Thursday, January 10, 2013

The Definition of Chutzpah: Maurice R. Greenberg


The Definition of Chutzpah: Maurice R. Greenberg

Up until now the word “chutzpah” has defied precise definition.  Webster’s dictionary defines it as supreme self-confidence, nerve, or gall.  It lists synonyms such as audacity, brassiness, cheekiness, or temerity.  None of these English words quite capture the Yiddish meaning of chutzpah until now.

The former Chairman of AIG, Maurice R. Greenberg, is suing the United States Government for breaching its fiduciary duty to AIG shareholders in structuring the bailout of the company, and for subsequent decisions to sell certain subsidiaries and settle various claims with Goldman Sachs and other banks.  He tried to pressure AIG into joining him in suing the United States.  AIG has declined to join his legal claim.  After I provide you with a bit of background, we’ll get back to the definition of chutzpah.

Voting on a Deal (1999)


In September 2008 right around the time of the Lehman bankruptcy, the Federal Reserve Bank of New York stepped in to save AIG from collapsing.  In exchange for extending $85 billion in credit, the Federal Reserve received a warrant to acquire 79.8% of the company.  The loan carried an interest rate of 13.5% (8.5% over LIBOR).  As AIG’s problems deepened, the Federal Reserve injected more capital, and the loan grew to $90 billion.

I know we’d rather forget, but the credit crisis didn’t abate after the Lehman failure and the initial rescue of AIG.  In order to keep AIG solvent and reduce the debt burden on the company, in November 2008 the US Treasury purchased $40 billion in preferred shares.  And, in February 2009, the Federal Reserve restructured the credit facility to dramatically lower the interest rate on the credit facility.  As AIG continued to consume capital, the Federal Reserve and Treasury repeatedly expanded their commitment.  In the end, the US Treasury wound up owning about 92% of AIG.  If you’re interested in a summary of the government’s actions you can read Peter Eavis’s article in yesterday’s New York Times.[1]  Or if you relish reading extensive reports, you’ll find the details on the US Treasury’s website.[2]  Truth be told, I like reading these reports.

Let’s get back to Mr. Greenberg.  He’s complaining that the Federal Reserve and US Treasury severely damaged shareholders through the onerous terms of the bailout.  If you’re interested in his legal argument you can read the United States District Court decision by Judge Paul A. Englemayer.[3]  While the judge dismissed his case, a similar suit is still pending in the D.C. circuit.  However, I’m not interested in Mr. Greenberg’s legal theories of recovery.

I’m focused on the guy who is complaining and forcing the taxpayer to run up legal bills answering his claims.  This is the same Hank Greenberg who was ousted as Chairman and CEO of AIG in 2005 as the result of alleged accounting irregularities.  He’s the guy who built the sprawling empire that eventually spiraled out of control.

He’s still chairman of C. V. Starr & Co, a controversial company that controlled a large slug of AIG shares and helped to make Mr. Greenberg very wealthy.  He sparked further controversy when he sold a large portion of those shares shortly after his ouster.  After spending four decades navigating the conflict prone relationship between his duties as chairman of AIG and his simultaneous control of Starr, Mr. Greenberg can hardly complain about the conduct of the US Government.

Rather than complaining, Mr. Greenberg should be thanking the United States.  The Federal Reserve and Treasury could have wiped out Mr. Greenberg and the other private shareholders entirely.  In fact, a bankruptcy would have done just that. Moreover, the failure of AIG would have wiped out a lot of Mr. Greenberg other investments.  This guy has chutzpah.


In the interest of full disclosure, I worked with Mr. Greenberg in the early 1980s.  I was Executive Director for the Council on Fiscal and Economic Priorities for New York Governor Mario Cuomo, and Mr. Greenberg was chairman of a task force to reform the laws governing investments by insurance companies licensed in New York State.

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