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Former AIG chief plots his return

In early September, Hank Greenberg was watching the collapse of AIG from a unique vantage point. He'd much rather have been in the driver's seat.

By James Bandler, editor at large, with Roddy Boyd and Doris Burke
Last Updated: October 6, 2008: 1:13 PM ET

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Maurice "Hank" Greenberg with his dog, Snowball, near his vacation home in Switzerland
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Celebrated trial lawyer David Boies is a leader of Greenberg's legal defense.
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Nicholas Gravante Jr.of Boies Schiller & Flexner heads up Greenberg's legal team with David Boies.

(Fortune Magazine) -- In early September, Hank Greenberg was in on-again, off-again settlement negotiations with the New York attorney general, with tens of millions of dollars and his reputation on the line. But his mind was elsewhere: While Greenberg was testifying on Sept. 12 amid the settlement talks, AIG lost 30% of its value, leaving him $276 million poorer.

(This is an excerpt from a story in the October 13 issue of Fortune. Read the full story.)

While Wall Street was unraveling, and AIG with it, Greenberg was in New York fighting allegations by the New York attorney general that he had instigated a series of fraudulent transactions to burnish AIG's underwriting results. (AIG had reduced earnings by $3.9 billion in connection with those transactions and others.) The next week, as AIG's share price disintegrated, Greenberg took to the airwaves to try to save the company, which he described on CNBC as a treasure. "It's in our national interest that AIG survive," he said.

A day later, he spoke to his lawyer, David Boies. "If they'd only let me raise capital six weeks ago, David," Greenberg says. The desperation and frustration in his voice are unlike anything Boies has ever heard from his client before.

On Sept. 16, the U.S. government acquired 80% of AIG (AIG, Fortune 500) when it extended a two-year loan of up to $85 billion. The way the loan is structured, AIG will be forced to draw down the entire $85 billion quickly, forcing it to sell off assets to repay the government within two years. That almost certainly shuts out any possibility of a rescue by a private-sector investor.

Greenberg says shareholders would have been better off if the company had filed for bankruptcy protection. "I just think it is disgusting," he says. "This is not American."

An uneasy truce

AIG was designed to cope with almost any shock; when he was CEO, Greenberg's lieutenants even drew up plans for the company to survive a revolution in the U.S. or a nuclear holocaust. But no one understood the danger that was ticking away deep in the company's financial products unit. It was a bomb that Greenberg unwittingly helped build by venturing into the world of credit default swaps tied to mortgages.

Like many brilliant men who gambled with such complex and sophisticated financial products, he thought he had a handle on the risks. After all, the risk models always seemed to show the same thing: No matter what historical default scenario was plugged in, the hazards were small. Generations of data didn't lie - American homeowners paid their mortgages. Until they didn't.

AIG's financial calamity occupies a special place in the storm that reshaped Wall Street in the past month. It was where Treasury Secretary Hank Paulson drew the line on letting companies die, after letting Lehman Brothers go under and Merrill Lynch be sold.

But Greenberg, while devastated, is determined to play a role in the endgame. Fortune spent the past four months talking to Greenberg and his advisors (full story here). At the outset, AIG stock was trading at $37 a share; at presstime the price was $3. During that span the entire financial industry was turned upside down, and AIG got its 15 minutes of infamy.

In May, Greenberg's legal problems were getting worse, and he was also growing increasingly alarmed by the deteriorating financial situation at his old company. AIG reported a first-quarter net loss of $7.8 billion and said it needed to raise $12.5 billion in capital. The May disclosures came just days before the annual meeting. Greenberg wrote a letter to the board urging it to delay the meeting to give shareholders time to understand the events. "The company is in crisis," he wrote.

Other major shareholders soon joined the crusade. By the end of May, CEO Martin Sullivan, who had taken the job when Greenberg was ousted in 2005, was fighting for his job. In June the board installed the company's chairman, Robert Willumstad, as CEO. Willumstad, a former president and COO of Citigroup (C, Fortune 500), said the board needed to reach out to Greenberg, its largest shareholder, as soon as possible.

Over the next few months a polite but uneasy truce existed between Greenberg and the company, still embroiled in litigation over C.V. Starr and SICO, two offshore companies that have been vital to the operations of AIG's business for more than 50 years and which Greenberg controls. Willumstad and Greenberg had several meetings in the private dining room in Greenberg's apartment building. Both men declared their eagerness to settle the litigation, and Greenberg said he wanted to help the company with its problems. But he wouldn't help until the litigation was settled.

Greenberg and the New York State AG also seemed to be nearing a settlement. Greenberg was prepared to pay New York State as much as $100 million to subsidize home heating costs for the poor. But Greenberg would not agree to have the settlement include language describing the payments as a penalty or fine. He wouldn't even agree to the usual boilerplate language in which the defendant "neither admits nor denies wrongdoing." That nondenial was too much of an admission for Greenberg.

Plotting a comeback

By Monday morning, Sept. 15, AIG's situation was dire. At home that night, Greenberg learned about the government loan after reading an AIG regulatory filing, which says the loan is contingent upon shareholder approval. Ever the deal man, Greenberg began to mull scenarios: He can tap longtime relationships with sovereign wealth funds, carry out a possible rights offering, make as much as $20 billion in asset sales. But the following weekend, on NBC's "Meet the Press," Paulson telegraphs his intentions, saying AIG will be liquidated.

As the final terms of the loan are disclosed, Greenberg is forced to acknowledge that AIG will soon no longer exist. The terms of the deal, in effect, provide a tremendous incentive for AIG to draw down most if not all of the $85 billion, an amount that cannot be raised privately. That means that AIG will be sold in pieces to buyers around the globe.

Although he can't save all of AIG, Greenberg may be able to deploy a secret weapon - two of them, in fact: C.V. Starr and SICO. If AIG is torn asunder and sold off in pieces, Greenberg vows to use those companies to try to scoop up the crown jewels.

C.V. Starr and SICO have been badly hit by AIG's stock collapse, but they still maintain a war chest of more than $4 billion, thanks to sales they have made of AIG stock. And Greenberg, still held in high regard abroad, could attract deep-pocketed investors. C.V. Starr has already taken out a full-page advertisement in the Wall Street Journal to attract some of the lucrative specialty insurance business that made AIG rich. AIG officials have said they would not hesitate to sell to Greenberg if he has a compelling bid. But whether or not state regulators would allow Greenberg to operate American insurance entities remains an open question, given the legal cloud that hangs over him.

Much dust will have to settle before the role played by Greenberg - and many others - in the current financial crisis can be fairly judged. He is adamant that he bears no responsibility for the current crisis and is convinced that if he had been at the helm, the company would still be strong.

"It took 40 years for a group of people who worked together to build this. It was like a band of brothers.... Never in my wildest dreams did I imagine this could happen at AIG. So is it painful? Yeah, bitterly painful." To top of page

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