Greenberg Sends Mixed Signals On Regs

While warning against imposing additional laws and new federal overseers on an already heavily regulated insurance industry, Maurice Greenberg, AIG's former chief executive, said rating agencies need government supervision, while credit default swaps should be regulated as insurance.

"We blame management, of course, for the excesses that led to our financial crisis, but where were the regulators?" said Mr. Greenberg, currently chair and CEO of C.V. Starr & Company.

Contending that "regulators have the right to come in and examine a holding company," he said that "if they had done their jobs," the economic meltdown set off last year by reckless credit default swaps, based on collateralized debt obligations made up of ill-considered subprime mortgages, might not have occurred or at least been so severe.

AIG was faced with a crippling collateral crisis and accepted federal bailout funds to keep the company afloat last year thanks to trading in credit default swaps.

"I don't recall any regulator coming to look at the [insurance] holding companies, and if they did, it was a very superficial job," he added during a speech last week at St. John University's School of Risk Management.

"Now we're talking about what new regulations and regulators we need," he said. "To me, that's the wrong approach. There are already plenty of regulations on the books. The problem was in their lack of implementation. So don't throw the baby out with the bathwater."

Instead of overreacting during a post-crisis panic by passing a slew of new federal laws and creating additional regulatory bodies, he suggested that "we ought to appoint a blue ribbon panel of some wise people to look at what happened, whether existing regulators did their jobs, and whether we really need more regulations or just better regulators."

However, he was more bullish about imposing new regulations when it came to rating agencies and credit default swaps.

"You have to regulate the rating agencies," according to Mr. Greenberg, citing the fact that high ratings mistakenly granted to certain "toxic" securities helped set off a chain reaction that nearly crashed the economy.

"The conflict is so apparent when you have to pay for a rating," he said. "And you should have to pass a test to be allowed to do this job."

He urged regulators not to ban trading in credit default swaps because "there is definitely a need for this product." However, he added that CDS "ought to be regulated as an insurance policy, with reserves behind it." He said "there should also be a public, transparent exchange, with a standard form imposed so that everyone understands what is being bought and sold."

Mr. Greenberg said the way Washington has responded to the economic crisis has soured him on the prospect of federal regulation for insurance. "For years, I have favored an optional federal charter," he noted. "But given what's happened in this last debacle, I'm not sure we wouldn't be better off with state regulators."

He said that "if you look at the landscape in Washington today, I don't feel like I'm in America, with a federal czar regulating executive pay, and the government contesting bonuses that were contractually guaranteed. I think I'll take my chances with the states."

Mr. Greenberg said "risk management must change" in the insurance industry and across the economy, suggesting that all companies "should have a Risk Management Committee of the board, and not in name only. It should be staffed with competent people who meet frequently because it has to be current, and it has to be able to challenge management on issues of concern."

He noted that AIG, under his leadership, had established enterprise risk management throughout the organization, but did not explain how that system after he left had failed to detect or deter the ill-advised credit default swaps in AIG's Financial Products unit that nearly bankrupted the company and prompted its ongoing federal bailout.

Mr. Greenberg left his AIG posts in 2005 in the midst of an accounting scandal over the use of bogus finite reinsurance deals to artificially bolster the company's balance sheet. The scam resulted in criminal convictions of five people–one from AIG and four from General Reinsurance, including former CEO Ron Ferguson.

Mr. Greenberg was cited as an unindicted co-conspirator in that case. In August, he paid $15 million to the Securities and Exchange Commission to settle a securities violation allegation pertaining to the same situation, and a New York State civil fraud investigation is ongoing.

Mr. Greenberg said he is not sure "whether holding companies will survive" the political fallout from the economic crisis–and if they do, "under what restrictions" they will operate. He wondered whether "we'll see more monoline companies, financed by separate stock."

His old company, AIG, has rebranded its property and casualty carriers as Chartis, and the company has talked about a public offering to raise additional financing.

"If the holding company survives as an entity, what kind of capital and disclosure rules will it face?" he said. "If holding companies do survive, they probably won't be allowed to stray very far from their insurance roots."

He warned against imposing too many restrictions, however, saying that "there is a reason why holding companies came into existence–diversification," adding that such a goal was sound, if properly executed.

On Oct. 9, responding to a National Underwriter query, the New York Insurance Department e-mailed a response, stating that "we agree with most of Mr. Greenberg's major points."

"State regulation of insurance is superior to federal regulation. Credit default swaps should be regulated and backed by reserves. And AIG's holding company was not adequately regulated by the Office of Thrift Supervision," the department said.

"Indeed, OTS admitted in testimony to the U.S. Senate that it was responsible for regulating both the holding company and the unit that sold credit default swaps, and that it failed to carry out those responsibilities adequately," the department added.