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Greenberg's AIG Case Is Intriguing, but Doomed

NEW YORK ( TheStreet) -- Former AIG (AIG - Get Report) chief Hank Greenberg should lose his lawsuit against the U.S. Treasury Dept. over what he argues was effectively the theft of the company he spent 37 years building, though his case is better than you think.

Greenberg was forced to resign from AIG in 2005 amid an accounting investigation the company eventually settled for $1.6 billion. He remained a large AIG shareholder, however, when the insurer was bailed out in 2008, and is suing on the grounds that the transaction violated the rights of shareholders.

In The AIG Story, a book he published earlier this year with co-author Lawrence Cunningham, Greenberg argues the U.S. Treasury essentially nationalized the giant insurer so it could pursue a "back-door bailout" of the rest of the financial system.

As Greenberg tells it, AIG's main problem in Sept. 2008 was a lack of liquidity -- an issue faced by many domestic and foreign institutions at that time. But while nearly everyone -- even a bank 29% owned by Libya -- got a loan at the Federal discount rate of roughly 2.5%, AIG was forced to pay a whopping 14% interest rate for its $85 billion loan, while giving the government a 79.9% stake in the company to boot.

Some of Greenberg's argument is familiar. The decision by the New York Federal Reserve to pay 100 cents on the dollar to Goldman Sachs (GS - Get Report) and 15 other financial companies that had credit default swaps agreements with AIG has already been subjected to considerable scrutiny. Which is not to say it doesn't deserve more scrutiny, but Greenberg makes other valid points that have gotten less attention in the post-crisis analysis we have seen to date.

One of those points has to do with Ed Liddy, a former Allstate Corp. (ALL) CEO who then-Treasury Secretary Hank Paulson appointed to run AIG immediately after firing Robert Willumstad, according to various accounts, including Greenberg's book, Paulson's book, On The Brink: Inside the Race to Stop the Collapse of the Global Financial System, and Andrew Ross Sorkin's Too Big To Fail. (None of these accounts, incidentally, square with AIG's 8-K filing, but that is a subject for a separate article.)

As Greenberg points out, Liddy was still on the board of Goldman Sachs at the time he signed off on a bailout that would lead to the transfer of the $63 billion in assets out of AIG and into Goldman and the other banks. He resigned from Goldman's board five days later, on Sept. 23 according to a Sept. 26 filing by the investment bank. Liddy's resignation came "in light of his new role as Chairman and Chief Executive Officer of American International Group, Inc.," the filing states.

Running a company that is in a multibillion dollar dispute with another one on whose board you sit is a big conflict. Even putting that problem aside, however, Liddy was a surprising choice among AIG insiders at the time of his appointment, according to Sorkin's Too Big To Fail. Willumstad couldn't even recall who Liddy was when Paulson informed him of his selection, and at least two AIG board members were quite surprised by the choice, according to the book. One of those board members, insurance industry executive James Orr , announced that -- forget about the short list -- Liddy "wouldn't have been on the long list," of potential candidates to replace Willumstad if the board had been left to come up with its own CEO.

But to former Goldman chief Paulson and top advisor Ken Wilson -- also from Goldman -- Liddy was the perfect person to run AIG.

"He was the Goldman board member to whom everyone turned for advice whenever they discussed whether the firm should acquire it," Sorkin wrote.

The Liddy conflict isn't Greenberg's main complaint, though it is important, and it hasn't received much attention in other accounts of the AIG bailout. Liddy didn't return a call to Clayton Dubilier & Rice, where he is a partner.

The larger question is whether the government truly forced AIG to accept such tough terms.

In a recent telephone interview with TheStreet, Greenberg certainly made it sound that way.

"Paulson, then Secretary of the Treasury, calls up Bob Willumstad who was then CEO of AIG," Greenberg asserts. "He said 'You're only going to get one deal from us. Now take it or leave it. And incidentally, you're fired.' The first question you have to ask yourself is since when does the Secretary of the Treasury call the CEO of a public insurance company and fire him? I've never heard of that. He doesn't have that authority. So he fires him and says 'Now you sign that [bailout] agreement.'
[Willumstad] said 'No, you just fired me I'm not going to sign the agreement.' So he sends in his successor which is Ed Liddy, who is on the board of Goldman Sachs, and Ed Liddy while on the board of Goldman Sachs signs this agreement, then resigns from the Goldman board three days later retroactively. I've never heard of anything like that. How do you resign from a board retroactively, after taking action that's going to benefit Goldman Sachs?"

If it were true, this version of events would certainly be troubling. Greenberg says he got most of this information from Willumstad, a call to whom was not returned.
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