In This Article
30-Second Summary
Headline Links: Major AIG shareholders protest; SEC launches accounting probe
Video: ‘AIG’s Executive Storm’
Background: CEO Hank Greenberg’s ouster
Reactions: Lawyers for AIG board, Greenberg battle in The Wall Street Journal
Opinion & Analysis: ‘Reasons for Greenberg’s AIG Ouster Debated’
Historical Context: AIG-GenRe investigation
Related Topic: GenRe securities fraud ruling
Key Players: Hank, Jeffrey and Evan Greenberg
Subscribe to Finance Updates
CEO of AIG, Martin Sullivan
Laying the Blame at AIG: Get Your Scorecard Ready
June 12, 2008 04:36 PM
by
Anne Szustek
Amid steep losses and weakened credit ratings, Martin Sullivan, CEO of American International Group, the world’s largest insurer, becomes the latest target in an ugly public spat.
30-Second Summary
Eli Broad, billionaire philanthropist and former director of current AIG subsidiary Sun America, along with fund managers Bill Miller and Shelby Davis, who together control 100 million shares—or 4 percent—of AIG, sent the insurance conglomerate a letter Thursday demanding that CEO Martin Sullivan be swapped out with a stand-in chair selected from AIG’s board while a search is launched for a permanent replacement.
This follows the revelations reported in Monday’s Wall Street Journal that, on May 12, two days before AIG’s annual shareholder meeting, those three major shareholders sent a letter to its board of directors that assailed AIG’s financial practices, saying that the company had experienced a “staggering breakdown of risk controls and an unequivocal loss of investor confidence.”
Current AIG chair Robert Willumstad and director Morris Offit met with the three shareholders. Willumstad said of AIG’s market performance, “You’re not telling us anything we don’t know.”
For the moment it appears that AIG’s board is supporting Sullivan, who replaced Maurice “Hank” Greenberg as CEO in 2005. But Thursday’s letter is merely the latest of Sullivan’s woes. The Securities and Exchange Commission is examining whether AIG adequately marked down the value of credit-default swaps, a financial tool that buffers the effects of the sub-prime mortgage crisis on bondholders.
Under Sullivan’s tenure, AIG made $14 billion in profits in 2006. However, in the past two financial quarters, the company has announced $13 billion in losses and $20 billion in write-downs, prompting a need for capital injections—$20.3 billion worth.
But despite the influx of capital, Citigroup analyst Joshua Shanker wrote in a May 27 report that the billions put in may not be enough to keep AIG’s credit rating, already downgraded last month, from slumping further.
Greenberg, who was pushed out as CEO three years ago, remains a significant shareholder in the company and has also fiercely criticized its practices. However, Greenberg himself continues to be under fire. Three weeks ago, the SEC gave him a Wells notice—essentially a warning of a pending indictment—for possible accounting impropriety in dealings between AIG and General Re, a reinsurer owned by Warren Buffett’s conglomerate, Berkshire Hathaway. The transaction in question resulted in an extra $500 million appearing on AIG’s balance sheets.
This follows the revelations reported in Monday’s Wall Street Journal that, on May 12, two days before AIG’s annual shareholder meeting, those three major shareholders sent a letter to its board of directors that assailed AIG’s financial practices, saying that the company had experienced a “staggering breakdown of risk controls and an unequivocal loss of investor confidence.”
Current AIG chair Robert Willumstad and director Morris Offit met with the three shareholders. Willumstad said of AIG’s market performance, “You’re not telling us anything we don’t know.”
For the moment it appears that AIG’s board is supporting Sullivan, who replaced Maurice “Hank” Greenberg as CEO in 2005. But Thursday’s letter is merely the latest of Sullivan’s woes. The Securities and Exchange Commission is examining whether AIG adequately marked down the value of credit-default swaps, a financial tool that buffers the effects of the sub-prime mortgage crisis on bondholders.
Under Sullivan’s tenure, AIG made $14 billion in profits in 2006. However, in the past two financial quarters, the company has announced $13 billion in losses and $20 billion in write-downs, prompting a need for capital injections—$20.3 billion worth.
But despite the influx of capital, Citigroup analyst Joshua Shanker wrote in a May 27 report that the billions put in may not be enough to keep AIG’s credit rating, already downgraded last month, from slumping further.
Greenberg, who was pushed out as CEO three years ago, remains a significant shareholder in the company and has also fiercely criticized its practices. However, Greenberg himself continues to be under fire. Three weeks ago, the SEC gave him a Wells notice—essentially a warning of a pending indictment—for possible accounting impropriety in dealings between AIG and General Re, a reinsurer owned by Warren Buffett’s conglomerate, Berkshire Hathaway. The transaction in question resulted in an extra $500 million appearing on AIG’s balance sheets.
