The W$J offers an interesting analysis of what Eliot Spitzer has done to AIG based on a white paper filed by Hank Greenberg’s lawyers. According to this document, after Spitzer forced Greenberg out of AIG after 38 successful years, the team that replaced him questionably restated financial results to the tune of minus $2.26 billion in shareholder equity. For example, the new AIG expensed nearly $500 million in executive compensation that had been handled through Starr International for AIG’s benefit and added $850 million in liability reserves without any obvious changes in liability risk.
The W$J asks:
Why? One possible answer is that AIG is the latest example of a company that felt compelled to play along with a prosecutor's attempt to apply new standards, on an ex post facto basis, to previous behavior. Threatened by Mr. Spitzer with the death sentence of a corporate indictment, directors first let Mr. Greenberg go. Then wanting to put the whole saga behind them, new management decided on the familiar strategy of conceding every Spitzer allegation and taking the biggest write-off possible. What isn't at all clear is how AIG's shareholders have benefited from this. Mr. Spitzer is making up the rules as he goes along -- rather than leaving that job to the legislators and regulators who are charged with it -- and investors are footing the bill. AIG's share price has taken a beating, dropping from more than $73 a share in February to below $50 in April, and recently climbing back above $60.
If these were merely accounting matters, it’s not clear how they so affected AIG’s prospects, and therefore its stock price. Was the previous accounting, or is the present accounting, misleading the market? Or is it the continuing Spitzer threat to AIG’s management, the possibility that some other shoe is going to drop, or just the fact that, without Greenberg or somebody of equal caliber to replace him the market assumes AIG will be less successful?
Greenberg was the last of the imperial CEOs, and the whole Starr International setup did not seem designed for transparency or governance discipline. But history will probably demonstrate that AIG was better off with him in charge, or trusting to corporate governance processes to replace him, than with Spitzer's political maneuvering. In other words, the price tag on the costliest governor election campaign in history is mounting.