Greenberg's Chutzpah

Hank Greenberg didn't like AIG Bailout I, not AIG Bailout II. So he's pushing for AIG Bailout III, which will be even nicer to AIG's shareholders, such as Hank Greenberg.

More needs to be done to save AIG. A new plan needs to be drawn up to allow private capital to replace the government's capital. And the company itself cannot be so burdened with interest payments that it is forced into effective liquidation, making jobs impossible to keep and decreasing the likelihood taxpayers will be repaid.

There is a plan to allow private capital to replace the government's capital. It's called selling off assets, and it's going to take a while. As for "effective liquidation", I don't think that Greenberg or anybody else needs to worry about that, so long as the government owns 80% of the company. Hank should ask one of his German friends what Anstaltslast means.

Greenberg says that he wants the government to "apply the same principles it is applying to Citigroup to create a win-win situation for AIG and its stakeholders" -- but on closer examination, he really doesn't. He writes:

First and foremost, the government should provide a federal guaranty to meet AIG's counterparty collateral requirements, which have consumed the vast majority of the government-provided funding to date.

A federal guaranty would allow a large portion of the previously drawn capital from the federal credit facility to be repaid and redeployed elsewhere in the financial system with no loss to the American taxpayer. This is exactly the type of guaranty that the federal government is providing to Citigroup.

No, it isn't. AIG is being forced to put up collateral; Citigroup isn't. Greenberg seems to think that a federal guaranty will somehow take the place of that collateral. I have no idea whether that's possible, but at the bare minimum it would surely involve AIG regaining its triple-A credit rating -- which in turn would mean the government guaranteeing AIG's debts more generally. Citigroup's guaranty hasn't garnered it a triple-A rating; what makes Greenberg think that the same thing would get such a rating for AIG?

What's more, the guaranty at Citigroup is against further losses, over and above the mark-to-market losses already taken. At AIG, the existing collateral requirements are the equivalent of those mark-to-market losses: They're a function of where the CDS market is trading. Greenberg is asking the government to guarantee not AIG's future losses, but its existing losses -- leaving lots of upside for private shareholders.

I'm not sure why the WSJ decided to print this craven plea, but no one in government should pay any attention -- not that they're likely to. Greenberg was instrumental in setting up AIG Financial Products; he, as much as anybody, is to blame for AIG's enormous losses. And he certainly doesn't deserve a personal bailout, which seems to be what he's asking for here.

Disclosure: No positions.

Comments

[oregonjon:]

Felix, calm down. AIG's Bailout I was nationalization. Bailout II was so the government wouldn't kill AIG so quickly. Greenberg's proposal for Bailout III simply suggests that AIG's original shareholders should get the same deal given Citi's shareholders. And at Citi the government's nominal exposure is even greater than at AIG. If you want to hang Hank by the thumbs, fine, but why should other AIG shareholders suffer the same punishment?

2008 Dec 02 02:47 PM

[Chris B:]

George Bush... Hank Greenberg, pretty soon an ivy league degree will be considered a sign of incompetence.

2008 Dec 02 03:10 PM

[oregonjon:]

Chris B

Hank Greenberg does not have an Ivy League degree. If you meant Hank Paulson, then we might agree.

2008 Dec 02 03:38 PM

[AIGGUY:]

AIG should get the same treatment as Citi. Just because Robert Rubin (Goldman Crony) sits on the board of Citi doesn't mean AIG shareholders should get screwed. Greenberg is right, and he is the lone voice for the shareholders. BTW - who EXACTLY is receiving the collateral from the govt? Why don't you investigate that? What would be your opinion if Goldman was the beneficiary?

2008 Dec 02 04:19 PM

[Tom Armistead:]

I am pleased to have Hank Greenberg as a fellow shareholder in AIG: he says things that make a lot of sense and people listen to him. I saw him make the same pitch for bailout III on TV: he makes a good case.

AIG's problems stem from the collateral requirements on the CDOs they insured, a bizarre episode where everybody agrees actual payments will be easily managed but the collateral called for in order to meet market prices is totally outside the realm of reason.

Bailout II stripped shareholders of 5/6 of the benefit of the expected difference between collateral requirements and actual losses.

The extraordinary negativity of those who have profitted by creating a financial Armegeddon has created a situation where the only guarantee that has any credibility at all belongs to the US Government.

