All the Devils Are Here [122]
When you got right down to it, there was something almost Wizard of Oz-like about the way AIG was run. It was simply not the company it was purported to be. Behind its impressive facade was a tough, stubborn old man who refused to groom a successor, refused to run his company the way modern companies were supposed to be run, and refused to play by anybody’s rules but his own. Those attributes were about to hurt both him and his beloved AIG.
AIG’s stock peaked toward the end of 2000, at around $103 a share. It was, by then, a very rich stock, with a much higher valuation than its competitors; keeping it that way was deeply important to Greenberg. But over the next year or so, as the Internet bubble burst, the Enron and WorldCom scandals broke out into the open, and the 9/11 attacks took place, all insurance company stocks suffered, including AIG’s. By 2002, the stock was struggling to stay above $65 a share.
In retrospect, it appears that these were not the only factors causing the stock to drop. The market was beginning to realize that AIG was going to have increasing difficulty meeting Greenberg’s 15 percent earnings target. Partly, that was simply a function of AIG’s mammoth size: the bigger AIG got, the harder it became to tack on 15 percent in additional profits each year. Analysts call this the law of large numbers.
There had long been suspicion that Greenberg got to his 15 percent target not just by pushing his executives to take more risk, but by taking advantage of complex accounting rules to help smooth out earnings, disguise underwriting losses, and tuck away surpluses that he could use for a rainy day. AIG had set up a series of reinsurance companies in places like Bermuda and Barbados—away from the prying eyes of U.S. regulators—which, although ostensibly independent, did almost all their business with AIG. Reinsurance companies exist to take on risk that insurers like AIG want to lay off, but state regulators had long suspected that AIG did at least some of its reinsurance deals to pretty up its books. AIG was by no means an Enron—its businesses were very real and so, for the most part, were its profits. But wasn’t it at least a little implausible that, year after year, its earnings never did anything but go up by 15 percent?
Once, a Wall Street analyst took some clients to see Greenberg and asked him point-blank how he managed to produce that steady stream of earnings growth “in this highly volatile industry,” as he put it. “Aren’t you concerned that the SEC or someone is going to look at AIG and ask if you are managing earnings?”
Greenberg was not happy with the question, but he gave a surprisingly straightforward answer. “Look,” he replied. “We are in the long-tail liability business”—meaning that, though the risks AIG insured didn’t occur very often, the payout was very large when they did. “If there is one thing we have learned, it is that there are risks we can’t anticipate, so when we have extra capital we are justified in setting it aside.” He added, “What do you want? Do you want steady growth? Or do you want up 60 percent one quarter and down 15 percent the next?” The analyst recalls thinking that Greenberg had just admitted he was managing earnings.
It was around this same time—with the stock sliding and the market wondering if AIG was finally bumping up against the law of big numbers—that the company found itself in a series of small scandals. The first came in 2001. The SEC accused AIG’s National Union unit of constructing what amounted to a sham insurance transaction to help a company called Brightpoint hide nearly $12 million in losses a few years earlier. “It was some dinkyassed insurance deal that they did that fudged around with the accounting at the end of the day,” says a former executive. And yet it took two years to settle the case—years in which AIG, and Greenberg, infuriated the SEC by dragging its feet on producing documents. “He was arrogant to those people,” recalls this same former executive. “Uncooperative.” When