Financial Markets (2011)

ECON 252 (2011) - Lecture 14 - Guest Speaker Maurice "Hank" Greenberg

Chapter 1. Introduction of Maurice “Hank” Greenberg [00:00:00]

Professor Robert Shiller: I’m very pleased that we have Hank Greenberg here today. We’ve already talked about him and his career. Let me just reiterate it. It’s a most amazing career. It starts when you landed on D-Day, right? On Omaha Beach, amazing. At age 17? 18?

Maurice ”Hank” Greenberg: A little over 18 then.

Professor Robert Shiller: And this goes way back. And then, participated in the liberation of Dachau at the end of World War II. And then, not to be stopped, was involved in the Korean War as well. And then, took over an insurance company, and made it into the most important insurance company in the world. And experienced a number of vicissitudes inherited with that as well.

So, I was asking Mr. Greenberg, if he would talk about what he did, how he made this enormous success. We’re interested in finance here, so do something about how it was financed, but as we’ve been emphasizing in this course, it’s more than just mathematical CAPM modeling, it’s about incentivizing people, about finding people with the right character. And I think that you can tell us about your experiences, and what you’ve learned over so many years.

So I’ll turn it over to you. And then, we’ll stop at around 10, and then, we have time for a few questions from you.

Chapter 2. The Start of a Career in the Insurance Industry [00:01:56]

Maurice ”Hank” Greenberg: That’s fine. Good morning. Let me start, really, picking up where the professor–I enlisted in the Army when I was 17. I hadn’t finished high school. World War II was on. I felt I wanted to do something, and I was bored. So, I was able to fix a birth certificate, so it said I was 18. And they had no problem taking me, because they weren’t looking too closely. I went to Europe, went to England first. I got there in 1943, a year before the invasion. Spent the year training. Left England, went to the continent, obviously, on D-Day.

Then, went all the way through Europe, linked up with the Russians in Linz, Austria. The war was then over. Came back. I had to finish high school, which was a chore. Coming back after being in a war, and going back to high school was one of the toughest times in my life, actually. But I did, went on to college, and law school. Finished law school when Korean War broke out. I was a Reserve officer. I’d gotten commissioned toward the end of the war. Spent the year in Korea, separated as a captain. Came close to staying in the military, because I was fairly young and moved up pretty well in rank, and was offered–tried to incentivize me to stay in the military, but I didn’t. But I’d finished law school, and came back. I was married by then. I just married a girl that I met in college. And had to get a job. I didn’t feel like practicing law. I didn’t think–I had a law degree–I didn’t think I wanted to do that. I came back from Korea, and the next day went down to visit some of my friends who I went to law school with, and it convinced me that I didn’t want to practice law. And as I left their office, I went by an insurance company, Continental Casualty Company. And I thought, I’d see if they had a job opening. And I went in, went up to the personnel director, and he was kind of nasty.

I had just come back from Korea, and I came back, I had orders to fly back, so I was really very untamed at that moment. You know, just only about four days before that, I still had mud on my boots. And so, I went down to the main floor, looked around the directory, and there was a resident vice president by the name of [? Bob Braureid ?]. I just walked into his office and said, you have a–the word I used is not the word I use now–you don’t have a very good personnel director. And I was a little more excited than that, and I wound up getting a job. And I started as a junior underwriter in the insurance business.

So, what is a junior underwriter? You analyze risks and decide whether the company wants to write those risks or not. And I had to get a job, because I said I was married and had responsibilities. And I kind of liked it. I was working in what they call the Special Risk Division, which was different kinds of risks almost everyday. Some were sports risks. Some was accidental deathing for executives. It was a whole range of different risks you had to analyze. I found it interesting. I became the youngest vice president in the history of that company, and moved to Chicago where its head office was.

And about a couple of years later–it’s a whole long story so I won’t take you through–I met Starr, C.V. Starr, who was the founder of the company that I chair today. Starr started his company in China in 1919. Long time. And obviously during World War II, he had to leave, came back to the United States. And he had a series of small insurance companies then. I was intrigued with his business, because it operated outside the United States by and large.

He had one company in the United States called The American Home, which really was a failure. It was not doing well, and he was embarrassed by that fact, that a company that was not doing well that he owned. His other business, he represented American companies in doing business overseas. It was called the AIU, American International Underwriters. It was one of a kind. And it operated mostly in Asia, one or two European countries, but, by and large, its background was really Asian, having started in China, as I said, 1919.

So anyway, I joined Starr and took over The American Home in New York, which I said was not doing well. It was a failure. Now, what was wrong with it? It did business through agents, and depending upon the skill of a company, it would determine the quality of the agents that it had. And while it was an old company, it had a very poor agency organization. And so, the quality of its business was very, very, very poor. So, it was losing money year in and year out. And the job I had was to turn it around.

