Background of American Insurance Group (AIG)
AIG has always been an American-owned company, though it had its origins in China. Cornelius V. Starr founded AIG in Shanghai, in 1919, the first western insurance firm in the Far East. From the start, AIG’s international focus was made-to-order for intelligence operations. In 1939, the Japanese invasion of China compelled Starr to relocate to New York, where, in 1943, he joined with OSS chief William “Wild Bill” Donovan to form a special insurance unit to gather war-time intelligence about Nazi Germany and Japan. During the war, the OSS actually shared Starr’s offices in New York City. The special unit used Starr’s connections in China, including his Shanghai newspaper, as a spy network. Meanwhile, the special agents at the New York office sifted through mountains of insurance documents for blueprints of enemy bomb plants, the design of the Tokyo water supply, timetables for tide changes, and other details about shipping and manufacturing which aided the allied war effort. As World War II drew to a close, the special unit investigated how the Nazis might seek to launder their assets via phony insurance policies.
In 1962, Cornelius Starr picked Maurice Greenberg to manage AIG’s holdings in the US, which were floundering at the time. Greenberg administered a quick turnaround and, in 1968, succeeded Starr as head of AIG. The next year, he issued a public stock offering and began to expand the company. According to various reports, Greenberg was a long-time confidant of Ronald Reagan’s CIA Director William Casey, who had headed the Securities and Exchange Commission under Nixon. Casey attempted to recruit Greenberg to be his deputy at CIA, but Greenberg declined, preferring to remain at AIG. Once, during a New York Times interview, Casey mentioned Greenberg as one of the few individuals outside of government whom he relied on for advice. Henry Kissinger was another close friend and client. In 1987, Greenberg appointed Kissinger as chairman of AIG’s advisory board. For years, both men lobbied China’s leaders to open the country to western investment, though Kissinger’s role is more widely known. In 1980, the Chinese finally granted Greenberg a license to sell insurance in Beijing, and in 1996 AIG reoccupied the same Shanghai offices originally used by C.V. Starr.
For years, AIG generated profits at a rate that blew away the competition. Over a ten-year period, from 1988-1998, AIG’s earnings compounded at an average rate of 14%, an impressive figure in a business that tends to be cyclical. While the rest of the insurance industry suffered periodic ups and downs, AIG behaved more like a “growth” company. Its consistently high earnings wowed investors. Some compared AIG to a perpetual money-making machine. In a column, David Schiff, publisher of an insurance industry newsletter, wrote that “AIG is to the insurance business what the Yankees are to baseball.” The comparison was based on more than whimsy. Rumor had it that Maurice “Hank” Greenberg drew his nickname from the first Jewish superstar of baseball, Hammerin’ Hank Greenberg, whom the Yankees recruited in 1929 (but who played first base, most of his career, for the Detroit Tigers).
How did AIG beat the trends? Writing in 1998, Schiff acknowledged that “No one quite knows the answer. Some who follow AIG have told us they can’t really analyze it.” Many investors did not bother to try. They simply accepted the fact that Greenberg was brilliant, and that AIG was somehow unique. The view expressed in 2002 by Morgan Stanley analyst Alice Shroeder was typical: “What investors really want is for Hank to become immortal.” Some probably felt the same way about Bernie Madoff, but there were significant differences. AIG was no Ponzi scheme. Whereas other large insurance firms like State Farm were fairly simple to understand, AIG, by comparison, was “fabulously complex,” virtually impenetrable from the outside. The reason: AIG had hundreds of affiliates in 130 countries and did most of its business offshore, in other words, beyond the scrutiny of US regulators. The Wall Street Journal once referred to AIG as a “black box.” (The same op-ed also mentioned Enron.) This helps to explain why Greenberg and AIG remained untouchable for so long.
AIG was not solely an insurance firm. By the 1990s, Greenberg had diversified into other areas, such as derivatives trading, private banking, financial services, and asset management. Another division boasted the world’s largest airline rental company. But AIG achieved its lofty reputation by succeeding where others failed. I was surprised to read that most traditional insurance companies lose money underwriting policies. They turn a profit by shrewdly investing the premiums. AIG was different. It had a reputation for actually making money writing insurance policies; or so people thought. However, in the spring of 2005 when the dust finally settled, it was clear that AIG also lost money in the insurance business but obscured the fact through a myriad of creative accounting schemes that transformed AIG’s underwriting (business) losses to investment (capital) losses, a slick way to enhance AIG’s corporate balance sheets. One of Greenberg’s favorite expressions was: “All I want in life is an unfair advantage…”
After 9/11, it gradually became clear that not even AIG insiders were privy to the decisions being made at the top. In 2002, an internal audit committee reported that AIG’s financial accounting was suspect. Later that same year, the Securities and Exchange Commission (SEC) uncovered evidence of securities fraud. In 2000, AIG marketed an insurance product that enabled a company named Brightpoint Inc to conceal $11.9 million in losses. When the case was settled, the SEC doubled the fine to $10 million because AIG’s CEO Maurice Greenberg refused to cooperate. One of Hank’s tactics was to stall the investigation by delaying to hand over subpoenaed documents, including one internal white paper that “completely contradicted everything they’d been saying about how this was just the fault of one guy who wasn’t getting supervised.” It turned out that scamming the system was company policy. In subsequent weeks, even as AIG sought to portray the Brightpoint case as an isolated incident, federal investigators uncovered another phony transaction that enabled a subsidiary of PNC Financial Services to remove problem loans and assets from its balance sheet, thus enhancing its financial position. AIG paid a $115 million fine. The shady transactions were reminiscent of Enron.
