- To help readers better understand the nuances of foreign policy, CFR staff writers and Consulting Editor Bernard Gwertzman conduct in-depth interviews with a wide range of international experts, as well as newsmakers.
Amid a swirl of negative financial news, the largest U.S. insurer, American International Group (AIG), has seen its shares pummeled following a series of credit downgrades (CNNMoney). On September 15, New York state officials granted the firm emergency permission to loan itself $20 billion, but speculation soon arose that the firm might need significantly more money. After attempts to secure a loan through private markets failed, the federal government provided AIG $85 billion in emergency funding (FT) on September 16. In this interview, recorded before the loan was secured, Maurice R. Greenberg, the retired chairman and CEO of AIG and current chairman and CEO of the financial services firm C.V. Starr & Co., tells CFR.org that the collapse of AIG could have major ripple effects for the global financial system given the extent of the company’s operations. Greenberg, who is honorary chairman of CFR’s board of directors and controls approximately 12 percent of AIG’s shares, says the collapse of America’s largest insurance company would be "very negative to the United States’ interest." The process of unwinding the firm’s various contracts could take ten years, he says, and would prove damaging for the numerous financial players involved. He says the firm’s problem "is not a solvency issue, it’s a liquidity issue," and that he doesn’t see other insurers facing similar predicaments in the coming weeks.
I was hoping you could outline for us what you think needs to be done to stabilize AIG.
There are a number of things that need to be done. They need a temporary bridge loan from the Fed, unless Goldman Sachs and Morgan are able to raise the needed funds in the private markets. That we’ll know very shortly.
AIG is not a solvency issue, it’s a liquidity issue. AIG has a trillion dollars of assets so it’s not an issue of solvency. It’s really just they need some cash to meet the collateral requirements that are being made on them. The underlying subsidiaries, which are all the insurance companies principally operating worldwide, are perfectly healthy and making money. But if this thing continues, there will be a run on insurance companies. Clients will say, "Why should we do business with a company that might be going under." So time is of the essence to get this resolved.
Now AIG’s solvency and liquidity is in our national interest. It operates in 130 countries. There’s no entity like it in the world. It serves many, many purposes for the United States. First of all—being around the world as it is—it’s been an ambassador of goodwill from a foreign policy point of view. Very often, I can tell you from my own experience, when you meet with the leaders of these countries you enhance the relationship between the United States and these countries. You are a source of investment income—because of your local business—to American companies or other foreign companies wishing to invest in these countries. So it spurs trade and investment.
We also carry the flag of the United States around the world. It’s a flag carrier. There’s no company like it. So to have AIG go down would be very negative to the United States’ interest, and business in those countries. They won’t understand our government let this happen to it. I think it would undermine the credibility of our own government.
What sort of timeframe are you talking about in terms of getting the loan?
They need to get it very soon. You need to get a loan to stabilize the company so that the ratings agencies don’t downgrade it. The more downgrades you have the more collateral you have to come up with in capital. So that’s critical. We’re talking about something that would be temporary because over a reasonable period of time you’ll raise the capital and you’ll sell some assets. It’s not as if this is impossible to do. It can be done. I assure you it can be done.
So you think they are at risk of another ratings downgrade quite soon if they don’t get an emergency loan?
If they don’t get a bridge loan, I think that the rating agencies are under such pressure from how they behaved previously that now they’re bending over the other way.
From the standpoint of Morgan Stanley or Goldman Sachs, why is it in their interest to raise the money?
It’s in their interest because they are counterparties to many AIG transactions. The eventual problem would be, when you’re starting to unwind counterparty transactions worldwide in a company the size of AIG, it will take about ten years to do. The major beneficiary would be the lawyers. But everyone else will come out worse off.
To what extent is this a firm-specific concern if it’s just a short-term liquidity thing? Is this something we’re going to be seeing more of in the days to come, weeks to come, at other major insurers?
I don’t think so, because AIG is unique. There was and is no company like AIG.
What’s the actual impetus here? Is it the fact that AIG is invested in mortgage-backed securities itself, or is it due to obligations it has due to having sold credit protection to other firms?
It sold credit protection to other firms. It sold credit default swaps. Now you probably know, the SEC [U.S. Securities and Exchange Commission] is going to institute new regulations on short selling. What was happening was short-sellers would short AIG stock, so that would make the stock go down. And because of the stock going down they would have to put up more collateral on their credit default swap business. So it was feeding on itself. So that has to be changed, and that would be of help, obviously.
Last, let me just ask you, what else do you see as necessary—clearly it’s a big question—on the regulatory front?
The governor of New York has worked with the insurance department to modify the regulations permitting AIG subsidiaries to move up about $20 billion of excess assets as a means of helping. That will help. But on the regulatory front, other than a bridge loan, that’s all they need.