The Badger

American International Group minority shareholder Maurice (Hank) Greenberg, 89, sued the US government in 2011, charging the bargain it drove when it rescued the enormous insurance company he had built from humble beginnings was not only extortionate (the Federal Reserve Board took 80 percent of A.I.G.’s stock) but illicit, to boot.

US Court of Claims Judge Thomas Wheeler, a referee in matters where the government is involved, agreed to hear the case. Last summer the jurist set out  his ambitions this way:

I think by the time we get finished with this case and we have our trial, we’re going to have the full picture on everything that occurred regarding the government’s rescue of A.I.G.  Why did they do it the way they did here?

If only it were as easy as that!

The bench trial finally began last week in Judge Wheeler’s courtroom in Washington, D.C.  The three principal architects of the response to the 2008 panic testified: former Treasury Secretary Henry Paulson, former New York Federal Reserve Bank President Timothy Geithner, and former Federal Reserve Board chairman Ben Bernanke.

The biggest surprise so far:  Bernanke resorted to using the pseudonym Edward Quince in some of his emails in order to preserve the utmost confidentiality in the desperate hours. Bernanke’s testimony ends Monday; the trial is expected to last five more weeks.

However deft is David Boies, Greenberg’s lead attorney, and however wise an opinion Judge Wheeler ultimately writes, the proceedings won’t come close to providing a full picture of why, starting in September 2008, things played out as they did.

To begin, that requires pulling back forty-two months, to February 9, 2005. That was the day that New York Attorney General Eliot Spitzer declared war on Greenberg, who at that point had led A.I.G. as chairman for nearly forty years. By building what had been a relatively simple collection of life and general insurance businesses into a thoroughly diversified international financial colossus, he had become a Wall Street legend.

That morning Greenberg spoke with analysts in a conference call, reporting yearly earnings of $11 billion, despite what he said was a difficult year. In response to a question about the Sarbanes-Oxley Act of a few years before, he employed a tennis term to criticize over-zealous prosecutors “who look at foot faults and turn them into a murder charge.”

That afternoon, after seeing an item on Greenberg’s remarks in the news, Spitzer instructed his staff to issue subpoenas to A.I.G. and Greenberg, demanding documents connected to a case of which Spitzer had been informed, but not yet begun to investigate.

That evening, in a speech to executives at the headquarters of Goldman Sachs, Spitzer mentioned Greenberg, spoke darkly about the possibility of wrongdoing, and said “Hank Greenberg should be very, very careful talking about foot faults.  Too many foot faults and you lose the match.”

All this, and a good deal more, is to be found in The AIG Story, Greenberg’s 2013 book, with Lawrence Cunningham. Part one is a lively account of company-building; part two describes non-stop woe.  In 2005 Spitzer was in the early stages of running for governor of New York, perhaps with hopes of a presidential bid if he won. A few months later, Greenberg was out of a job, dumped by a faction of outside directors he portrays as intimidated by Spitzer and ill served by the attorneys they hired to advise them. Spitzer won election the following year.

In 2008 it was Spitzer who was forced to resign, after the governor was caught on a wiretap during a federal investigation of a prostitution ring.  By then, decapitated A.I.G. had begun a period of drift, and when it wound up in the killing zone of the crisis, its management was essentially clueless.

What happened next is mostly not to be found in the book, or, for that manner, in the court filings.  The Fed, the Treasury Department and the White House desperately sought to understand the linkages of a banking system that had grown far beyond what had been thought to be its bounds.

In the months leading up to its near-collapse, in September 2008, A.I.G. was in the soup, not because of insurance businesses, which were conservatively managed and regulated by state commissions, but because of its Financial Products division, an exceedingly profitable skunk-works headquartered well away from the spotlight in Westport, Conn., and, because it owned a Paris bank, regulated by the Bank of France.

FP specialized in writing insurance against default on complicated mortgage bonds and other asset-backed securities – soon-to-become famous credit default swaps The story of the origins of its “Beautiful Machine” was well-documented by Robert O’Harrow Jr. and Brady Dennis of The Washington Post soon after the panic ended.

But in the midst of the September frenzy, the discovery that the short-term funding problems of this little known and poorly understood subsidiary was on the verge of throwing the global financial system into gridlock was nothing less than astonishing. It formed the background for the loan negotiation. The insurer’s stock-lending business was in trouble, too. A.I.G. wasn’t even a bank!

It was in these circumstances that the Fed nationalized A.I.G., demanding and receiving 80 percent of its common stock in return for an $85 billion loan. The sum eventually rose to $185 billion, which A.I.G. repaid in full, mostly by selling off assets. The Fed made a profit when it sold its shares back to the private market.

From his perspective, the unhorsed Greenberg saw something else – an inept A.I.G. management permitting the government to take advantage of its disarray in order to end the crisis on terms favorable to the banks – a “back-door bailout” achieved by paying off the claims against the company at one hundred cents on the dollar, instead of driving a harder bargain.  In The A.I.G. Story, he concludes

Paulson [a former Goldman Sachs co-chairman then serving as Treasury Secretary], a wise man of Wall Street who heard Spitzer’s speech indicting Greenberg back in February, 2005, surely detected this disarray in September, 2008.  Like dogs sensing weakness, he and the Goldman alumni on his staff may have found it convenient to roll over A.I.G. in order to prop up their old firm. Geithner, who implemented much of the nationalization of A.I.G., may have found it appealing to protect the favored financial institutions he oversaw as president of the New York Fed.  But he did not act alone.

“If I had been in the room I would have said no,” Greenberg wrote in his book.  Who knows what would have happened then?  Certainly the former chairman was  lighting up the message boards of all concerned, with emails, faxes and phone calls that went mostly unreturned.   The irony is that the advice he was giving was probably good. He knew the company far better than its governing board; understood that it was the victim of plummeting prices, not the cause of them; believed that its options book was mostly sound, as, indeed, it apparently turned out to be. Doubtless he would have sought to hold out for a better deal.  But Greenberg wasn’t in the room, and that, it would seem, is that. The world was falling apart. The deal was done. The rest is simply second-guessing.

But there’s a wrinkle – a potentially significant one.  Thomas Baxter, general counsel of the Federal Reserve Bank of New York, the second witness called to the stand by Greenberg’s attorney Boies, testified last week that the Fed was so eager to do the deal, lest A.I.G.’s lawyer, Rodgin Cohen, of Sullivan and Cromwell, who might very well have been returning Greenberg’s calls, were to come back the next day for better terms, that its lawyers didn’t hammer out the details of the governance of the firm under government ownership – a lapse that may yet turn out to be the deciding factor in Greenberg’s suit.

Greenberg’s lawyers think they have discovered that the Fed is forbidden by statute to take stock in return for a loan. That’s why Boies wants the Fed’s “Doomsday book” admitted into evidence – its highly confidential in-house assessments of the extent and limits of its powers, some dating as far back as the 1930s.

Greenberg’s complaint that 12 percent interest the government charged for its loan was too much is preposterous. But in nationalizing the insurance company, the Fed may have overstepped its bounds.  If it turns out that Boies is right, some part of Greenberg’s request for redress may go through (He has asked for $40 billion.)

But even that that won’t produce a “full picture,” or even a clear one, of the circumstances in which the white-knuckles negotiation took place. A proper understanding of the preceding forty-two months may explain Hank Greenberg’s tenacious grip on the Fed. Eliot Spitzer crippled a great American company. But the heart of the matter is the panic itself.

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