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Mar 05

Hank Greenberg: time to play shuffleboard

Posted by Stephen Taub in systemic riskRegulationPaul VolckerDealsCredit RatingsConsumer Financial Protection AgencycompliancecompensationCollapsebonusesBanksAIG

Stephen Taub

Maurice "Hank" Greenberg has never been a popular guy. He long had a reputation for being a bully, tough to work for. He would threaten lawsuits when he senses a publication was working on a story critical of him or his company. And in his 32 years running American International Group (AIG), he was routinely criticized for not have a viable successor in place in case he abruptly could no longer run the insurance giant.

In 2005, however, the 84 year-old resigned on the urging of then-New York attorney general Eliot Spitzer, who was investigating the questionable practices of a number of insurance companies, including AIG.

In recent years, however, Greenberg has been desperately trying to rehabilitate his image and rewrite history, especially since Spitzer was forced to resign as New York governor amid a sex and prostitute scandal, and ever since the global financial markets collapsed. He has spent a lot of time kvetching that had he been at AIG's helm, it never would have loaded up on all of those toxic credit default swaps (CDS) that resulted in the government bailing out the insurance giant.

His latest public service: On Friday he laid out his "Six Steps Toward Financial Reform" in a Wall Street Journal Op-Ed piece. As if he is an expert on this stuff.

Yes, he calls for better regulation and regulators. He wants to tie compensation to long-term performance. Make rating agencies independent. Allow financial institutions to remain competitive-meaning, don't reduce their size. Institute responsible risk-management systems. And use stimulus money strategically-on infrastructure, creating jobs and improving competitiveness.

However, reading the piece, you quickly realize his omissions are more revealing than his proposals.

First of all, he does not even discuss the issue of systemic risk. You know, the number one reason why the Bush Administration felt it was necessary to bail out AIG and the other major investment banks because of their reckless practices. In fact, the whole purpose of the financial regulation bills is to avoid the kind of systemic risk that can cause the financial markets to move to the brink of another depression.

More specifically, in his discussion about regulation, he does not even address the issue of OTC derivatives and the bid to regulate them and require trades to go through independent clearing firms. He does not mention that Wall Street firms, swaps dealers and many end-user groups are vehemently lobbying against this proposed provision of bills kicking around Congress.

He decries excessive compensation and calls for pay for performance. But, nowhere does he call for clawbacks-programs under which bonus recipients would lose some of their payouts if they do a lousy job in subsequent years. A number of Investment banks have instituted this policy, which is fast becoming a Best Practices feature.

He also conspicuously avoids addressing whether there should be some sort of consumer protection agency to make sure individuals aren't duped into making inappropriate decisions by unscrupulous salespeople. You may say Buyer Beware, but right now most taxpayers and savers are paying for the blow-ups in the mortgage markets by having to accept artificially low returns on their CDs and other fixed investments.

And he also opposes the "Volcker rule," which basically calls for investment banks disbanding their proprietary trading operations. This is another controversial issue. Basically, critics say banks are partially taking Federally insured deposit money and other company assets and investing it in the same risky manner as hedge funds.

This is part of the "too big to fail" discussion. But, Greenberg asserts: "Although many argue that banks and businesses have become too big, that doesn't mean we should become a country of midsized companies."

Again, he misses the point. Most people don't oppose big companies simply because they are big. They oppose big financial institutions if their collapse threatens the global economy and forced taxpayers to distastefully go along and bail them out, and then watch them take huge bonuses afterward and pretend they recovered all by themselves.

Hank, thanks for the memories. It's time to play shuffleboard.

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