To cut to that short, I got rid of all the agents, and went toward the corporate brokerage business. Instead of writing small businesses, we began writing large commercial risks. And we needed a lot of reinsurance. I went to London, got Lloyd’s to back that strategy. And up to then, most of the large risks were being written in London at Lloyd’s. Very few American companies had the skills to underwrite large, complicated risk, whether it was large property risk, or casualty, or marine, aviation, very difficult risk.

And we assembled a group of quality underwriters, and we started doing that. We ultimately became the largest brokerage underwriting company in the United States. We were going to run out of capital, we were growing so rapidly and successfully. So, I looked around for a couple of other companies that had the same problems that we had, before we turned it around. I found one called the National Union. We bought that, got rid of all of its agents and agency business, and consolidated that into American Home. Kept its identity, because it was a very old company. It was one of the oldest companies in the United States. And then, subsequently, bought the New Hampshire Insurance Company, did the same thing.

Chapter 3. Creating AIG and Its Basic Principles of Operation [00:10:33]

By now it’s 19–in the mid ’60s. And by 1967, I created AIG, put a holding company on top of these three companies, and AIG was born. In ‘67, I also became the head of C.V. Starr & Co., which was the owner, by and large, of these insurance companies. Starr died in 1968, but he saw the beginning of AIG. It was formed. We also owned a life insurance company, called American Life,that did business outside the United States. And we consolidated that into AIG, so we had both a life and a non-life business. And we were expanding internationally.

We ultimately did business in 130 countries. We opened markets around the world. We introduced new types of insurance. One of the things that made us different was that we continued to evolve new products that the business or individuals needed. For example, we were the first ones to introduce directors and officers liability insurance in the United States. We introduced political risk insurance. American companies doing business in very difficult environments, where their business might be nationalized or confiscated, we insured against those risks. We introduced kidnap ransom insurance. American companies doing business in the not-so-friendly countries, where some of the employees might be kidnapped and held for ransom. We insured against that. And we put together a unit that helped find and get their release. Sometimes on a friendly basis, sometimes not so friendly basis.

So, we were very creative in developing products that American business needed around the world. We began to diversify, because the insurance business, the property casualty business, is a very volatile business. You’re subject to earthquakes. You’re subject to hurricanes. You’re subject to different economic environments. And that affects the outcome of your business. And so, we wanted to diversify not just within the property casualty business, but globally. That’s why we entered so many countries around the world, which gave us diversification. More diversification in your business provides greater stability, and that became one of the things that was very important to us.

We also focused on, what the expense ratio should be. Most insurance companies are running an expense ratio of about 30%. We ran our company with an expense ratio of 19%. And how’d we do that? Being the most efficient, using reinsurance very, very properly. So, we did a much better job in both developing our business and managing the business in a more efficient way than others would do.

And obviously, you have to have an organization. You have to surround yourself with people, who share the same values, the same aspirations that you do. You have to have a team that works hand in glove, and we did. The senior management of AIG was like a band of brothers. We saw things alike. We work well together. I mean, there wasn’t ever a palace revolution, anything like that. It was a great organization.

Chapter 4. The Connection between Foreign Policy and Business [00:14:37]

We added more diversification, because clearly diversification was essential. But in order to do business in many countries, you had to open the market. Markets didn’t welcome you in many countries. Take Japan, for example, it was a very closed market. The Japanese were very reluctant to open their market to foreign insurers, so we had to force the market open. And we did. The U.S. government was very much on our side, and if the Japanese didn’t open their market to us, we worked hard to keep some of their own companies, whether it was insurance or otherwise, or other things, from doing business in the United States. We didn’t hesitate to use the U.S. government to support our desire to open markets around the world.

When there was negotiation on trade, for example–most of the negotiation in the early years was on goods and trade. Things, not financial services. Financial services were not negotiated at the world trade negotiations, the WTO. We brought that into being. I served on the President’s advisory board for trade negotiations. They had never heard of negotiating financial services. And it took us a while to get that done, but we did. We opened the market for financial services to be negotiated. And there are rules then that came into existence, so that you can negotiate trade services.

It wasn’t easy, even when the rules changed, countries dragged their feet. It took a long time to open us in Japan and Korea. China, it took me from 1975, the first time I visited China, to 1992, to get the first life insurance license ever granted to a foreign company. Moreover, while other foreign companies afterwards could only get a license where they could only own 49%, we owned 100%. And to date, still, it’s the only foreign company in China, a life insurance company,that owns 100% of the company. It wasn’t easy. As I say, it took from ‘75 to ‘92. And I visited China every year, a couple of times a year, to make that happen. But we did a lot of things for China. At the same time, we helped China. I lobbied very hard for China’s entry into WTO, which was very important for our country and for China, and really for the world.

