When I left AIG, in seven months, they wrote more credit default swaps on so-called AAA CDOs, credit default swaps covering them, than we wrote in seven years. They wrote quality that was way below what we would have written, and they didn’t hedge anything. It’s a question of management.
Morgan Housel: When you have a bank that is large enough to be too big to fail, and to cause systemic damage when it does fail, and it’s run by poor managers, which we saw quite a bit of in 2008 with BEAR STEARNS DEPOSITOR INC (NYSE:TZK.CL) and Lehman Brothers Holdings Inc. (PINK:LEHMQ), Citigroup Inc. (NYSE:C), and the same with AIG.
What should regulators do with a company like that?
Hank Greenberg: Well, stop. What were the regulators doing? Take Bear Stearns for example. There were six months between Bear Sterns and Lehman Brothers. What did the regulators do?
Citigroup was overseen by the New York Fed. I chaired the New York Fed for about — I was on the New York Fed board, then vice-chair, then chair — probably all together about eight years. The Fed oversees Citigroup. What were they doing?
Morgan Housel: Not much.
Hank Greenberg: No, obviously.
Morgan Housel: In Hank Paulson’s memoirs, he does say that he pushed for Lehman Brothers to sell itself, in that period. Not successfully, but…
Hank Greenberg: Yeah, but he didn’t go to the aid of Lehman Brothers. They gave a Bank Holding Company license to Goldman Sachs Group, Inc. (NYSE:GS) and to Morgan Stanley (NYSE:MS). They turned down Lehman Brothers.
American International Group Inc (NYSE:AIG) didn’t have a solvency problem. It had a liquidity problem because they were responding to collateral calls from their counter parties. Once they lost the AAA rating after I left the company — almost the next day they were downgraded from AAA to something less — at that point they were required to put up collateral under the agreements.
But if you knew what was going on, there was no price discovery on any of these CDOs, what the value was. There’s no exchange that you could trade them on, so every broker-dealer had a different price for the value of the CDOs. Some had very low prices, which we require more and more collateral.
I wouldn’t have responded … we wouldn’t have been in that position to begin with. We wouldn’t have lost that AAA rating. I wouldn’t have responded, if I were them, to any of the collateral calls.
With different prices, who would you respond to? The highest price? The lowest price? I would say, “I’m not paying anybody. If you don’t like it, the courtroom is around the corner. Five years from now we’ll know who was right.”
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The article Exclusive Interview With Former AIG CEO Hank Greenberg: Black Boxes and Too Big to Fail originally appeared on Fool.com and is written by Morgan Housel.
Morgan Housel has no position in any stocks mentioned. The Motley Fool recommends American International Group (NYSE:AIG) and Goldman Sachs. The Motley Fool owns shares of American International Group and Citigroup and has the following options: Long Jan 2014 $25 Calls on American International Group.
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