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Extra
AIG's Greenberg: the anti-Buffett
The two corporate titans have often been compared. But the deal that forced Greenberg out shows how different they really are. Investors can draw a lesson.
By Christopher Oster
In 2000, when American International Group's stock price was approaching its peak of $103, The New York Times paid the company's chairman, Maurice R. "Hank" Greenberg, a high compliment.
In a front-page article lauding Greenberg's leadership, the Times said Greenberg and Berkshire Hathaway (BRK.A, news, msgs) Chairman Warren Buffett "have more in common than what sets them apart" and noted that it was "high time, too, to examine Mr. Greenberg's legacy in the same light as Mr. Buffett's."
AIG (AIG, news, msgs), the article noted, had returned 864% in the prior 10 years, compared to Berkshire's 647%.
Recent events, which led to Greenberg's resignation as both chairman and CEO in March, point to a different conclusion: That Greenberg is in many ways the anti-Buffett.
Buffett typically lets the chiefs of his portfolio companies to run their businesses with little interference. And the folksy Omaha resident cares little about whether Berkshire's short-term results are volatile, so long as the company delivers in the long run.
In stark contrast, Greenberg as chief executive was so much a micromanager -- and apparently so consumed with delivering consistent short-term results -- that he allegedly helped engineer the deal to boost AIG's premium revenue that is now being examined by regulators.
That deal, which reports say is most directly responsible for ending the 79-year-old Greenberg's nearly four decades as AIG's iron-fisted leader, was consummated in 2000, the year of the Times' fawning article. And the purpose of the arrangement was to make AIG's results look better than they really were.
On the opposite side of the table in the deal: Berkshire Hathaway subsidiary General Re. The arrangement again shows the contrasting styles of the two CEOs. Greenberg allegedly helped engineer it personally with a call to Gen Re's head. Buffett, according to The Wall Street Journal, was told Greenberg inquired about a deal, but denies knowing how it was structured. Buffett is expected to be quizzed by regulators on April 11 about his role in the transaction.
Since the Times' piece, the fates of the companies' shareholders, at least, have diverged sharply. AIG's stock is down more than 40% from its all-time high. Berkshire's shares, since June 2000, are up 62%.
Greenberg announced his retirement on March 29, in a letter written by his lawyer that noted the need to "promptly and cooperatively resolve all inquiries and investigations by regulators and other authorities." Those authorities include New York Attorney General Eliot Spitzer, the SEC and the Justice Department, according to reports. In addition to the Berkshire deal, regulators are looking into AIG's relationships with some of its offshore affiliates.
For investors, the lesson of AIG's decline and Greenberg's fall is this: A CEO may be worshipped on Wall Street and celebrated by the New York Times, but if you don't understand what a company does to generate its profits, a CEO's reputation is of little help.
Beating competitors, browbeating analysts
While making the case that Greenberg is the anti-Buffett, let's give Hank his due. He built AIG from the also-ran insurance company he took over from founder Cornelius Vander Starr in the mid-1960s into a powerhouse, a company that even now is valued at $134 billion by the stock market. Last year, the company generated $11 billion in profits on $99 billion in revenues.
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A big part of Greenberg's genius was his discipline. Cutthroat competition among property-and-casualty insurance companies frequently led AIG's industry peers to slash prices at the worst possible times, hoping to make up for any losses by investing the premium dollars. Greenberg refused to stoop to such measures, known as "cash-flow underwriting," even though it provided its practitioners with gaudy results when times were good. When those other insurers had to pull back because of losses -- as many did a few years ago, when corporate scandals brought a flurry of executive-liability claims -- AIG rolled out policies with tight contract terms and high premiums, and hauled in the profits.
Wall Street loved AIG's consistent results: The company delivered 15% annual profit growth almost without fail. But analysts never completely understood how the company worked. One fund manager with a big AIG stake went so far as to construct a wall-sized map just to comprehend how the company's subsidiaries were related.
When analysts did dare question how AIG's success would continue, they got an earful from Greenberg, sometimes in the middle of a quarterly earnings call. Reporters, too, drew Greenberg's wrath when he didn't like their stories. (And it wasn't just him -- the family got into the act. While covering AIG for The Wall Street Journal, I was chewed out not only by Greenberg but also by his adult children.)
Greenberg's take-no-prisoners style apparently proved too much for two of his sons. Each left AIG while in the role of heir-apparent.
AIG grew to its current size in part through Greenberg's smart -- and at times quirky -- use of the cash generated by its core insurance operations. In 1990, AIG paid $1.3 billion for an airplane leasing company, which has been a huge moneymaker for AIG.
But AIG's biggest acquisition has become part of Greenberg's undoing. In 2001, AIG paid $23 billion to acquire annuity giant American General. But federal prosecutors, according to The Wall Street Journal, are looking into whether Greenberg tried to keep terms of the acquisition more favorable to AIG by propping up the company's stock price. Reports say he did so, in part, by trying to call Dick Grasso, then head of the New York Stock Exchange, to ask him for assistance.
AIG spokesmen have denied any wrongdoing by Greenberg or the company related to the American General deal.
Who's afraid of a little volatility?
Greenberg's attention to AIG's stock price is legendary. When the company's shares took a beating in 2002 because of concerns about a successor for the then 77-year-old CEO, he phoned an analyst at Credit Suisse First Boston and asked why his stock was "under attack."
Buffett, by contrast, doesn't appear to mind a few bumps in Berkshire's share price. In 2002, in one of his famous, plain-spoken annual letters to shareholders, Buffett said one of Berkshire's advantages as an insurer was its "tolerance for huge losses," noting that periodically, taking on huge risks "will bring on a terrible year."
The contrasting styles brought the two companies together in late 2000, when AIG, according to the Journal, booked $500 million in premium from Berkshire's General Re as revenue and added $500 million to its reserves for expected insurance claims.
The transaction didn't impact AIG's profit, but regulators are examining whether the deal made AIG's reserves and revenues look better than they really were. AIG acknowledged on Wednesday for the first time that it was wrong to characterize the Gen Re deal as an insurance transaction, and said it would adjust its financial statements.
It's unclear what the impact was on Berkshire's books -- or what benefit Berkshire got from the deal (aside from a reported $5 million commission). But Berkshire for years has been willing to take on other insurers' volatility and short-term problems in exchange for the better long-term deal.
In Berkshire's 2000 annual report, Buffett noted that its subsidiaries wrote coverage that "penalizes our current earnings but gives us float [investment capital] we can use for many years to come."
The transaction in question is one of dozens AIG entered into that currently are being looked at by regulators.
Now the question for investors is whether Greenberg's departure is good for AIG. The stock market says yes. AIG shares jumped 2% the day Greenberg announced his resignation as chairman.
Even if the market is right, shareholders are likely in for a bumpy ride as regulators dig deeper into AIG's books. AIG's new management, too, is sure to try and surface any sins now, so they can be blamed on Greenberg's leadership and not the new administration, headed by CEO Martin Sullivan.
All that is good news for shareholders. AIG for years has been a company long on profits and short on explanations about why those profits were so consistent. Now regulators are rooting around where stock analysts and fund managers couldn't.
Any bad news generated by such probing will create buying opportunities. In the long run, and to Greenberg's credit, AIG is poised to take advantage of two huge trends that should drive the company's stock higher: The aging of baby boomers (via subsidiaries American General and SunAmerica, two big sellers of annuities) and the growth of Asia, China in particular. AIG is the top foreign seller of life insurance in China, and has 19,000 insurance agents in the country.
For investors, the message is clear: It's time to forget the emperor and focus on the empire he created.
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