So, we were very active, and you had to be in foreign policy matters. It was linked to our business. Since we did business, I said, in ultimately 130 countries, it became essential that we were at the leading edge of what the foreign policy issues were. We did business behind the Iron Curtain, before the Iron Curtain came down, in Hungary, Poland and Romania. Moreover, I went to the Soviet Union in 1964, during the height of the Cold War, and began a reinsurance relationship with them. And that lasted throughout the years, even during the height of the Cold War we had a relationship going on. It wasn’t easy. They thought I was in the CIA, most of the time. It was a difficult thing, but we persisted. And when the Iron Curtain came down, we had a head start against anybody else. Doing business in Romania, and Hungry, and Poland, before the Curtain came down, was not easy, but we built relationships, so then, when it did happen, we had a head start against anybody else.

We operated all through Latin America, the Middle East, parts of Africa. And all of those were a story in themselves, because in each country it was a different environment, and you had to deal with different personalities and governments. It was very difficult.

But we also had some basic principles. We would never, never be involved in a bribe. Anybody in our company that got involved in anything like that would be fired instantly. We understood what the Foreign Corrupt Practices Act meant, before they even had such a Corrupt Foreign Practices Act. So, we had a reputation that you didn’t tamper with us that way. And they knew also that we wouldn’t hesitate to retaliate through our government if necessary, if they tried to keep us out of their country. So, we were tough on that basis. We wanted to open markets, and we did.

Chapter 5. AIG’s Growth and the Expansion into Financial Services [00:20:09]

You go back, what kind of a structure did we have? And how do you bring a group of people together that can work so harmoniously and enthusiastically together. It’s critical. And to run a business like that, you have to have an organization that, really, everybody’s on the same track, and everybody is enthusiastic about what they’re doing.

Our overseas people, we had what we called an MOP, Mobile Overseas Personnel. It was like our own state department. You can be working in Nigeria today as a manager, and then six months later you might be in Singapore, or some other country. And so, you have to be mobile, and you have to be prepared to move, and not be reluctant because of one thing or another. And becoming an MOP was a very high honor. Everybody couldn’t get that designation. You had to earn it. And it was a great group of people.

But how do you motivate people to do that? How do you get an organization that could be so effective? AIG at its pinnacle, when I left in 2005, was the, by far, largest and most profitable insurance company in history. I mean, think about that. From a dead stop. Now, we had a compensation structure that was unique to the industry. I mentioned it briefly to the professor. C.V. Starr & Co., we considered to be the ultimate company in the group. It spawned AIG, and so, within the organization, it was viewed as the top company in the group. And since we spawned AIG, and put assets into AIG in exchange for AIG stock, so that C.V. Starr and Starr International, the two companies, owned in the beginning, 100% of AIG.

As we grew, and we needed more capital, because we were growing so rapidly, we had to raise capital, and therefore we got somewhat diluted. But even at the end, we controlled about 15% of AIG. The market cap was close to $200 billion dollars from a dead stop of 300 million, when we first went public. From 300 million to $200 billion, one of the largest companies in the world. So, we weren’t afraid of anybody taking us over. Nobody was big enough to even attempt that.

But what we did, we had several principles. Nobody could earn more than $1 million in salary. I put that rule in. Two, nobody would have a contract. You stayed in AIG because you loved it, and you didn’t have to have a contract. And I refused a contract any number of times. But you got bonuses based on performance, and performance was fairly rigid. We tried to grow our business close to 15% a year, and for many, many years we achieved that growth. The private companies that owned AIG stock were not owned by AIG, but by the private companies.

We set up a structure, where the private companies would allocate some AIG shares to individuals based on performance. At the end of every two years, if we hit the goals that we had established, they’d have a certain number of AIG shares set aside for them that they would get at retirement. So, it was golden handcuffs. If you left the company, you left behind the shares that were set-aside for you. And these were worth an awful lot of money. Very few people left the company. I can assure you that it was a great incentive to stay. The people we wanted to stay are the ones that got allocated shares obviously. It cost AIG nothing. The public shareholders of AIG had no cost allocated to that, so the shareholders of AIG benefited from that, and, obviously, the company overall benefited because they did so well. So, it was a great organization.

So what happened? In 2000–in the meantime, we had further diversified. Our life insurance business grew dramatically. We bought a company called SunAmerica, American General Life, and so we became a very major life and non-life company.

And then we wanted to expand into financial services, which we did. We had consumer finance. We had a thrift. All of which was done, because we could benefit from all the policyholders that we had, that we cross-market from one to the other. And so, it was natural for us to do that. And we had close to $1 trillion of assets to be invested, obviously. And so, we had the funds and the capital that we needed to finance these new startups. And that was going quite well.

