's Uganda in the 1970s, Mr. Greenberg and his wife attended a rooftop reception hosted by the U.S. ambassador. There they observed senior Ugandan officials and their wives amusing themselves by throwing drinking glasses over the railing and trying to hit passersby on the street below. "The atrocious behavior was a microcosm to the horrors of Amin's Uganda—where AIG did not remain for long," the authors write.
But there were other markets where the company arrived early and thrived for decades, including Hong Kong and the Philippines. The authors argue that, no matter how mundane or exotic the risks, AIG focused on what is known as an underwriting profit. Put simply, insurance companies can make money in two ways. The first is by analyzing risks and pricing their coverage above the cost of the eventual claims from policyholders. The second is by exploiting "the float," the time between the collection of premiums and the payment of claims. By investing premiums wisely during the float, insurers can be profitable even if their underwriting is weak. But for Mr. Greenberg, relying on the float was unacceptable, and AIG managers were judged on whether they could claim a profit from underwriting itself—i.e., on whether they had accurately analyzed risk before selling a policy.
Mr. Greenberg's exacting management style meant that AIG was "not an easy place to work," according to the authors. "Discipline was not a hallmark of the American insurance industry in the 1960s," they write, and Mr. Greenberg "set out to change that." The veteran of World War II and the Korean War encouraged his employees not to imbibe during the day and ordered them not to return to the office if they'd had more than one drink.
Taking over in 1968, Mr. Greenberg launched the company on one of the great winning streaks in corporate history. By 2005, the authors report, the value of the company had increased by 19,000%, and AIG was the world's largest insurance company. The streak ended that year when New York Attorney General Eliot Spitzer accused Mr. Greenberg of fraud—specifically, of having engineered a sham reinsurance transaction to boost AIG's reserves against losses—and bullied the AIG board into firing him with threats of a corporate indictment. Like many of Mr. Spitzer's prosecutions, the case turned out to be less successful in court than in the media. No criminal charges were ever filed against Mr. Greenberg, and much of the civil suit was later dropped.
After Mr. Greenberg's 2005 ouster, the board announced that it was cleaning up its corporate governance and hired Arthur Levitt, former chairman of the Securities and Exchange Commission, to lead the effort. The following year, in March 2006, Mr. Levitt hailed a "remarkable transformation" at AIG and described a list of reformed governance practices (e.g., enhancing the role of outside directors, increased transparency on executive compensation and political contributions). Mr. Levitt said that he was "gratified to have been part of this extraordinary exercise in leadership, responsibility, and respect for the public interest."
It certainly was extraordinary. The Levitt overhaul coincided with the new management's plunge into the mortgage market, which would almost destroy the company. After Mr. Greenberg left, AIG took on mortgage risk in two significant ways. It agreed to insure against the potential default of tens of billions of dollars in mortgage-backed securities, including many that held risky subprime loans. To further juice its profits, AIG also began buying more mortgage-backed securities itself. Compounding the risk, it was making these purchases with cash that it would soon have to return to other parties. The money was collateral that other companies had given AIG, which had traditionally kept the money in safe liquid instruments. But in the post-Greenberg era, AIG wagered the cash on the residential mortgage market. As mortgages declined in value, AIG would have to take losses whenever it returned the collateral.
When the day of reckoning came in 2008 and the failed mortgage bets threatened to sink the firm, the government took control of AIG. Mr. Greenberg argues that it was illegal since the feds never received the approval of shareholders.
Mr. Greenberg had demanded an almost military-style discipline from his employees. But the authors report that his successor, Martin Sullivan, had a different message in his first meeting with senior managers in 2005: "Don't forget to have fun." There wasn't much fun for shareholders after that.
Mr. Freeman is assistant editor of The Wall Street Journal editorial page.
A version of this article appeared February 6, 2013, on page A11 in the U.S. edition of The Wall Street Journal, with the headline: Insurer To the World.