Enough has been written about last year’s collapse of insurance giant AIG after it had to make good all the insurance it sold against corporate bond defaults and the fact that the US government bailout happened to help Goldman Sachs, the firm that US Treasury Secretary Hank Paulson once ran. Much less, however, is known about the company’s origins (it was the first reverse MNC, with its headquarters in China), of how it had such tremendous clout it could even threaten governments with US sanctions, or of how in the second World War it allowed US intelligence agency officials to masquerade as journalists of one of the newspapers it owned and collect information against the Japanese.
This wealth of information, and a lot more (did you know it was best to approach the mercurial Hank Greenberg with bad news after 5, when he’d had an hour with his masseur?) is what you get in Fallen Giant by an ex-AIG insider along with a former editor of Fortune. While Greenberg, AIG’s longest-serving CEO and the man who succeeded its founder Cornelius Vander Starr, spent 37 years and a fortune cultivating top American corporate chiefs and government officials, ironically, when he was being investigated by New York Attorney General Eliot Spitzer, it didn’t take the same group too long to turn Greenberg in — indeed, AIG got into a dispute with Greenberg over who actually owned certain pieces of art worth $15 mn! He was forced to step down from the same foundations he generously donated to — the Starr Foundation had donated $35 mn to the American Museum of Natural History but this wasn’t enough to save Greenberg. The other boards he quit included the Asia Society. While Greenberg didn’t quit the seat at the Council on Foreign Relations, the council quickly amended his cv on its website and described him as the “retired” chairman and CEO of AIG. It also removed his flattering portrait from its gallery of current and past leaders at its headquarters!
Greenberg, of course, wasn’t quite the hapless victim since, thanks to the way AIG’s holding structure had been designed by Starr, he remained chairman of both Starr International (Sico) and CV Starr — Sico is AIG’s largest shareholder and CV Starr is a group of insurance agencies that places a lot of business with AIG! The AIG-CV Starr/Sico battle is too complicated to explain in this review, but while salaries in AIG were low, star performers got shares in Sico — so, when the battle began, one of the issues was that Sico had kept 311 million shares that actually belonged to AIG’s star performing employees, the ones who met Greenburg’s demands of a 15 per cent growth in revenues and profit each year, and a 15 per cent return on equity year in and year out. Sort of tells you AIG’s regulatory battles with Spitzer, and later with the federal authorities, were only the half of it. And you thought insurance was dull and boring, meant only for people who didn’t have the personality to become accountants!
Indeed, the book was first conceived by the author when, in 2005, Greenberg was forced out of AIG when he was caught cooking his books. By September 13-14, 2008, however, the story had moved far beyond Greenberg’s exit and was focused on how AIG would be forced to declare bankruptcy.
AIG, from the time the 27-year-old Starr set it up in Shanghai with the $1,000 of capital he had — after selling the first ice cream store and soda fountain the small town of Fort Bragg had ever seen — was always a company that took big risks. Much of this, of course, came from Starr’s immense confidence, confidence that allowed him, barely two years into the business, to journey half way around the world to New York to convince insurers who didn’t know him that he could represent them in a market they knew even less about. When British insurance firms wouldn’t sell life insurance to the Chinese, Starr figured out better health facilities would increase their longevity and make it a great business; Greenberg began selling directors and officers liability insurance — everyone needs it but how many claim it? — and even sold ransom insurance for First World executives posted to Third World countries (again, the same reason was given).
If this was the good side, there was enough of the seamy side as well that got Greenberg into trouble — the rigging of bids for insurance deals, setting up special purpose vehicles to allow clients to clean up their balance sheets by moving assets to off-balance sheet entities and, finally, even getting Warren Buffet’s GenRe to buy reinsurance from AIG in order to show increased reserves. And there was the raw use of power. Greenberg’s contacts in the US government ensured China’s entry into the WTO was backed by the US, but when China was about to be admitted, Greenberg wrote a letter to Chinese Premier Zhu Rongi, asking for Chinese insurance markets to be opened. Zhu sent a representative to negotiate with Greenberg to allow AIG to keep running its Chinese subsidiaries, and only after that was China admitted to the WTO. A Bill allowing New York-registered banks and insurance companies to invest in risky Mexican bonds was kept in abeyance till Mexico allowed AIG to own a majority share in its insurance business in that country — AIG was the only firm this concession was given to!
Ron Shelp with Al Ehrbar; Wiley;
279 pages; $16.95