One day I had a call from Senator Ribicoff, who was a Connecticut senator at the time. And he wanted me to meet a young fellow, who was running a financial services business. He had been with Drexel originally. And he came–he was a very bright guy–he came to us. And we started something called AIG Financial Products. It was a very successful company. Did derivative business. Everything was hedged. It was a very successful operation. He got a little greedy at one point, and we separated. He left. We wanted him to leave. And we put somebody else in, who was a very, very good man. Most of these people were all Ph.D.’s in math. They were a special breed. They were different, and in order to ensure that we knew what they were doing, we had a mirror of all the computer systems that they used for some of the things that they were doing. We got one off-site that mirrored every transaction that was being undertaken.

We also had in the company what they call an enterprise risk management system, which means we monitored both market risk and credit risk throughout our organization, because insurance is a risk business to begin with, and you have to monitor risk. So, that was part of our nature. We understood risk. And knew how to balance it and how to manage it in the insurance business and the financial business as well. After all, we had to invest $1 trillion of assets every year and growing, so clearly we had to know what we were doing. And I said it was a very successful company.

Chapter 6. Eliot Spitzer and Greenberg’s Parting from AIG [00:28:30]

In 2000 and–I guess it was 2004, the end of 2004, we were reporting our earnings on a conference call with analysts, and one of the analysts asked me, what the regulatory environment was like today. And I said, it’s like a foot fault is like a murder charge, because things had changed dramatically after Enron in the United States. The regulatory system became very, very difficult, and anything at all really was being exaggerated beyond what you can just believe.

The next day we got a subpoena from Eliot Spitzer, who then was the Attorney General in New York. And I should say a word about this, because there was a major change in the regulatory environment after Enron, and in some states, in New York particularly, the Attorney General’s office has been used as a platform to run for governor. It became a politicized office. And Spitzer had gone after me. He went after my son, Jeff, who was running Marsh & Mclennan, the largest insurance brokerage firm in the United States. He went after Sandy Weill, who was running Citigroup. He went after Merrill Lynch, all to promote himself as an attorney general who was helping the people, quote, unquote.

He destroyed several hundred billion dollars of value, is what he did. He got elected governor, and you know the outcome of that. It was a very short tenure. He got caught with prostitutes and had to resign. But he left behind a lot of broken companies. I was forced to leave, because he threatened the board of directors of AIG, that, if I didn’t leave the company, he was going to indict the company. He went on national TV, and accused me of accounting fraud in the company. Just before Thanksgiving, he dropped all those charges, because nobody reads the newspapers the night before Thanksgiving. He was a bad actor.

So, I left the company in 2005. The outcome was that–the plan actually had been that I would step down as CEO in May of that year at the annual meeting, and remain as chairman, and see how the successor team would work. At that point, we had 92,000 employees, not a small company. To make sure that the new management team would be able to handle the diverse businesses that we were in. These were all experienced people. There was nobody new in that role. I believe that we wanted it to have the new team come from within the company, not from outside. Because they had to understand what we were.

Chapter 7. AIG Shortly before and during the Financial Crisis [00:32:31]

And we had a culture in the organization that was quite unique, and you can’t just change the culture of a company instantly. You build a culture over many, many years. In any event, I was out. A new chap came in, Martin Sullivan, who had been a senior man in the organization for years. He attended every senior staff meeting that we had for years. We had several different–I won’t go through all of that–but several senior management meetings that were critical to knowing, what was going on throughout the organization on a real-time basis. We’d meet every Monday morning. About 15 people represented the entire organization. They’d be reporting on everything that was happening on a real-time basis. We did the second meeting, held on a Wednesday every morning,that dealt with hedging full-time, and risk management. And those two subjects were on a real-time basis weekly. And, of course, there were people working on that on a daily basis. But anything that was out of the ordinary would be surfaced at these meetings.

For some reason or other, he discontinued those meetings. I can’t understand why, but he did. And what’s very disturbing is that the audit committee of AIG’s board knew that and did nothing about it. The outcome of that was then, that AIG Financial Products loaded up on credit default swaps. They did more credit default swaps in the nine months after I left the company than we had done in seven years.

Now, let me say something about credit default swaps, because I think it is important. A credit default swap originally was created, so that, if a security–in this case CDOs [Collaterized Debt Obligations], which was really a product that was mostly real estate put together, and packaged and sold as a CDO–originally, those instruments had to have a default before a CDS, a credit default swap, would respond to that instrument that defaulted. Someplace along the line, that was changed, so that you didn’t have to–the instrument didn’t have to default, it simply had to lose value. And you had to put up collateral, the one who issued the credit default swap had to put up collateral equal to what the loss of value–even though it wasn’t realized, on what the CDO had lost in value.

That change played a major role in what happened in the recession that we’ve just been going through, particularly on Wall Street. Putting up more collateral meant you had to have a lot of cash on hand. No matter how big you were, it became a very important issue, as to the ultimate demise of several companies, including the problems that AIG ran into. They were called on for billions and billions of dollars of collateral, which ultimately–I don’t care how big you are, you run out of cash, which they did.

