Eliot Spitzer on AIG
Wednesday, March 18, 2009
Eliot Spitzer, columnist for Slate and former governor of New York, talks to WNYC's Brian Lehrer about AIG bonuses, CEO compensation, the NYS budget, and other matters of the day.
Brian Lehrer: What put AIG in your sights as New York attorney general?
Eliot Spitzer: We were approached by some sources who said that AIG, which was at the time guided by Hank Greenberg as CEO, was, to speak in street vernacular, juicing its books by creating false reinsurance contracts that would appear to add capital to its balance sheet. Now that sounds all very complicated but, what it really means is they were playing games with their accounting in order to look stronger than they were. Hank Greenberg, there are tapes that prove this, was very, very concerned with any, even minor, fluctuation in their stock evaluation.
These contracts, it was alleged, were designed to make them look better in the eyes of Wall Street. We investigated, brought a civil case to settlement of $1.4 billion. At the time, $1.4 billion seemed like a lot of money. It was the biggest financial settlement ever. The board removed Hank Greenberg because he invoked the Fifth Amendment, when he was asked about this. Four people were charged criminally and convicted for basically playing games. But it lead us to inquire and to probe into the inner workings of the company and what we saw was a mess.
Lehrer: You say the real AIG scandal is not the bonuses, but the payments in full to the counterparties that AIG does business with: Goldman Sachs, Bank of America, JP Morgan Chase?
Spitzer: In essence, and the numbers are just astronomical. The initial payment was $80 billion and there have been subsequent payments bringing it up to about $183 billion, which to put it in perspective is larger by significant percentage, than the entire budget of the state of New York for fiscal year, but much of that money, AIG was a conduit. It was given to AIG, and AIG then shipped it on through to other firms. My question is, when the group got together, and as we best understand it, it was Mr. Bernanke and Tim Geithner and Hank Paulson, and Lloyd Blankfein, I think was there as well, the CEO of Goldman. When they got together last Fall and decided very very quickly that AIG needed $80 billion, why did they make that determination? That is the issue Congress should be probing. The bonuses yes, they matter, but they are penny ante compared to this money. Why, if they knew that that money was going to go back to Goldman, BofA and Morgan Chase, did they need it? What were they getting the money for and what was the premise that made them pay that money up front?
Lehrer: Do you disagree that the AIG bailout is necessary, that precisely because they are so intertwined with the big banks and all this money on their toxic assets, that if AIG were allowed to fail like Lehman Brothers, the whole financial market would really collapse way beyond what we’ve seen so far?
Spitzer: Let’s go back to where we were last fall, right after Lehman had failed which is, almost universally viewed, as having been a policy error. You had Bear Stearns, you then had Lehman on the cusp and I think what really happened is that Washington said, we have to show that somebody can fail, that we won’t bail everybody out. The whole discussion of too big to fail is a separate discussion. I think policy was fundamentally flawed to let these banks get that big without putting real constraints upon them. Either you are too big to fail and we regulate you, or we break you up so you are not too big to fail. You can’t have it both ways, too big to fail, without the regulation.
Lehrer: Are they now, in fact, too big to fail for the good of America?
Spitzer: Parts of AIG needed to be preserved, some of these contracts needed to be stabilized, you couldn’t have another credit crisis such as that happened after Lehman failed, but that doesn’t mean that you write a check for $173 billion, 100 cents on the dollar, to cover all these contracts.
Lehrer: When you were looking at AIG’s books, as NY State attorney general, did you see the credit default swaps and the outsized risk that they represented?
Spitzer: We were not looking at that part of the company. We were looking at their reinsurance contracts with Gen Re, but what we saw was a company, when you peeled back the first layer of the onion, that was without anything close to adequate controls and adequate structure to know what was going. The way they put their financials together was something that was absolutely beyond what was acceptable, which was why they paid a fine of $1.4 billion.
Lehrer: The Wall Street Journal lead editorial went after you, actually blamed you for kicking of the AIG crisis and the housing crisis even.
Spitzer: The Journal Editorial page has been wrong on just about every issue out there and I hope nobody relies upon them to make important life decisions. It is akin to blaming the doctor who discovers the cancer, saying if you hadn’t discovered it, it wouldn’t have been there. When we looked at the books, they were a mess. The board of extremely wise individuals and notable individuals in the hierarchy of American business and politics looked at Hank Greenberg and said, “No, this is not the way to run a company.” And we have seen what has happened as we have had needed to work through the resulting problems. The company when we looked at it was in deep trouble and the finances continue to get worse, absolutely, because they were following the policies that were put in place while he was there. The Editorial page is always looking for a scapegoat. They have never been able to accept that any of the CEOs that they liked made any errors in judgment.