Headline Links: Major AIG shareholders protest; SEC launches accounting probe
The June 12 letter from Broad, Davis and Miller read, “Significant and immediate changes at both the management and board level are clearly called for. The only actions taken by the board with regard to holding senior management accountable have been the public expression of praise and support for the CEO.” AIG’s market value has dropped 43 percent this year.
Source: Bloomberg.com
Two of Sullivan’s main efforts since taking AIG’s helm were to open the company up to investors and regulators and to promote cross-selling of the conglomerate’s products to its consumers. But critics deem his perceived unwillingness to fire people or to meddle in individual divisions in the company a weakness in leadership. And with the recent losses, following on years of turmoil at the company, major shareholders have become impatient.
Source: The Wall Street Journal (registration may be required)
AIG spokeswoman Chris Winans refused to comment on The Wall Street Journal’s report that the SEC was gearing up to investigate the insurer, saying, “we always cooperate with all our regulators,” and that the current market volatility made accounting for credit-default swaps “subject to significant change.”
Source: Bloomberg.com
Video: ‘AIG’s Executive Storm’
Former AIG CEO Hank Greenberg spoke about his former employer in a televised interview on CNBC Monday: “Look, I think the company is falling apart. The price of the stock is very clear. The stock is down close to $60–70 billion since I left the company. If you tell me that’s good management, then I don’t know much about management.”
Source: CNBC
Background: CEO Hank Greenberg’s ouster
A probe instigated by N.Y. Atty. Gen. Eliot Spitzer regarding a finite risk reinsurance deal between GenRe and AIG led to the forced departure of Greenberg on March 14, 2005. AIG’s then-CFO Howard Smith and vice president of reinsurance purchasing Christian Milton were put on leave as well. MarketWatch wrote, “The General Re transaction helped support AIG’s share price because it allowed the company to artificially inflate premiums and reserves without knocking reported earnings over two quarters in late 2000 and early 2001.”
Source: MarketWatch
A March 15, 2005 New York Times article reported that Hank Greenberg “said yesterday that he would yield as chief executive” after AIG’s board “pressed for … his resignation.” Ultimately it was Hank Greenberg’s defiance that would be his downfall, said Wall Street insiders interviewed for the article. One top executive said, “Greenberg would have been smart to just say ‘We want to work with you.’ But that’s not his style.”
Source: The New York Times (free registration may be required)
On March 30, 2005, AIG disclosed that three of its offshore insurance entities, Union Excess Reinsurance Company, the Capco Reinsurance Company and the Richmond Insurance Company did not have best-practice accounting measures. “Some $1.1 billion of the $1.7 billion that AIG said it might shave off its net worth will come from changing how it treats 14 years’ of transactions with Union Excess,” wrote The New York Times. According to a former AIG executive, another offshore entity, Astral Re, made some $18 billion in profits in 2000 and was shut down two years later. CV Starr & Co., a holding company owned by AIG executives since its inception some 90 years ago, “has attracted criticism for paying its 80 or so partners, all AIG executives, dividends and benefits from its undisclosed profits,” writes the Times.
Source: The New York Times (free registration may be required)
On Sept. 6, 2006, Spitzer’s office announced that it would drop two of six civil charges against Greenberg after AIG paid $1.64 billion to assuage allegations of shoddy accounting practices. Greenberg spokesperson Howard Opinsky said that the company’s shareholders “are owed an explanation as to why $1.6 billion in company funds were spent to settle allegations that do not withstand scrutiny.”
Source: MSNBC (Associated Press)
Reactions: Lawyers for AIG board, Greenberg battle in The Wall Street Journal
A May 16 editorial in The Wall Street Journal wrote that on the eve of AIG’s annual shareholder meeting two days earlier, “after a three-year experiment in Eliot Spitzer-imposed management that has cost them billions, more than a few shareholders were pining for the days of former CEO Hank Greenberg.” The paper argues that Spitzer’s investigation was unfounded, and “instead of uncovering some great fraud by a titan of industry, its main result has been to damage the company, and harm innocent managers and shareholders.”