One of the problems was in trying to determine what is the value of a CDO, since there was no price discovery, because there was no exchange in what you traded the CDOs on. That was, strangely enough, during the Clinton administration, the Treasury Department, then run by Bob Rubin, turned down the question of having an exchange and regulating credit default swaps. So, you had a situation where every broker dealer had a different price for a CDO. And how much collateral did you really need to put up, if you couldn’t tell what the price of one was. In this instance, Goldman Sachs had the lowest price of any CDOs that were being called on for collateral. And since AIG Financial Products did a great deal of business with Goldman Sachs, they were being called on for more and more collateral. They ran out of cash.

Now, the insurance companies were all very, very solvent. It’s state-regulated. You can’t just take their capital for something else. They were protected, all the policyholders were protected, under the fact that there was state law and not federal law that governed the insurance companies. But AIG ran into difficulties. I was not in the company. I would have handled it much differently had I been there. I would not have responded to the call for collateral, when you couldn’t tell what the price discovery really was. I would have said, you know–

And one other thing, AIG was a AAA rated company when I was there. The day I left the company, it lost its AAA rating. So, if you were AAA rated, you did not have to post collateral. If you were not AAA rated, you had to post collateral. So, AIG ran out of cash. So, they turned to the Fed for help.

You got to remember, this was now in a time, when Bear Stearns first got in trouble. And they found a buyer in J.P. Morgan, which really, J.P. Morgan got Bear Stearns for nothing, practically. It was six months in between Bear Stearns and Lehman Brothers. What did they do during that six months, the government that is, to prepare for any kind of financial upheaval? There was no plan to deal with what was about to descend in the financial markets in the United States.

So, Lehman Brothers, who could have been saved by the Fed, was let to go down. And that caused a run on virtually all the banks. The loss of confidence that ensued, when Lehman Brothers was let go into bankruptcy, startled the financial world. And everybody that had any money in any of the investment banks, or banks, was pulling money out. And so, there was a–you couldn’t borrow any money. The markets froze. And so, there was an ad hoc approach to doing things.

So, Goldman Sachs and Morgan Stanley, both of which were going to have a problem, were given a bank holding company license. That gave them access to the Fed window, and they could borrow money at virtually no costs at all, practically. The Hartford Insurance Company, here in Hartford, a medium-sized company, was also given a bank holding company license. And AIG was denied one. So, AIG was left to really find a solution. So, they went to the Fed, the New York Fed, which I had chaired, incidentally, for about seven years before. So, I knew the people in the Fed quite well.

They borrowed $85 billion from the New York Fed at 14.5% interest. And the Fed took 79.9% of the equity of the company. So, they essentially nationalized the company. Now, the money that AIG got, the $85 billion, at these terms, which is outrageous, they then had to pay the CDOs that you couldn’t tell what the real price was, because there was no price discovery. You could have negotiated the value of those at about 40 to 60 cents on the dollar, but the Fed made them pay 100 cents on the dollar.

So, AIG borrowed the money, paid Goldman Sachs and others 100 cents on the dollar, and had to pay that money back to the Fed. So, things began to unravel very quickly after that. They obviously lost credibility in the marketplace. They were losing business left and right. They had to pay back the government. So, one thing led to another.

The Treasury put in a man by the name of Ed Liddy to run the company. He’d be on nobody’s list to succeed running AIG. He hadn’t got a clue how to do that. And they began to sell off assets of AIG, really at prices that were just outrageous. So, the outcome is, that AIG is a shadow of what it had been. The government now owns 92% of AIG. They want to sell that 92%. It’ll take at least, in my view, three to four years, because it’s an overhang. If they sell 10%, everybody knows there’s another 80% to be sold, and so the stock will go no place. So, do I feel bitter about it? Yes I do. I feel very bitter about it.

So, what am I doing? I’m running C.V. Starr & Co., Starr International. We’re building it back into a major organization. When I left AIG, C.V. Starr & Co. had 300 people. We’re about 1000 right now, so we’re adding employment to the country. And that’s coming along. We’ve formed three new insurance companies. We’re doing business in probably about 30 countries right now. We have a big Lloyd’s operation. We operate throughout the European market. I’m going to China next week. We’ll have a joint venture in China by the end of April. We’ll be in Southeast Asian countries, all of which we know for years and years. And we have a big investment operation.

I’m giving you a shorthand version of what really is happening. How much time do I got?

Professor Robert Shiller: Nine or ten minutes.

Chapter 8. Assessment of the Causes of the Financial Crisis [00:44:45]

Maurice ”Hank” Greenberg: All right. So, I think there’s a lot to think about. Why did we get into this trouble in the country? What’s this about? How could a country as wise as we are, and financially literate as we are, do what we did? And I have my own thoughts about that, but let me just rattle some of the reasons off their thing. There was a desire in this country, during the Clinton Administration, that housing should be an opportunity for everybody. Everybody should have the right to own a home. There wasn’t much differentiation, whether you can afford one or not.