Lehrer: The editorial also says that you bullied out the responsible Hank Greenberg on trumped up charges, that you never even tried to actually prove and a lot of Wall Street thinks that.
Spitzer: No, what happened, in fact, is that the company agreed to pay the fine, restate its earnings, it had no controls that were adequate. Our complaint alleged all that. There are tapes and overwhelming evidence that proved our case, four people went to jail because of it, he was called, he being Hank Greenberg, by the federal prosecutor in that criminal case, an unindicted co-conspirator in that precise set of facts. Now the larger reality is that the company itself was not being managed in a way that the board could tolerate,which is why the board, independent of our judgment, asked him to leave after he invoked the Fifth Amendment. That historical record will speak for itself. The Wall Street Journal Editorial Page, I think everyone should keep in mind speaks to an ideology that is precisely the ideology of that last 10 years that got us to where we are. Never wanting a regulatory framework that would require either adequate capital, reasonable controls, or an examination of the types of remarkably outsized risks that we are talking about. So you have a clear ideological choice to be made here. Either The Wall Street Journal Editorial Page or the one that I think we are all now gravitating towards which is sound, reasonable regulation.
Lehrer: Again now, it is the New York state attorney general who is really pressuring AIG on the bonuses. Andrew Cuomo discovered these bonuses and told Barney Frank, which is raising the question, “Where was Tim Geithner, the treasury secretary, who was head of the New York Fed at the time?" Is Geithner asleep at the wheel or maybe too in the Wall Street tank?
Spitzer: Tim, along with Mr. Bernanke, and Hank Paulson and lloyd Blankfein, who were all there, need to answer some real questions about why they made those initial judgments. Those questions, as I say in my article yesterday, I laid them out. I said they should be answered in public, very quickly, about the initial decisions, what was known, about who the counter parties were, who were the beneficiaries going to be of these payments, because that needs to be understood in terms of evaluating the wisdom of their judgments. Tim has got to answer those questions and I think that should be done very quickly.
Lehrer: These are retention bonuses, meaning so people don’t leave the company, but why weren’t these executives, who were specifically in this credit default swap division of AIG fired for failing at their jobs, rather than bribed so they wouldn’t leave?
Spitzer: My answer to that, if I had to make a judgment right now, I’d put you in as CEO of the company so you could do precisely that. As I understand, it only pays a buck a year right now. There is a sense in corporate America at the top, that individuals become indispensable and are then paid based upon that premise. It’s not right. Especially when you look at the record that we now have before us and you see the egregious misjudgments that have been made. Your question is precisely the right question. “Why do we want them in the first place? Aren’t there other people who can come in, either to unwind the contracts that they have put in place, or to make better judgments going forward?”
Lehrer: It was a year ago yesterday that you left office. How do you feel now about having taken yourself out of the position of being more directly involved with all this?
Spitzer: I am obviously disappointed in what led to that. I’ve apologized and in my view, have acted in the past year the way I should have, which is to say I will remain quiet, others will step in and hopefully pursue these issues, whether it’s the MTA refinancing or AIG investigations and continue to move forward. I, like others, also am disappointed in what I have seen in terms of public policy in these domains and as you suggested, there was a period when as attorney general of New York I was pursuing issues that nobody else wanted to pursue. And we pursued AIG and Wall Street’s structural failures in a way that others shied away from because it was politically unpalatable for them to address those issues. Now it is the flavor of the month. Everybody is jumping up and down serving subpoenas, beating their chests trying to be tougher than the next person. That’s wonderful. But I think as you say, there was a moment when that was not the case. And so perhaps I can add a slightly different perspective.
Lehrer: Are you trying to make a comeback as a media person?
Spitzer: No, I am simply trying to add a few words, occasionally as I best can, to shed light on some very vexing policy problems that are out there that have not been addressed necessarily in the best possible way by our leadership. We all have to work together to do what we can do to move forward and to the extent that writing a few columns and adding my perspective can help, I’m thrilled to do that and help in any way. I think that’s what we all owe to our society.
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