American International Group, Inc. recently reached a $1.6 billion settlement with the SEC and New York state authorities after a year-long investigation into accounting improprieties at the company. But while government officials take bows for their apparent success, it is worth remembering that it was a journalist who first sounded the alarm about AIG.
Writing in The Economist in February 2002, correspondent Tom Easton noted that “Enron’s collapse…raised a whole raft of concerns about corporate America: conflicts of interest on Wall Street, impenetrable accounting, the offshore registration of corporate vehicles, large financial exposures, unhealthy deference given to celebrity chief executives, and high share valuations. Every one of these concerns is germane to AIG.”
CJR Daily spoke with Easton last week about the difficulties of going out on a limb, and the travails of taking on AIG and Hank Greenberg, the company’s famously aggressive ex-CEO.
Mark Mitchell: When you published your first story pointing to problems at AIG, virtually everybody believed it was one of the most successful companies around. Yet you published a story comparing AIG to Enron. That seems pretty extreme. How did you conclude that AIG was like Enron?
Tom Easton: You had all these issues of obscurity and impenetrability that you had at Enron.. All the clips and all the research reports were flattering. But then I spent a vacation reading AIG’s annual report and securities filings, and they were really hard to read. I looked at the proxy and tried to figure out what made this company so great, or even what Hank Greenberg’s income was, but I found it all impenetrable.
I put [the Enron comparison] in because I thought if it was happening there, it could be happening [at AIG]. But I would’ve written the story even if Enron had never happened. It was just a rhetorical device, a way of saying, “Let me characterize where AIG stands in the pantheon of other things.”
MM: Still, it was a bold call. How did you go about reporting the story?
TE: I just couldn’t justify the filings with everyone saying the company was good. You want to know why it was good. What was it’s sustainable advantage? What unique qualities did it have that made it so much more successful then everyone else? Did it have a rare genius? A unique network that was nonduplicatable? I started expecting to write a positive story, but I couldn’t write that story.
I began reading research reports in a different light. I thought, how do they know this company is doing so well? I thought they all must be really really smart, because I clearly did not get it. After I read all this stuff, I thought it was incredibly shallow. There was this general endorsement, but when I started calling these people and asking questions, their answers were incredibly unsatisfying.
I got The Economist to send me down to Bermuda to cover an insurance conference. The real reason I wanted to go to Bermuda was to check the filings for Star [International, a private offshore company owned by AIG managers]. I had to search though all these boxes of papers, and finally I found what I was looking for. And do you know what it said? It said, see Panama. I don’t think anyone before that had ever heard that Star was in Panama. They didn’t even allude to that in their U.S. filings.
The story took an incredible amount of time to write because it was confusing. I talked to more people than you can imagine. I went down to the NY state insurance office to get filings …. I talked to insurance brokers, risk managers, other companies. I talked to headhunters to see why they hired from AIG, what sort of people worked there. I had heard that Star was so secretive that even divorce lawyers couldn’t get access to it. Spouses [of AIG managers] wanted to know how much their husbands and wives were worth, but they couldn’t get the information. So, strangely, I ended up talking to divorce lawyers too.
MM: Is it true that in all the interviews you did, you couldn’t find even one person who was willing to say on the record that there was anything wrong with AIG? At the time your story came out, AIG’s stock price had fallen something like 30%. So, clearly, someone must have seen a problem.
TE That’s right, the stock price had gone down, but everyone was still saying buy. I think a lot of analysts were saying buy on the dip, or something stupid like that.
Some people were very nervous about talking. I mean reallynervous. Nervous on a higher level [of] nervous. Ask why, and you’d find out that Hank would scream at them if they said anything critical even though they didn’t feel critical about the company.
I did not speak to anyone who was short AIG until after the story was published. And I encourage short sellers to leak to me. Let me just say, leak to me please. Any leaker, please call me, give me your grudges. [laughter] …. But unfortunately, I didn’t find any of those people until after I wrote the story.
Everyone really was positive at the time. My negative story went up on Yahoo! Finance for about a minute and half and some positive story by a competitor went up and stayed for weeks. I assume AIG had some kind of leverage to get that story off the Yahoo! Website.
MM: Are you saying that AIG told Yahoo! to remove your story?
TE: It was amazing how briefly my story stayed there. Who knows why a story goes on and off the Yahoo! site. There’s new management now.
MM: At the time, you asked Seabury Insurance Capital to do a valuation of AIG, and as your article points out, the company concluded that AIG was overvalued. How did you know you could rely on that analysis, given that everyone else in the world was still saying that AIG was in good shape.
That was someone who came into my office for a different reason, and I asked them if they could do a breakout valuation…The analyst [from Seabury] had tremendous intellectual integrity He was absolutely solid. We talked about those numbers time and time again. It wasn’t a flimsy number or a sales pitch.
MM: You ultimately managed to get an interview with Hank Greenberg…
TE: AIG wouldn’t talk to me for a long time. It was the Panama [information] that got me the interview. Hank held a press conference to disclose that he wasn’t dying or something, after there’d been reports that he wasn’t well…I went up to him and asked, why is Star in Panama? And he went, “Oh, well, come in to see me. Whenever you have time. Like how about tomorrow.” I mean, he really reacted quite strongly.
I like Hank. He is very smart. When people say he’s the brightest guy in insurance, I believe that….He is [also] tough. AIG was [The Economist‘s] second largest advertiser, and [after the story came out] they canceled all our ads. It was very painful during a recession….AIG also sent a private plane with their executives to London to formally complain about the story…Even Henry Kissinger questioned the story when he came to talk about foreign policy. He was on [AIG’s} advisory board, and he said “I just want you to know that Hank Greenberg has more integrity than any person I have ever known in my life. Who wrote that AIG piece?”
MM: Do you think the government would have investigated AIG if it weren’t for your story?
TE We do not know what prompted the investigation. My assumption is that Hank would have died on the job, he would have left the company eventually. When he left, there would have been some huge write-off. Either it would have earned its way out of the problem, or there would have been some huge write-off and reconciliation. It might never have come to light. But ultimately, can you bury the truth forever?
Mark R. Mitchell wrote the The Audit column in 2006.