Source: The Wall Street Journal
Richard Beattie, whose firm Thacher and Bartlett is serving as legal counsel for AIG’s independent directors, defending the company’s decision to let Greenberg go in 2005, wrote a letter to The Wall Street Journal in response to the May 16 opinion piece. Beattie writes that, in 2005, “AIG’s auditors had determined that they could no longer rely on Mr. Greenberg’s certification of the company’s financial statements. This would have made it impossible for AIG to meet its filing requirements as a public company.” When Spitzer launched his investigation of the company, according to Beattie, “more than 15 AIG employees voluntarily submitted to questioning. … Mr. Greenberg refused to do so.” Beattie acknowledges Greenberg’s successes at AIG’s top spot, “but the events of 2005 made clear it was time for the company to move on to a new generation of leaders.” Beattie maintains that Spitzer never threatened to prosecute AIG if the company did not terminate Greenberg.
Source: The Wall Street Journal
David Boies, the head of Hank Greenberg’s legal team, wrote a rebuttal to Beattie’s remarks that ran in the May 23 Wall Street Journal. “As Mr. Beattie has previously admitted,” Boies writes, “Mr. Spitzer repeatedly threatened to indict AIG if Mr. Greenberg continued as CEO and chairman. During the critical weekend of March 12–13, 2005 … Mr. Beattie himself communicated that threat to Mr. Greenberg and others.” Boies argues that “Greenberg did not invoke his Fifth Amendment rights until April 12, 2005, weeks after he had retired” as head of AIG. Boies wraps up the letter by calling attention to any role the former AIG head may have played in the sub-prime crisis, which Boies asserts “were undertaken after Greenberg left.”
Source: The Wall Street Journal
Opinion & Analysis: ‘Reasons for Greenberg’s AIG Ouster Debated’
Sally Roberts of online publication Business Insurance calls the vying over Hank Greenberg’s ouster in The Wall Street Journal “a public spat.” She writes, “A spokesman for AIG, who confirmed the information in Mr. Beattie’s letter, declined comment on the letter by Mr. Greenberg’s attorney.”
Source: Business Insurance
Historical Context: AIG-GenRe investigation
In mid-May, the SEC issued former AIG CEO Hank Greenberg a Wells notice regarding possible links to an AIG-Gen Re reinsurance deal that, on May 15, the U.S. District Court of Connecticut ruled had connections to several counts of fraud. Reuters writes, “The SEC has also informed former AIG chief financial officer Howard Smith that it may bring civil charges against him in connection with AIG's restatements.”
Source: Reuters
Related Topic: GenRe securities fraud ruling
On May 15, 2008, former AIG executives Ronald Ferguson, Christopher Garand, Robert Graham, Christian Milton and Elizabeth Monrad were convicted on charges of conspiracy, mail fraud, making false statements to the SEC and securities fraud related to “a fraudulent reinsurance contract between AIG and GenRe. At trial, after the close of the government’s case and again at the close of all the evidence, the defendants moved for a judgment of acquittal, which was denied. The proceedings read, “The government presented sufficient evidence that, starting with Greenberg's October 31, 2000 phone call to Ferguson, there was an agreement to carry out a transaction to artificially inflate AIG’s loss reserves and deceive AIG’s investors about the amount of the company’s loss reserves and the quality of its earnings.” The full text of the U.S. District Court of Connecticut’s ruling is available from The Wall Street Journal as a PDF document.
Source: The Wall Street Journal (PDF document)
Key Players: Hank, Jeffrey and Evan Greenberg
In a March 2006 Business Week article “Hank Greenberg at War,” the former CEO expresses his rage at Spitzer, AIG’s board and executive team, and everyone else that he felt had betrayed him.
Source: Business Week
Spitzer’s office charged Marsh McLennan—as of October 18, 2004, the world’s largest insurance broker—with bid rigging and cheating corporate customers by collecting hefty fees from companies with which it did business. Hank Greenberg’s son, Jeffrey, was Marsh’s chief executive at the time. According to attorney general office insiders, Spitzer privately called Marsh’s business practices “the same kind of cartel-like behavior carried out by organized crime.” Soon after, Jeffrey Greenberg resigned.
Source: New York Magazine
Jeffrey Greenberg was succeeded by Michael Cherkasky, who was once Eliot Spitzer’s boss and remained a close friend and campaign supporter of Spitzer. Some observers at the time criticized Spitzer’s demands for the head of Greenberg and his seeming anointing of Cherkasky.
Source: USA Today
Cherkasky himself resigned in December 2007, after failing to fix Marsh’s struggling financial performance.
Source: The Street
Spitzer also pursued ACE Insurance, whose CEO was Evan Greenberg, another son of Hank Greenberg, in connection with certain improprieties. In April 2006, ACE agreed to pay $80 million in restitution and penalties, and Greenberg remained as CEO.
Source: CFO Net
© 2009 Dulcinea Media, Inc.