It is time to stop vilifying AIG's management past and present and focus on restoring public confidence in our financial institutions.

2008 Dec 02 04:33 PM

[Konsta:]

the government has been doing things ad hoc, they facilitated the takeover of Bear Stearns, let Lehman fail, wiped out FNM, FRE and AIG shareholders, and now they are seeing that wiping out equity..duh...scares investors, that is private funds being invested in institutions, they could have avoided it by not letting Lehman fail, moral hazard is Obviously a Moot point, but their lack of insight has made all the bail outs much more expensive (than Lehman's market cap, for example). Bernake's defense of the government's decison to let Lehman fail is laughable,

it's all been a joke that would be funny if I didn't have money in stocks

2008 Dec 02 04:39 PM

[Konsta:]

my point is, that's why they changed their approach with Citi

2008 Dec 02 04:40 PM

[dato2020:]

Folks it is what it is. AIG renegotiated a good deal..... considering.

Liddy is a class act. The future. Hank is history. Problem is he is the only guy who does not know it.

AIG, has quality management.....AIGFP aside. They only owe about 35 Billion at this point and can pay it down systematically. Then they will be in a position to renegotiate the equity equation and perhaps pay down the perpetual preferred.

I am glad to see the government and tax payer make a profit on the two SPV's and not some hedge fund creep.

Go AIG!

2008 Dec 03 01:24 AM

[monday1929:]

No, the time to "stop the villification" of financial industry "leaders" will be after they are convicted and jailed. Only the hubris of "management think" allows the promotion of "personal responsibility" when it comes to the poor, petty criminals and low level workers- when the elite fail and steal it is a great opportunity to "learn from our mistakes and focus on the future".
Why should we promote confidence in those who clearly do not deserve it? Time for realism, Bub.


On Dec 02 04:33 PM TomArmistead wrote:

> I am pleased to have Hank Greenberg as a fellow shareholder in AIG:
> he says things that make a lot of sense and people listen to him.
> I saw him make the same pitch for bailout III on TV: he makes a good
> case.
>
> AIG's problems stem from the collateral requirements on the CDOs
> they insured, a bizarre episode where everybody agrees actual payments
> will be easily managed but the collateral called for in order to
> meet market prices is totally outside the realm of reason.
>
> Bailout II stripped shareholders of 5/6 of the benefit of the expected
> difference between collateral requirements and actual losses. <br/>
>
> The extraordinary negativity of those who have profitted by creating
> a financial Armegeddon has created a situation where the only guarantee
> that has any credibility at all belongs to the US Government. <br/>
>
> It is time to stop vilifying AIG's management past and present and
> focus on restoring public confidence in our financial institutions.

2008 Dec 03 08:56 AM

[nym:]

Please refrain from long quotes of previous comments.

2008 Dec 03 09:55 AM

[Tom Turncoat:]

Get rid of the crooks and clean up the corruption at AIG with a good power flush, then maybe you're right.
On Dec 02 04:33 PM TomArmistead wrote:

> I am pleased to have Hank Greenberg as a fellow shareholder in AIG:
> he says things that make a lot of sense and people listen to him.
> I saw him make the same pitch for bailout III on TV: he makes a good
> case.
>
> AIG's problems stem from the collateral requirements on the CDOs
> they insured, a bizarre episode where everybody agrees actual payments
> will be easily managed but the collateral called for in order to
> meet market prices is totally outside the realm of reason.
>
> Bailout II stripped shareholders of 5/6 of the benefit of the expected
> difference between collateral requirements and actual losses.

>
>
> The extraordinary negativity of those who have profitted by creating
> a financial Armegeddon has created a situation where the only guarantee
> that has any credibility at all belongs to the US Government.

>
>
> It is time to stop vilifying AIG's management past and present and
> focus on restoring public confidence in our financial institutions.

2008 Dec 07 01:29 PM

[Tom Turncoat:]

Get rid of the crooks and clean up the corruption at AIG with a good power wash, then maybe you're right.

2008 Dec 07 01:32 PM

[ariel1935:]

AIG was more than 50% less into bad paper until Greenberg was sent packing only 3 years before the "Great Deleveraging". He seems to be tough but generous on employees. AIG would have been better off if he had stayed despite his occasional penchant for living on the edge.

Jan 06 07:50 PM