Fatal Risk: A Cautionary Tale of AIG’s Corporate Suicide
By Roddy Boyd (Wiley, Hoboken, N.J., 2011)
AT ThE TuRN oF ThE CENTuRY, MAuRICE “hANK” GREEN-
bERG loomed over Manhattan’s insurance marketplace. of the giants
in the financial district, only hank had built his colossus atop property/
casualty insurance, the stepchild of Wall Street finance.
Hank was tough. He was a taskmaster,
a scold, a genius, a scoundrel. From his
five decades on top, two lessons emerged:
■ ■ Cash is king. All the accounting cleverness is nice, but when you’re doing
business, make sure you’re the one
holding cash and the other guy is
waving a receipt.
■ ■ only Hank could run AiG. The tapestry of AIG’s companies and its wide
reach—from auto insurance to aircraft leasing—could be understood
and managed by Hank only.
A decade later, we know the truth
about the truisms. Roddy Boyd’s book,
Fatal Risk: A Cautionary Tale of AIG’s
Corporate Suicide, documents the fall.
Boyd, a veteran Wall Street journalist,
writes that AIG’s demise was a suicide,
though AIG’s behavior was no more suicidal than a chain smoker’s—a series of
unforced errors compounding. Though
he doesn’t emphasize it, Boyd’s story also
shows how enterprise risk management
should, and should not, be practiced.
whole splendid, cumbersome deal in a
big, motherly, AAA-rated hug.
One type of loan was shunned in particular—mortgage-backed securities. Tom
Savage, Financial Products’ leader at the
time, had designed the earliest mortgage-backed securities, had seen them founder,
and now wanted no part of them.
Boyd generally does a good job of
describing for the layman most of the
complex financial instruments that
drove AIG’s collapse. I think most
actuaries and other quant-oriented professionals would prefer more detail and
a tad more accuracy. One description
of leverage, for example, had a crucial
typo and was so bewildering that I spent
three hours deciphering it. Another
description seemed to confuse a percentage point with a basis point. (A basis
point is 1/100th of a percentage point.)
The Ultimate Risk Manager
The story is familiar to anyone following property/casualty insurance. Hank
Greenberg took over a sprawling, gangly
international insurer in the late 1960s
and bolted on company after company.
After he built a property/casualty powerhouse, he moved into financial services
and capital markets.
In later years, debt grew quickly, but so
did profits. It worked because Hank was
the ultimate risk manager, scrutinizing the
smallest detail—anywhere in the company.
Much of Boyd’s story focuses on the
Financial Products unit, AIG’s eventual
destroyer and the poster child of the
financial crisis. The unit started in the
mid-1980s to assemble derivative deals
that skimmed profits while hedging
away as much risk as possible. Finan-
cial Products grew into a genius town
of highly risk-averse derivative dealers,
with Hank and his viceroy, Ed Mat-
thews, scouring details from AIG’s 70
Pine St. headquarters. It was Hank run-
ning the firm as only he could run it.
Author Boyd makes it clear the execu-
tive team struggled to understand the
intricacy of the business. But where they
knew little, they trod carefully.
The Dog That Didn’t Bark
Through the late 1990s, AIG continued
to grow, mainly by acquiring new companies. It also edged into dicier territory.
One deal helped bank giant PNC scrub
$762 million in bad loans from its balance
sheet—until federal regulators found out.
Boyd fails to note that several property/
casualty companies got caught in similar
messes, but rightly notes that combative
Hank fought the feds’ allegations when
even AIG’s counterparties did not.
Boyd uses the episodes to show how
Hank’s control of the Financial Products
unit began to slip. He points to the dog
that didn’t bark. The PNC debacle generated $126 million in fines, but no one
was fired, forced out, or reassigned.
“There is nowhere else in corporate
America,” Boyd writes, “where anything
like that series of events could have
transpired without sweeping changes
occurring in its wake.”
Boyd’s assessment of Greenberg
is clear-eyed. He credits him for his