Historically, in our country, mortgages were granted by local banks, who knew the individual, and would work with that individual, if they got into any trouble. When the Clinton administration decided to expand housing, Fannie Mae and Freddie Mac were buying mortgages from these local banks. And local banks only serviced the mortgage, but they really didn’t have any financial involvement after the mortgage was sold. And clearly many people got mortgages in homes that couldn’t afford it. So, that was one thing, that was going to lead up to, ultimately, a problem.

Second, investment banks in the United States were leveraging their capital 30 and 40 times. It was outrageous. Going from, say, five and six times, or seven times your capital to 40 and 50 and 30 times your capital, was obviously a risk that shouldn’t have been taken. The SEC [addition: Securities and Exchange Commission] just ignored that fact. Why? It’s hard to understand. But it was clear that it was setting in motion some conditions that would be very difficult to live with on a real-time basis. And, of course, it was going to cause problems.

Then, some of these investment banks said, look, our job is to be creative and create products. So, they took some of these mortgages that were being now written for people, who didn’t have, really, the right to own a home. They just didn’t have the financial needs. They didn’t have the financial background for it. And they packaged these mortgages into a product. They took mortgages, they said, from the east to the west to the south, and the northeast, put them all together. They said, the diversification is terrific, and that means, it’ll be marked AAA.

They went to the rating agencies, and sold the rating agencies, Moody’s and the rest, that this diversification–they deserve a AAA rating. And the rating agencies accommodated them, didn’t do very much analysis of their own, and they were marked AAA. And they sold these mortgages then, these products, these CDOs, to every client and customer they could find all around the world. And, of course, they weren’t AAA.

And then, as I said earlier, these credit default swaps, that would respond to a normally a default, had been changed, so that you responded to just a reduction in value. It blew up in everybody’s face. The same time they were doing all of this, the Accounting Principles Board [Addition: now called the Financial Accounting Standards Board], located here in Connecticut, came out with mark-to-market accounting. Couldn’t have picked a worse time to do that. And that marked balance sheets, that you normally would carry, say, at cost, or held to maturity, where you keep the value–you had to mark it down to a market value. And that destroyed capital artificially in many instances. That never should have happened.

The SEC, who oversees that, kept silent. So, you had all of these things come together, at the same time, that led to the destruction that took place. There are other things that happened. I could go through a list of them, but I don’t think the real story, on what truly occurred in our country, has been fully recognized yet. Jelling will take a while. There have been a lot of books written, but jelling on parts of it, not the entire issue. I testified before a couple of congressional committees on this, particularly on the AIG issue. For example, by what right did the government have to take, essentially, 92% of AIG? To me, it was an unlawful taking.

What should have been done, and if you look at the other companies that they aided–they aided Citigroup and they got about 30% of the equity. That’s different than 92%. And they aided several other companies the same way. So, why was AIG set aside and used the way it was? AIG was a national asset. We have no insurance company that operates globally in 130 countries. When I tell you it was a national asset, I know what I’m talking about, because we did many things that were beneficial to our country and our government. It was totally destroyed. They saved Goldman–AIG was used to save many, including Goldman Sachs. But that story will come out. It’s been alleged already in the newspapers, and in articles, and magazines, and you have it.

But anyway, I think I’ll stop right here and take questions.

[SIDE CONVERSATION]

Chapter 9. Questions & Answers [00:52:16]

Student: So, when you were talking about the culture of your organization, you mentioned that you do not prefer having contracts with your employees. And I’m wondering what that means not to have contracts, and why do you do it?

Maurice ”Hank” Greenberg: I didn’t quite understand.

Professor Robert Shiller: About your contracts.

Maurice ”Hank” Greenberg: Yeah. I didn’t think that you ought to hold and have a contract, that you stay if you weren’t doing the job. But you have to start someplace and it started with me. I refused a contract. I thought that, if I wasn’t doing the job, I shouldn’t be forced to stay in the company. They should have the right to have a new CEO, so I turned it down.

Professor Robert Shiller: Is that because the contract couldn’t be explicit?

Maurice ”Hank” Greenberg: Well, no. Say, that, if you have a five-year contract, at the end of three years, if the company’s not doing well, why should the company be forced to keep you for two more years? If you don’t ask me a question, I’ll ask you some questions.

Student: I guess, this is more of a personal question. I was wondering what–so, we’re all in school, and we don’t have jobs yet. And so, in thinking about careers, it’s an important decision, so, I wondering what made you really enjoy your job. Was it the success you had? Was it the day-to-day activities? Was it the impact you made on being part of AIG?

Maurice ”Hank” Greenberg: Well, I think it’s many things. You have to love what you do, to begin with. And I love building. And I loved working with the group of people that we had. It was a very close group. And it’s a lot of fun opening new markets, and beating our competitors. It was a very satisfying experience. And you have to love it. The other thing I would say, you need a lot of energy. You have to want–you know, work should not be viewed as, say, from nine to five. You work as long as you have to because you love doing it.

