Sunday, October 5, 2008

The Activist Entrepreneur: Greenberg and the AIG Magnet

This is part one in a series of posts that will continue to follow the activist investing efforts of Hank Greenberg at AIG. This blog is written by Chris Faille, a writer (formerly with Reuters’ HedgeWorld) and regular contributing expert to our blog. Chris’ blog on the struggles for corporate control can be viewed at

Recent news about AIG and about its former chairman, Maurice (Hank) Greenberg, makes an important point about activist investing. Indeed, about entrepreneurship. We might get at this point through an analogy from physics: how is an activist-entrepreneur like, and unlike, an iron filing? On the one hand, an activist moves toward a profit making opportunity as iron filings move toward a magnet. But, on the other, if you put a playing card between the filings and the magnet, the filings will press indefinitely against that card’s surface, going no further. With an entrepreneur, the pursuit can get ingenious and convoluted.

Greenberg, who was at the center of AIG’s growth over a period of decades, has asked for the chance to buy some of its assets. He was unceremoniously ejected from the company in 2005, and has since sought – against obstacles a good deal hardier than playing cards – to find his way back there.

Even if a stone wall is imposed by the fiat of New York State or the United States between the activist-entrepreneur and the opportunity, the former will not remain idiotically pressing his face against the stone, crying “foul”. If he is both agile and determined, he’ll find some more circuitous route, up over the wall or around one of its sides.

The latest news is that Greenberg – who couldn’t be reached for comment on this entry – has objected, in a letter to AIG chief executive Edward Libby, that the process of selling assets has been taking place “without transparency and without providing the opportunity for the participation of alternative purchasers.”

The Wall Street Journal broke this story Wednesday morning, and an AIG spokesman confirmed in a telephone conversation that the company has received the letter as described in the Journal’s report.

The spokesman, Joe Norton, said that he couldn’t comment on the specific contents of the letter, but that the company “welcomes any reasonable expressions of interest in the businesses we plan to sell.”

Some History
AIG is a powerful source of entrepreneurial magnetism for Greenberg. It was the company’s founder, Cornelius Vander Starr, who put Greenberg in charge of its North America holdings in 1962, and named the younger man as his successor six years later. It was only a short time thereafter that the company went public.

Greenberg was still at the top of the corporate hierarchy there in 1999, when AIG put out a press release that described consolidated assets as $259 billion, and shareholders’ equity as $32.3 billion.

Some critics maintain that at or around this time, AIG was paying “contingent commissions,” an illegal way of persuading independent brokers to steer business their way. The critics, including the usual class-action plaintiffs’ lawyers, maintain that the company’s capitalization was inflated because it hid this practice, and consequently its legal liability, from its investors.

The Stone Wall I
In October 2004, the then attorney general for the state of New York, Eliot Spitzer, filed a lawsuit against Marsh & McLennan Companies, a giant insurance brokerage firm, in connection with their solicitation of just such commissions. Maurice Greenberg’s son, Jeffrey Greenberg, was the chairman and CEO of Marsh Mac at the time, a position whence the younger Greenberg resigned soon after the charges were made public.

The elder Greenberg stayed on longer, protesting that the charges were unfounded. The board of directors of AIG pushed him out in March 2005. That May, Spitzer dropped the other shoe, bringing charges against AIG, Greenberg, and the former AIG chief financial officer, Howard I. Smith, alleging fraud and violations of insurance and securities laws.

The AG office hasn’t been able to make any of these charges stick. Spitzer himself dropped some of the charges while he was still AG.

Mr. Greenberg was (understandably) unhappy about his directors’ rather spineless appeasement of Spitzer, and he continued through various entities to control a large chunk of the equity of AIG. In recent months, he had been acting like a man in search of vindication and return.

In November 2005, Greenberg filed a notice with the SEC that he and entities he controlled had decided “there are opportunities to significantly improve the Issuer's [AIG's] performance and strategic direction, as well as the value of their investment." The filing committed Greenberg to nothing, not even to "holding discussions" with other shareholders. Why does one file a document with the SEC that says in effect, “I'm not all that happy with the return I'm getting and I might talk to some others to see if they feel the same way”? People who hold large chunks of stock in a publicly owned company are required to keep the public, and so the management of that company, apprised of their intentions, so there are no takeovers-by-ambush. Despite all the cautious lawyerly wording, then, it appeared to many that Greenberg was setting the stage and some sort of struggle for control was in the offing.

The Stone Wall II
The following month, the Insurance Department of the state of New York stepped up to the plate. New York law says that if an individual stockholder, or a group acting together, acquires more than 10% of the equity of a company selling insurance within that state, the acquirer becomes a "controlling entity" – which means such an acquisition requires state permission.

In December, the department calculated that Greenberg and various affiliated entities constituted a “group” in the relevant sense, and demanded that he “cease and desist from engaging in any further activities aimed at exercising a controlling influence over AIG.”

An attorney for Greenberg, Marcia Alazraki, replied at once, saying that the various entities involved weren't a group in the relevant sense, and asked for a meeting with NY officials to discuss the issue. Ms Alazraki knows the issue well. She was deputy superintendent at the NY Dept. of Insurance herself in the early 1980s, and assistant counsel to the Governor of the state, Hugh Carey, before that (1979-81).

Stone Wall III
But Greenberg persisted, in the belief that he could rescue AIG from what ailed it. In a filing with the SEC on September 16, he said that he had retained an advisory services firm in connection with his investment in AIG and that he was pursuing a variety of options.

Finally, though, the company interposed between itself and its former boss the largest stone wall of all, the United States. It signed a definitive agreement to set up a $85 billion credit line with the Federal Reserve Bank of New York, and to surrender 80% of its equity to the federal government. (As of September 30th AIG has drawn down $61 Billion on the credit facility)

Obviously this implied a devastating degree of value dilution for the shareholders, including Greenberg, who owned roughly 11% of the stock at that point. When he left the company, he held $20 billion worth of its stock. Those holdings are now worth about $800 million.

A less persistent ‘iron filing’ might have taken his losses and drifted away at this point. By contrast, Mr. Greenberg’s interest in those asset sales has an inspirational quality to it, as befits his “greatest generation” bona fides.

This entry was posted by Chris Faille who is a journalist covering activist investing issues and a regular contributor to our blog.