With that sly smirk, Maurice Greenberg looks like he is up to no good. And with the lawsuit he is filing against the federal government, that is exactly the case.
When it comes to my awkward phase, I try to bury all the memories to best of my ability. Looking back, I am mortified by my horrific fashion and hairstyle choices during this unfortunately long time period. In business and finance, when institutions make bad, embarrassing, unethical and/or illegal decisions, they try to put the past behind them, too. Rarely do they actively put themselves in a position in which they will be scrutinized and reprimanded again. After all, why further soil an already tenuous reputation? And yet this is exactly what the former CEO of AIG, Maurice Greenberg is doing in filing a lawsuit against the US government, claiming that the AIG bailout was excessively onerous and cheated shareholders in the process.
The SEC is supposed to protect Americans from corporations that are inclined to exploit for the sake of making a profit or increasing their salaries. Corporations often accuse the SEC of hindering capitalism.
News about large corporations and the government battling it out is not uncommon. Very often we read about the SEC, short for Securities and Exchange Commission, cracking down on companies and financial institutions for illegal business practices. This makes sense, given that the SEC’s role is to protect investors and maintain fair, orderly, and efficient markets. Rarely, though, does a pursuit in the opposite direction occur, in which a corporation tries to shape the government as the villain. Thus, this lawsuit is particularly unique in nature. Adding to its complexity is AIG’s marred history, specifically regarding its role in the Great Recession. That Greenberg is choosing to reinvestigate a nadir in America’s history, when AIG was a key participant, is sure to bring to light embarrassing details, as well as upset investors who lost their life savings.
Back in 2008, the American economy tanked. Referred to as the Great Recession, the time was marked by severe panic, uncertainty and fear. What happened is extremely long and complicated, but here is the story in a nutshell:
In 2005, the housing market in Arizona was hotter than its climate.
For a while, the real estate market was booming. Year after year, the prices of homes kept appreciating. Consequently, banks were generous in issuing mortgages, giving little heed to applicants’ credit scores, and requiring virtually no down payment. They rationalized that even if homeowners defaulted on their payments, there was room for profit by reselling the foreclosed home at a higher price.
Prices were rising and rising, with no end in sight. That is, until reality caught up to real estate.
Banks, dabbling in new financial innovation, also packaged these mortgages into bundles and sold them to investors as mortgage backed securities. These were securities were buttressed by assets-in this case, monthly mortgage payments. This system works well as long as homeowners continue to pay their mortgages. Unfortunately, the reality of the situation was that the continuously rising prices were creating a bubble. The state of this market was unsustainable; the prices would inevitably go down. And sure enough, they plummeted. Suddenly, many homeowners found themselves underwater, meaning that they owed banks more in loan payments than what their home was actually worth. A spike in foreclosures in the real estate market ensued, which consequently resonated in the financial market. Remember those mortgage backed securities? They had inaccurately been given ratings that indicated they were safe investments, when in fact they were extremely risky since many of the homeowners actually had terrible credit scores. Suddenly, there were no assets with value to buttress the value of these securities. While this was happening, a Ponzi scheme led by Bernie Madoff came to light. In short, pure chaos erupted in a short period of time.
The collapse in what was considered to be an surefire investment strategy was abrupt, and caught many off guard. Unlike during the Great Depression, the government decided to play an active role in the Great Recession, which could account for the comparitively limited damage-such as lower unemployment.
This spelled trouble for institutions that had issued mortgage backed securities. One such party that was impacted? You guessed it: AIG. Now host to these bad investments, AIG’s rating was downgraded. As a consequence, it had to post “additional collateral with trading counterparties,” a fancy way of saying they had to get something tangible and of value in order to appease their clientele. AIG was not able to gather enough cash, and a liquidity crisis ensued. AIG was on the cusp of bankruptcy, a scary thought considering the fact that it had nearly 90 million customers worldwide. If they went bankrupt, the global economy would be reeling. The US government intervened and bailout out the company by providing the requisite collateral. Looking back, we realize just how bad the economy was at that time. Imagine how much worse it would have been had the US government not provided relief to AIG!
Fast forward to 2014: Maurice Greenberg, the CEO of AIG at the time of this debacle, is suing the federal government over the bailout. The bailout, he claims, was burdensome in the sense that the interest rate AIG was charged on the loan it received was higher than the interest rate that other banks’ were charged. Moreover, the federal government received an 80% equity stake in the company as a result, which included voting rights. As the head of a charitable firm named Starr International Co., the largest shareholder of AIG, Greenberg thus believes that the government’s takeover of AIG, both in terms of financials and implementation, was punitive in nature.
The notion of being “too big to fail” caused many institutions to take far more risks than they should have. They rationalized that the government would not allow them to go under, as this severely unsettle the economy.
Not only is Greenberg’s claim ludicrous, but it is also the epitome of chutzpa. Had the government not bailed out AIG at the time, the institution would have crumbled almost immediately. Ever hear about Bear Stearns or Lehman Brothers anymore? Exactly. Talk about biting the hand that feeds you. The fact that the government even left a 20% equity stake is generous, considering the risky business practices that AIG dabbled in, with little concern for the consequences. It is also absurd for Greenberg to complain about high interest rates considering the fact that the bailout loan came from taxpayer money. The American people bore the burden at the 11th hour to save the company without even having a say in the matter. And now the recipient of the money bemoans having to pay an interest rate he considers unfair! Even now, in having to contend with this lawsuit, the government spends even more of our hard earned money. While Greenberg thinks that he is making a case against government overreach in public affairs, he is in fact doing the opposite. With unadulterated greed as his motive, Greenberg is blatantly being ungrateful for suing the federal government.
Sometimes, it seems that the needs of corporations take precedence to those of the people. Recently, with the tax inversion strategies that corporations have implemented, it seems that corporations have more rights than Americans!
This case is bringing back into the spotlight many key players in the Great Recession, such as former Fed Chairman Ben Bernanke and former US Treasury Secretary Timothy Geithner. With so many other important things going on in the world, this case should swiftly be thrown out of court. It ultimately only serves to open the old wounds of those who lost their life savings during this time period.
The Great Recession is the equivalent of the financial industry’s awkward phase. Greenberg should realize that in suing the federal government over the bailout, he is doing himself a disservice by allowing the face of ugly greed-in this case, his own- to resurface.