Student: It also kind of reminds me of Bear Stearns, and another very experienced chairman, Ace Greenberg, kind of warning his board–

Maurice ”Hank” Greenberg: I’m not hearing you.

Student: This is on? Like, AIG, the story of AIG really reminds me of Bear Stearns’ fall. And of a really experienced board member pointing out that what the company was doing wasn’t great. So, can you talk to, I guess, the idea of having experience in this field, and the fact that companies were kind of–boards weren’t working, was also a core problem of the financial crisis. So, can you tell me a little bit more about that and how you felt afterwards?

Maurice ”Hank” Greenberg: I didn’t quite hear that. Did you hear?

Professor Robert Shiller: Boards were not working properly.

Maurice ”Hank” Greenberg: Boards were not working properly is absolutely right. There was a lead director in the company–if you go back through the history of AIG, we had some outstanding people on the board. Over a period of time, some retire, some die. But we had a pretty good board. Carla Hills, for example, was on the board, and she was an outstanding director. She had been in the cabinet of George Bush, the first. She was a terrific director. Bill Cohen, who had been secretary of defense, was a director. Dick Holbrooke, recently died, was a director. So, we have had some good directors.

On the other hand, when Spitzer threatened the company, many of them just folded. Not Carla Hills and not Bill Cohen, but many others. And you don’t know, how people are going to respond until they’re confronted with an issue. But there’s no question that the board failed, in my judgment, to recognize what was happening after I left.

Student: So, China has recently been experiencing rapid growth. How do you think their growth, the change toward a consumption model, will change the insurance industry in China?

Professor Robert Shiller: China, you’re saying, has been growing rapidly.

Maurice ”Hank” Greenberg: What is?

Student: How will that change the insurance industry in China?

Professor Robert Shiller: The insurance industry in China, how is it changing with their rapid growth?

Maurice ”Hank” Greenberg: It’s changed dramatically. The largest insurance company in the world today, by market value, is China Life. Amazing growth in China, and you expect it. China has passed the United States in the number of automobiles being sold a year. They all have to be insured. So, the growth in the insurance industry in China is very rapid. Very immature in many ways in understanding risk, but that’ll change. They’ve come a long ways.

When I first went to China, and we entered our life company, the life insurance industry in China was very small. And they didn’t have agents selling life insurance. They had their employees selling life insurance. So, if an employee sold something, he would get paid, and he’d get paid whether he sold or not. So, they had a fixed expense. We introduced an agency system in China, and recruited thousands of agents. And they got commissions, if they sold something. If they didn’t sell, they didn’t get a commission. The Chinese companies quickly adapted to our system. So, you can say that we created millions and millions of jobs in China.

Student: Thank you. I’m just wondering what you do you think of Chartis and SunAmerica, currently sub-businesses, and how you would evaluate Robert Benmosche as the current CEO.

Maurice ”Hank” Greenberg: Look, I’ve known Bob Benmosche for 15, 20 years, and he’s a decent man. He’s a good man. And he’s, I think, a pretty good leader. He has very little experience internationally, and his experience has been in the life insurance sector, not in the non-life sector. One of the largest components of AIG is the non-life sector, so he’s got a hard job in front of him. Also, the most valuable assets have been sold. The AIA, which is the company that’s entered in China, that AIG owns 100% of, they sold that, which I wouldn’t have done. And they sold American Life to Metropolitan Life. That company does business in 55 countries around the world. You can’t replicate that. I wouldn’t have sold that.

So, AIG is a shadow of what it was before. Benmosche’s got a tough job. He doesn’t know the non-life business very well. And the culture of the company is gone. Most of the people who worked there, who were some of the better people, have left. Many have come to me, are working in C.V. Starr & Co., and in our agencies and our insurance companies. It’s going to be a tough job, but he’s a good man. I like him.

Student: Good morning. During your speech, you get to the destructive power of credit default swaps. And what I find interesting is, different countries have taken a very different approach. Some European countries have absolutely banned credit default swaps. China, most notably, introduced them in the market recently, but put a cap on the value with the underlying amount. So my question really is, what sort of regulation do you think would work well, both at a national level and, possibly, the international level?

Maurice ”Hank” Greenberg: That’s a good question. I would do at least two things. First, I would go back to where a credit default swap would only respond if the underlying instrument, that it is supposedly insuring, defaults. In other words, I would not respond to just a reduction in value, because if you look at all those CDOs, that the credit default swaps were covering, most of those have recovered in value. OK, so that there was a temporary reduction in value, but they didn’t default. And so, what it led to was unnecessary chaos in the market.

