Greenberg Says Feds Should Renegotiate AIG Bailout Deal

New York

The only way taxpayers are going to get repaid for their bailout of American International Group is for Washington to radically renegotiate the terms of the deal and seek recovery from those counterparties compensated in full with federal funds, AIG's former chief executive, Maurice Greenberg, contends.

"If you want to see taxpayers get back the bulk of their $85 billion, you should determine whether the counterparties [to AIG's credit default swaps] shouldn't be partly responsible, after they received 100 cents on the dollar when their securities were only worth 40-to-50 cents on the dollar," Mr. Greenberg said in a speech last week before a packed house of luncheon attendees at The Union League Club.

In addition, AIG should no longer be rushed by Washington into "selling off its assets at garage-sale prices," he said, adding that "by forcing the company to dump its crown jewel properties at such depressed values," the firm's ability to remain viable and fully repay its government loans is being jeopardized.

He also said the government might want to rethink its 79.9 percent ownership stake in AIG, which "means it can't raise capital in the private markets. Who wants to pour money into a company that's government-owned?"

These and other key components of the bailout deal will have to be renegotiated if AIG is to have a chance at repaying taxpayers, he emphasized.

This entire "debacle" could have been avoided, according to Mr. Greenberg, had the federal government "simply guaranteed" the ability of AIG to pay off its counterparties, effectively restoring the Triple-A rating it had lost in the credit-default swap market.

He also questioned not just the wisdom, but the integrity of the bailout decision-making process, given the fact that counterparties were never asked to take a reduced value for their investments in return for government help in the first place.

"This whole thing smells from the high heavens," he said. "Anyone who believes this process was done fair and square must also believe in the tooth fairy."

However, Mr. Greenberg said the entire episode with AIG was mishandled not just by the government, but by the company's leadership that succeeded him after he was forced out following an accounting scandal involving the use of finite reinsurance to bolster AIG's balance sheet.

"If they had the right leadership at the time, they could have gone to the [sovereign] wealth funds to raise enough capital to head off the liquidity problems they faced," he said.

He also asserted that AIG's leaders "did not have to respond to the call for more collateral" to back up their credit default swap portfolio. "They could have challenged the new valuations, and told the counterparties that if you'd like to argue about this, the court room is down the block. They had a strong case."

Had the government and AIG's management taken such prudent steps, "it would have avoided putting the taxpayer at risk," according to Mr. Greenberg–now chair and CEO of C. V. Starr.

Mr. Greenberg also took shots at his nemesis–Eliot Spitzer, the former governor of New York, who as state attorney general helped lead the investigations into allegations of accounting fraud that eventually drove him from AIG.

"This never should have happened," he said. "One ambitious politician should never have been allowed to effectively destroy this company."

Rather than lamenting his own personal losses–in terms of his job, his reputation and the value of his AIG stock–Mr. Greenberg cited "the employees who lost their jobs and some their life savings when AIG's stock plummeted," as well as all those not affiliated with AIG "whose pension assets were decimated with the drop in AIG's value."

"To elect attorneys general with political ambitions is a mistake," he said. "It should not just be a stepping stone to higher office. It perverts the system of justice."

"We go around the world preaching about the importance of the rule of law," he concluded. "We better take a look at America and make sure we have the rule of law here first."