Maurice Greenberg, Face of AIG, Finally Admits His Guilt

Once again, another corporate criminal settles with the government on a Friday. This time it is Maurice Greenberg, former chief executive of American International Group (AIG) who reached a settlement with New York State where he admitted his planning and approval of two transactions that were specifically designed to distort AIG's true financial situation. Joining Greenberg in the settlement was the company's former chief financial officer, Howard Smith. While the two acknowledged their primary roles in these sham deals, neither admitted to committing fraud. In addition, the two agreed to give up nearly $10 million in bonuses that they had accrued after these transactions took place and covered the period where AIG's financials were misstated. In other words, it was a typical Wall Street settlement where everyone admits to taking actions that are clearly illegal without admitting to any illegality. It's a pretty nice racket.

The case was originally brought in 2005 as part of a battle between Greenberg and then NY Attorney General Elliot Spitzer. Spitzer had gone after numerous Wall Street firms, gaining convictions on "independent" research being used to tout stocks favored by the firm, unlawful trading in mutual funds, and other more traditional schemes such as bid-rigging and kickbacks. One of Spitzer's victims was Greenberg's son Jeffrey who was forced out as head of Marsh & McLennan after the company was charged with bid-rigging and engaging in kickbacks. Greenberg claimed that Spitzer was over-prosecuting what he called "foot faults". That sentiment pretty much speaks to the criminal mindset of Wall Street executives.

The charges against AIG and Greenberg eventually forced the company to let go of Greenberg. In 2006, the firm agreed to settle charges over similar transactions and accounting fraud with the SEC, a case where AIG's own lawyers alerted the SEC that individuals in the company may have destroyed documents. But Greenberg vowed to fight for his innocence to the bitter end, primarily by appealing virtually every ruling through the full gamut of the court system.

A settlement was apparently nearly reached in 2008, but it fell apart because AIG itself collapsed and had to be bailed out by the federal government. The company bet heavily in the credit default swap (CDS) market, looking at it as an easy way to essentially pocket premiums for limited risk. AIG had over $61 billion in CDS backed by subprime mortgages but maintained that portfolio contained limited exposure and risk. But the warning signs began in 2007 as losses started to appear and counterparties demanded additional collateral. Its auditors criticized the company's risk management of the swaps, saying it was clearly a material weakness. But, by that time, it was practically too late. As the housing market crashed in 2008, AIG losses went from around $350 million to over $20 billion in the span of just six months. In September of that year, the Treasury Department, or more accurately the US taxpayers, injected $185 billion into AIG in return for an 80% stake. The bailout of AIG also helped bailout Goldman Sachs, who also received $10 billion in TARP money, because Goldman was on the other side of many of those swap contracts that AIG was now able to honor.

Meanwhile, Greenberg kept on fighting. His delaying tactics finally ended when the case finally went to trial last September. Greenberg's testimony and cross-examination continued his pattern of evasion, so much so that the trial judge had to admonish him to provide direct answers. Then last month, the lawyers involved began the negotiations that resulted in this settlement, where he finally admitted to his involvement in sham transactions after vociferously denying so for the last 11 years.

Maurice Greenberg was AIG. He was the face of the company and a hands-on manager. And his penchant for illegal, sham deals set the tone for the rest of the company. That attitude was in no small part responsible for AIG's subsequent collapse during the financial crisis. More than anything, though, Greenberg's attitude towards illegal behavior as merely "foot faults" is typical of Wall Street executives.