The second thing, I would have is an exchange, where you get price discovery. Without price discovery, you’re back where you were, and so you have to have that. And you’d have to put up reserves. If I was going to issue credit default swaps, you ought to reserve it. If it’s going to be an insurance instrument, treat it like an insurance instrument. And make the underlying company, who’s issuing them, put up reserves.

Student: It can be a bit intimidating sometimes to hear, or learn, or read about the insurance industry because of the regulation, and the billions and billions of dollars that are always involved, et cetera, as a student. But I’m wondering, in addition to what you’re doing yourself now, with C.V. Starr, what opportunities do you see for entrepreneurship in the insurance industry today, if any.

Maurice ”Hank” Greenberg: Well, I think there’s tremendous opportunity for being an entrepreneur. You know, you’re living in a changing world, changing economies, new products are being invented and developed every day. And investments are going on in different parts of the world. All of that needs insurance. And so, there’s great opportunity to be creative in the insurance industry, and differentiate yourself from everybody else. I’m about to do a joint venture insurance company in China. The one we’re doing a joint venture with, a very traditional company. We will change that in less than a year into something different. And that’s exciting to do that. So, I’m looking forward to it.

Student: Hi. Do you think that–I mean, with the recent financial crisis, we’ve seen a lot of government intervention and interaction through the private world. And I was wondering, do you think that the government should have any role, other than just keeping things fair? Do you think they should intervene, when these companies are having big issues, like what happened to AIG?

Maurice ”Hank” Greenberg: Do I think government should intervene? I think that–the least amount that’s necessary. I think, if you’re asking the question of ”too big to fail”, I think there are some institutions, that probably would cause chaos if they failed. But I would make that very, very few and far between. What troubles me is, what happened in this recession in government intervention. They picked and chose who they wanted to save and who they didn’t. It wasn’t even-handed. It was done with the intent to save some and not others.

The real story of what happened has not been printed yet. After all, it’s very common knowledge that Paulson, who was then Treasury Secretary, was surrounded by Goldman Sachs people. I’m not making that up. That happens to be a fact. And so, how objective were they in what they were deciding to do and not to? I think that there are times government has to intervene, but I happen to believe in the private sector, in the ability of Americans to create jobs and businesses. And government should be small. Government created jobs and not the best jobs. Private sector jobs are the best jobs, in my judgment.

Student: Thank you. What role do you think that banks should play in the future to avoid a similar crisis? And do you think that there needs to be a different sense of what risk is?

Maurice ”Hank” Greenberg: What was the last part?

Student: What kind of role should banks play in the future? And do you think that there needs to be a different definition of what risk is?

Maurice ”Hank” Greenberg: Of what risk is?

Student: Risk.

Maurice ”Hank” Greenberg: Yeah, OK. When you say banks, you have to differentiate between commercial banks and investment banks. Look, I think that the Dodd-Frank bill, that has been passed, comes up with a whole new set of regulations. Let me touch on that in a minute. And will banks use their own capital to do transactions that puts the whole institution at risk? Probably will not be the way it was. I think the Volcker Rule, which would limit the amount of individual transactions that might endanger the bank, are going to be limited. It’d have to use an off-balance sheet approach, so that that doesn’t pollute the rest of the bank. Investment banks, for example, that may have done transactions, that bet against their own clients, I think should be outlawed. If an investment bank is selling me, say, invest in the XYZ CDOs, and then they take a position against that, it seems to me that that’s immoral. And should not be permitted.

Now, the Dodd-Frank bill was enacted, before they even had any of the response of all the investigations that were going on. It seems to me, they should have waited and heard what the investigators had come up with, before they passed a new law. Now, the Congress has to provide for the financing of all these new regulators that are going to be created under the Dodd-Frank bill. And I’m not sure that’s going to happen. I’m not so sure that all of them are necessary. What we need are better regulators, not more regulation. We had plenty of regulation. If they had enforced the regulations that were in existence, we would have avoided a great deal, if not all, of what took place.

Student: Hi. You mentioned earlier about how AIG attracted and retained the best people in the business, and that’s how they grew, because of the strong culture there. But if you’re starting a new company, or even entering in a management position at a current company, how do you go about building that type of culture that just fosters growth?

Professor Robert Shiller: How do you build the culture that you have talked about?

Maurice ”Hank” Greenberg: The culture starts at the top, OK? It’s got to start with the individual running the company. The same thing, as I say, in risk management. The CEO is the top risk manager in the company. You have other people involved, but you’re the risk manager. You decide, how much risk you really want to take. And the same thing is true in culture. You build a culture based upon your performance, what you stand for, what you believe in, and you surround yourself with people who share those beliefs. If they don’t, they’ll feel out of step.

Professor Robert Shiller: All right. Thank you very much.

[APPLAUSE]

Professor Robert Shiller: That was great.

Maurice ”Hank” Greenberg: Do you want to get rid of all this stuff? Do we get rid of all these now?

Professor Robert Shiller: Yes, why don’t we just put them up here?

[end of transcript]

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