But it was only the beginning. Soon, AIG and Marsh & McLennan were in the cross-hairs of a state probe launched by New York attorney general Elliot Spitzer. In October 2004 Spitzer sued Marsh for bid-rigging and numerous other fraudulent accounting practices. As the investigation widened, Ace (run by Greenberg’s other son Evan), AIG, Hartford, and several other insurance companies were also named. Spitzer refused to negotiate with Jeffry Greenberg, Marsh’s CEO, whom the attorney general accused of stonewalling. The apple, as they say, falls close to the tree. In the end, the younger Greenberg was forced to step down and Marsh paid $850 million in restitution. Two AIG executives pled guilty to criminal charges.
It is notable that Marsh & McLennan purchased Kroll from AIG for $1.9 billion in July 2004, several months before Spitzer’s lawsuit. At the time, Kroll’s CEO was Michael Cherkasky who, years earlier, had been Spitzer’s boss at the Manhattan District Attorney’s office. Cherkasky joined Kroll in 1994, became CEO in 2001, and replaced Jeffrey Greenberg as CEO when the younger Greenberg was forced out in late 2004. Thus, it was Cherkasky who negotiated the final settlement with Spitzer. Did AIG pass Kroll on to Marsh to better shield the spy firm from Spitzer’s investigation, as Richard Grove has suggested? Possibly. It certainly does appear that Cherkasky was named to lead Marsh because of his previous relationship with Spitzer.
By early 2005, separate SEC and Department of Justice investigations were closing in on the elder Hank. By this point, the AIG board was also pressuring Greenberg to name a successor and step down. But Greenberg, who was approaching his 80th birthday, had no intention of relinquishing control of the company he had dominated for 37 years. Maurice Greenberg had always viewed regulators with disdain, and he had generally succeeded in intimidating them, one way or another. In 1996, for instance, when the state of Delaware launched an investigation of AIG’s bizarre relationship with a Barbados-based reinsurance company named Coral Re, instead of cooperating Greenberg rang up the Delaware insurance commissioner and gave her a tongue-lashing over the telephone. Greenberg also sent Kroll detectives to harass the state regulators. The get-tough strategy produced the intended result. Even though state laws had been broken Delaware had no stomach for a fight. The regulators drew back. In the end, the state “whipped AIG with a feather.” AIG got off with a mildly-worded reprimand, and was not even required to pay a fine. No sooner had Coral Re been dissolved, as per the settlement, than AIG shifted its business to several new shell companies modeled in its image and likeness. The case of Coral Re is important because of possible links to the drug trade and to Arkansas Governor Bill Clinton, as the reader will shortly learn.
Greenberg also resorted to Kroll after AIG’s general counsel Michael Joye resigned in 1992 to protest fraudulent accounting practices. Joye kept the facts secret for many years. But here is the gist: In the early 1990s, Joye was shocked to learn that AIG was cheating several states, including New York, out of tens of millions in workers’ compensation funds; and it was happening with the full knowledge and consent of CEO Greenberg. After conducting his own internal investigation, Joye sent Greenberg a bluntly worded memo informing him that AIG’s “intentional violations” could lead to “criminal fraud and racketeering charges,” in addition to exposing the company to astronomical civil penalties. Joye determined that for AIG to become legal the company “would have to hire about 40 new people to do filings properly. It would also have to charge clients more and pay ‘much higher’ assessment frees.” But according to the New York Times, Greenberg was not interested. When the issue came up in a meeting, Greenberg famously asked “Are we legal?” An employee responded: “If we were legal we wouldn’t be in business.” Hearing this, “M.R.G. [Greenberg] began laughing and that was the end of it.” After Joye tended his resignation, Greenberg sent Kroll a copy of Joye’s personnel file. It is not known what Kroll detectives did with it, but the case illustrates Greenberg’s temperament and autocratic style.