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Congress Backhands Greenberg in AIG Report

A new Congressional report heaps a bunch of blame on former AIG CEO Hank Greenberg for his role -- or lack of a role -- in AIG's operations leading up to the bailout. In the process it lets virtually everyone else off the hook.

NEW YORK (

TheStreet

) -- Was Hank Greenberg the only person who could have prevented the collapse of

AIG

(AIG) - Get Report

?

As unlikely as that sounds, it's what a Congressional report released on Thursday implies.

"Though a controversial figure, Hank Greenberg is widely acknowledged to have been the only person who fully understood the company's vast web of inter-relationships," says an analysis by the Congressional Oversight Panel of AIG's bailout and its impact on the markets.

The panel puts a heap of responsibility for AIG's problems on Greenberg, who left his role as chairman and CEO of the company three-and-a-half years ahead of its near-collapse in September 2008. The management team that followed Greenberg, or its board or the regulators who were asleep at the wheel get off easy in comparison.

And it's a fairly heavy assessment of blame, given the company's enormous requirement for government aid -- reaching $182 billion at the max -- as well as the fact that it's one of the least likely bailouts to be fully repaid. Furthermore, the panel claims the bailout had a "poisonous effect" on the broader financial market.

As it pertains to Greenberg, the panel noted his long time at the helm -- 37 years -- as well as his expansion of the business into new products and markets. Even after he left the firm, Greenberg used his leverage as a top investor to warn management in 2005 that it ought to exit complex investment products, called CDOs. He reasoned that, after AIG lost its top-notch credit rating in 2005, counterparties could demand more collateral if credit conditions began to falter.

In fact, that's just what brought AIG to its knees a few years later. But the panel implicitly faults Greenberg for this too -- saying that he should have done more to force management's hand.

"There does not appear to be any evidence that Mr. Greenberg advocated for such a position shortly after the downgrade, a period when he was no longer the CEO, but clearly a large shareholder with a unique perspective on the company," according to the report.

Oddly enough, the report only mentions Martin Sullivan -- the guy who led AIG between the time Greenberg left until a few months before its bailout -- twice. Once in passing, and once to point out that in December 2007, the then-CEO assured investors that AIG's derivatives were "carefully underwritten" and that "the probability that it will sustain an economic loss is close to zero."

And he ran a firm whose business was based on actuarial models?

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Instead of putting any undue blame on Sullivan, the panel puts more blame on Greenberg, and perhaps the board for not having had a better succession plan in place. If that had happened, the "new CEO" -- you know, the one that didn't exist -- "could have had a more thorough understanding of the complexity of the company, and thus could have prevented or mitigated the damage."

The panel also takes special note of "

Greenberg's role in fraudulent business practices and accounting fraud that misrepresented AIG's earnings." (We'd call it an "alleged role," since some of the charges filed by former Attorney General Eliot Spitzer have since been dropped and others remain unresolved.)

Officially, the panel never blames Greenberg for AIG's near-failure. Instead, it blames shoddy risk-management, its credit-default swaps and its subprime-soaked securities lending business. It also takes a stab at a toxic combination of negative market sentiment and the interconnectedness of the financial system (see

this helpful graphic). Finally, there's a brief section titled "Were Regulators Aware of AIG's Position?" (Short answer: No. Duh.)

The panel also names lots of entities that played a role in AIG's controversial rescue -- the Fed, the Treasury, state regulators, ratings agencies, law firms and counterparties -- as well as individuals like Joseph Cassano, the head of AIG's financial products unit and

Robert Willumstad, who ran the company for about three months before it went to the government with hat in hand.

Yet the only individual person it appears to cast significant blame upon is Greenberg. It's strange because the hard-charging 85-year-old staked his career, his reputation and a good deal of his fortune in AIG's performance, and lost billions when its stock was torn to shreds. Even after he was forced out of the top position, he tried to warn management of its missteps. But Greenberg continually butted heads with Sullivan's team, which waved him away like a burdensome gnat, leading Greenberg to eventually file suit.

Greenberg recently settled those legal headaches after making amends with the newest CEO, former

MetLife

(MET) - Get Report

CEO Robert Benmosche. He has also been largely cooperative with the government in its long-running, multi-pronged investigations into the AIG mess.

Most headlines about the report have noted Congress' assertion that the AIG rescue had a negative impact on the markets. But it's worth asking what would have happened had the government allowed AIG to collapse? Consider this: The firm's balance sheet was 1.5 times the size of Lehman Brothers, with far more ties to the markets, businesses and consumers.

But it's also worth asking who should be held responsible. After all, Greenberg was gone from the board room and executive suite long before AIG succumbed to financial pressures. Meanwhile, unnamed regulators, management and directors kept a blind eye to what was going on, right up until the end.

-- Written by Lauren Tara LaCapra in New York

.