AIG's meltdown has roots in Greenberg era

NEW YORK Tue Mar 3, 2009 10:06am EST

1 of 2. Hank Greenberg, who was chief executive of Insurer American International Group (AIG) from 1967 until 2005, appears on the Fox News Channel's 'Your Money' in New York, in this September 17, 2008 file photo.

Credit: Reuters/Mike Segar

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NEW YORK (Reuters) - Maurice "Hank" Greenberg's legacy as the man who built AIG into the world's largest insurer was tarnished by a 2005 probe but questions about whether he created a financial monster that subsequently ran amok could cause greater damage to his image.

The former Army captain -- who left AIG in 2005 amid allegations he used off-balance sheet transactions to improperly boost profits -- had previously been revered for his track record of steady profit growth over a 38-year tenure.

In the years since he quit AIG, Greenberg has pursued other business interests, but much of his time has been spent defending his name and railing against a succession of CEOs who replaced him at AIG.

But AIG's posting on Monday of a $61.7 billion quarterly loss, the biggest in corporate history, and the announcement of a third bailout by the U.S. government have prompted his critics to ask whether Greenberg planted the seeds of the financial disaster that already threatens to cost taxpayers $180 billion.

Greenberg's creation more than two decades ago of a financial products unit, which has triggered the bulk of AIG's massive losses, is their main focus.

Credit default swaps, or CDS, held by AIG Financial Products have been the biggest driver of AIG's losses, which have exceeded $100 billion over the past five quarters.

"The bottom line is that Hank Greenberg wandered out of the very safe, well-capitalized world of insurance into the surreal world of credit default swaps where you can create endless amount of risk," said Christopher Whalen, co-founder of Institutional Risk Analytics, which provides analysis and ratings to banks.

Greenberg has sought to distance himself from the losses at AIG, suing his former company for misrepresenting the risk of losses from credit default swaps held by AIG Financial Products. In the suit, which was filed last week but only surfaced on Monday, he claims to have been misled into buying stock at inflated prices. He said he paid more taxes than he should have because of the inflated prices, which caused him to overstate his income.

Greenberg and his lawyer could not be reached for comment.

DAMAGE CONTROL

Greenberg oversaw AIG's growth into a company spanning 130 countries and serving more than 70 million customers.

But in 2005, amid an investigation by then New York Attorney General Eliot Spitzer, Greenberg was forced out by AIG's board. He had refused to cooperate with the company's own probe.

He is still fighting civil charges being pursued by New York state, as well as a string of other lawsuits outstanding between him and AIG.

But detractors say he could face a tough time saving face given the latest loss revelations since the former chieftain was sole architect of AIG Financial Products -- the business that poured itself into the CDS market, and ultimately cost AIG so much.

That business "brought AIG to its knees," said Mark Keenan, an insurance partner with law firm Anderson Kill & Olick.

AIG itself is clear that Greenberg should bear some of the responsibility.

"AIG FP from the way it operated to its compensation were all set up under Greenberg, and AIG was well into it by the time he left," said Nicholas Ashooh, a spokesman for AIG.

Greenberg, a World War II veteran who helped to liberate the Dachau concentration camp, set up the financial products unit in 1987 as he was seeking new business avenues to diversify his growing empire against the highs and lows that are a trademark of global insurance markets.

He hired a group of traders that had worked together at Drexel Burnham. He would later promote Joseph Cassano to lead the unit, which became a sought-after employer since it offered to share a third of all its profits with staff. Cassano is now at the center of U.S. and UK probes into what happened at AIG Financial Products.

A PLAN THAT BACKFIRED

Greenberg's diversification plan paid off handsomely at first. AIG Financial Products contributed $5 billion to the insurer's profits from the time it was formed in 1987 through 2004, Greenberg's last full year as CEO.

But the risks also grew exponentially as the unit, driven by a thirst for greater profits, racked up guarantees on CDS worth a total of about $450 billion. Cassano boasted in 2007 that the company did not expect to realize even $1 in losses on the portfolio.

"AIG jumped into the high-beta world of credit default swaps when there was a low default environment," said Whalen. "But when the market goes bad it all goes bad, and with the kind of exposure that AIG wrote, it is just rancid."

Greenberg, in written testimony to a U.S. congressional hearing last October, argued that risk controls were not maintained at AIG Financial Products after he left, and that he would have done more to hedge the risks and head off losses.

Gerry Pasciucco, a former Morgan Stanley executive who is now winding down the unit, told Reuters last month that everyone with the benefit of "20/20 hindsight" would have reacted differently. The reality is no one did, under Greenberg, or later, he said.

"The overwhelming majority of AIG FP's books were hedged, but some remote risks were not," said Pasciucco.

AIG withdrew from guaranteeing multi-sector asset-backed securities -- the area that has triggered AIG's worst losses -- about 8 months after Greenberg's departure.

To be sure, some experts say neither Greenberg nor AIG could have predicted the extent of the U.S. housing market bust, or the prolonged recession.

"The business of insuring credit is good, and there is a valid market, but it was left unregulated and unsupervised. Credit insurance was the blind area," said David Kotok, chief investment officer at Cumberland Advisors. "We are now paying the price."

(Reporting by Lilla Zuill; Editing by Gary Hill)

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