14. Guest Speaker Maurice “Hank” Greenberg

14. Guest Speaker Maurice “Hank” Greenberg

November 20, 2019 0 By Kody Olson


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. 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 the
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 had 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 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, and 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, in 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 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 risks,
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. It 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. 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 them 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 worked well together. I mean, there wasn’t ever
a palace revolution or anything like that. It was a great organization. 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 were rules then that
came into existence, so that you can negotiate
trade services. It wasn’t easy, even when the
rules were 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 that, 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 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. 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. It did derivative business. Everything was hedged. It was a very successful
operation. He got a little greedy on 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. 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 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, and 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. 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, 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 the
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 $0.40 to $0.60 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.
and 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. MAURICE ”HANK” GREENBERG:
All right. So, I think there’s a lot to
be just thinking 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 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 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, 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] 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, who 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 expected 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, and 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 put the whole institution
at risk? It 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 — they 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 CDO, and then they take a
position against that, it seems to me that
that’s immoral. And that 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 hear what the investigators had come
up with, before they passed a new law. Now, 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. 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]