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WASHINGTON—After World War II, a far-flung insurance
company in China run by an American businessman took a
risky bet insuring that about 20 boats filled with
Americans would make it back to the United States.
From
those distant beginnings grew American International
Group (AIG), which became one of the biggest insurance
companies in the world, under the leadership of Maurice
“Hank” Greenberg.
With
more than $1 trillion in assets, AIG is bigger than
Fannie Mae, Freddie Mac, Merrill Lynch, Lehman Brothers
or the former Bear Stearns.
AIG’s
subsidiaries sell life, auto, property, workers’
compensation, kidnapping and ransom and many other types
of insurance. The company offers retirement plans such
as annuities. Its financial markets subsidiary services
include investment banks, pension funds, governments and
other institutional investors, and AIG manages
portfolios of stocks, bonds and real estate. The company
is the nation’s largest leaser of aircraft.
Among
the activities it ventured into: buying mortgage-related
securities and offering other firms an exotic type of
insurance to cover losses from investments tied to
mortgages.
That
proved to be a problem.
“AIG
didn’t have to be in those businesses,” said David
Schiff, a long-time observer of the company and editor
of an industry trade publication. “Obviously, they
didn’t think they were risking it. That’s the problem:
They didn’t envision that the situation could have
gotten so out of hand.”
By
Monday it was clear that AIG needed emergency funds to
keep it out of bankruptcy. The Fed turned down pleas for
help from Lehman Brothers, which filed for bankruptcy
protection Monday, but agreed to provide funds to AIG.
Analysts
say that most of AIG’s businesses are, on their own, in
fine financial shape. But what is happening on Wall
Street is at the root of AIG’s troubles. The steep
decline of AIG’s holdings of mortgage-backed securities
has weighed heavily on the firm’s balance sheet—just as
it has other fallen Wall Street firms.
But the
role AIG plays is much broader than many other firms.
AIG has sold $80 billion in credit default swaps—a type
of insurance—to investment houses to cover their losses
on mortgage-backed securities.
As the
mortgage market has melted down, AIG has been on the
line to cover more of the losses. Seventy-five percent
of mortgage-related securities insured by AIG were
derived primarily from subprime mortgages, which are
failing at unprecedented high rates. In all, AIG has
posted losses of $25 billion.
AIG’s
difficulties could have unleashed further chaos on Wall
Street if the company was unable to meet its
obligations. AIG has estimated that it would be
responsible for stopgapping $8 billion or more in
mortgage-related losses.
“Numerous of the Wall Street banks are exposed” to AIG,
said Rodney Clark, an analyst for Standard & Poor’s, the
credit-rating firm. He said Merrill Lynch, which was
acquired by Bank of America in a fire sale over the
weekend, is most reliant on the expected insurance
payments.
The
government’s plan to help AIG will exclude the insurance
subsidiaries, which are regulated by state authorities.
AIG released a statement saying that its life insurance,
general insurance and retirement-services businesses are
adequately capitalized and can meet their obligations.
Most states run pools to backstop insurers who are
unable to pay claims, though terms vary.
AIG was
once a darling of Wall Street before it started running
into trouble five years ago. The company achieved
startling growth under Greenberg, an insurance scion
whose sons also led major insurance concerns.
Although
AIG never paid extraordinary salaries, the most
successful employees could become partners in CV Starr
and Co., a financial-services firm named after AIG’s
founder. Starr partners could easily earn millions. AIG
operates in 130 countries and has more than 100,000
employees.
AIG
executives spent a lot of effort earning the
affections—and allegiance—of government officials in the
United States and overseas.
Ron
Shelp, a former AIG vice president and one of
Greenberg’s lieutenants who has written a book about
AIG, called it a “culture of influence.”
“It was
a belief that you can bring most government officials
around to your view,” he said. For instance, AIG worried
about whether countries would try to nationalize its
insurance subsidiaries.
AIG
lobbyists worked to persuade US lawmakers to impose
tariffs or cut off other countries exports if they acted
against the interest of US corporations operating
subsidiaries overseas, Shelp said.
Greenberg was known as an irascible leader whose
presence could be felt across a room. To build AIG, he
launched a buying spree of insurance companies and other
financial firms. That effort paid off personally: At one
point, Greenberg was worth $3 billion.
In 2005
Greenberg was forced out as chief executive in a clash
with regulators who questioned the company’s accounting
and other practices. AIG ultimately agreed to pay more
than a billion dollars in fines to the government to
resolve the charges.
Martin
Sullivan, another AIG insider, replaced Greenberg. He
was forced to resign earlier this year because of the
company’s growing morgtage-related losses, and was
replaced by Robert Willumstad, a former Citigroup
executive. |
