When you invest in a company, you give them money and hope that they do well enough to give you more money back. This is called a return on investment. There is a chance that you will get less money back than you hoped or no money back at all. This is called risk. Every investment includes these two variables, return on investment and risk, and they are known and agreed upon by the investor and person or company receiving the investment.
One company, rather a former leader of a company is in denial of this basic fact of investment. Maurice “Hank” Greenberg is the former CEO of American International Group, a multinational insurance conglomerate. Hank is the former CEO of AIG because of a fraud investigation resulting in a fine of $1.6 billion. Hank was ousted as CEO, but is still a major shareholder of the company. Hank is an unappreciative, spoiled brat.
In one facet of the organization, AIG sells protection for Credit Default Swaps (CDS), in which Company A buys debt from another Company B and then buys insurance from AIG in case they default on their loan payments to that debt. So let’s say company B, probably a savings and loans conglomerate, wants to eliminate some of their risk and they sell off some of their liabilities – unpaid loans and lines of credit to Company A. Company thinks they will get a return on their payment to Company B by collecting on these loans and lines of credit, but aren’t quite positive it will pay off, so they buy insurance from AIG. Company A and AIG enter an agreement that Company A will submit payments to AIG for the insurance, and if the owners of the loans and lines of credit they have acquired start to default on their payments to Company A, AIG will purchase the remainder of the value of those loans and lines of credit, and Company A will have no further liability. AIG, however will now own this debt, and is responsible for paying it off. The idea is that there is little risk for the CDS to go into default, so most of the time AIG makes a profit on the insurance because it’s never needed to purchase the liabilities.
To ensure that AIG will be capable of buying the debt in the event of default, they must maintain a high credit rating, or they are forced to provide collateral in the form of assets or cash. AIG posted significant losses in the second quarter of 2008 which led to their stock price falling over 95% and a downgrade of their credit rating. Since they no longer held a high credit rating, they were being forced to provide collateral to all of their partners with CDS agreements, but their assets had significantly declined in value and had a shortage of cash due to previously reported losses. Due to the concurrent recession and AIG’s previous successes that led them to acquire greater liabilities, the company was in alignment with other failing financial corporations in that they had become too big to fail. AIG couldn’t afford their new obligation to provide collateral due to their credit rating decline, and the amount of liabilities flowing back into the market would have been devastating for the economy. AIG thus became a candidate for a federal bailout.
AIG received $85 billion initially to cover collateral to their CDS partners so they could continue to operate. Towards the end of the bailout, AIG received a total of $182 billion in taxpayer money to avoid bankruptcy. When bankruptcy happens, all shareholders lose the value of their stock and the company restructures itself financially. The bailout saved the investments of thousands of AIG’s shareholders. AIG was part of the group of financial corporation’s receiving federal funds, who often traveled to Washington on private jets to appeal to congress on how badly they needed money, then proceeded to immediately hand out executive bonuses and salaries to the people that got them into their mess in the first place. But I digress; AIG took taxpayer money so they wouldn’t have to go through bankruptcy.
Now, Hank Greenberg is filing a lawsuit against the same people who bailed his former company out – the American taxpayer. Hank is upset that the bailout did not provide acceptable returns to the AIG shareholders, and I’ve mentioned before that Hank happens to be a major shareholder. You see, the federal government required AIG to pay back the $182 billion with 14% interest, and despite also being in charge of a bank that has no doubt charged higher than a 14% interest rate on high risk loans or defaulted loans, Hank feels this was too high. I’m sure had Hank been in charge of negotiating the terms of the bailout, he wouldn’t accept a 14% interest rate and instead gone through bankruptcy, effectively eliminating any shareholder value of the company. Since he wasn’t he feels cheated, and he feels all the other shareholders were cheated because they were not provided with adequate returns on their investment due to AIG owing too much money to the feds. This is, of course, ridiculous. So what you hear in the news today is AIG potentially allying with Hank in the lawsuit, which means AIG would be suing taxpayers $25 billion for charging too much interest on the bailout provided to them, even though they agreed to the charges. Perhaps if they didn’t shell out millions of bailout funds to failures of executives to “retain their talents” the return to AIG shareholders may have been larger. Really what this comes down to is that Hank is an unappreciative spoiled brat, among other shareholders of AIG that took a hit on their investment, and are ready to sue the very people that bailed them out of bankruptcy so they can make some of their money back. He and other shareholders are in denial of the risk they took when investing. When you are this greedy, no amount of treachery or disrespect is out of bounds. Hank believes that AIG doesn’t owe loyalty to the government; they owe loyalty to its shareholders, yet it wasn’t the shareholders that bailed the company out.
If AIG agrees to be a part of this lawsuit they are essentially throwing a big “F You” to taxpayers. If this happens, the next time you choose to take out a loan, put money into savings or purchase insurance from AIG, you are giving your money to a company that needed you to bail them out, and then sued you when they didn’t get enough money to save their business, pay their executives huge sums of money for doing a crappy job and pay off their shareholders.
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