The Washington Post's series on AIG Financial Products is actually quite good so far (see Part I here, Part II here). But in its history of AIGFP, I think the Post gives short shrift to Hank Greenberg. I'm dating myself a bit with this story, but here goes: Back in the early 1990s, when AIGFP was being run by former Drexel Burnham executive Howard Sosin, Greenberg had to set up a shadow group to infiltrate AIGFP (his own subsidiary!), which the Post article refers to in passing. But what the Post doesn't really explain is that when Greenberg found out from the shadow group how much risk AIGFP was taking on, he ousted Sosin in a very public battle, and reined-in AIGFP's risk-taking. There was a famous article in the IDD in 1993 called "The Shadow War at AIG" that detailed the entire episode (wow, I really am old!). The IDD article basically showed that Greenberg did the right thing, even though AIGFP was a virtual profit-making machine for Greenberg at the time:
As the shadow group read through the 40,000-plus memos, it became evident that there were some "unsettling things" going on at AIG Financial Products, an AIG official said. Not only did the shadow group have questions about the quality of AIGFP's models -- and thus some of its hedge positions -- they found virtually no reserve pool to back Sosin's positions, according to the official. AIG was stunned that Sosin could have left AIG so exposed, sources say. If the positions were not adequately hedged, that again would be increasing the profits of AIGFP in the short term, but exposing AIG to increased risk in the long term. The company quickly set up a reserve pool that would not only back up some of the positions, but might also pay for expenses if AIG were to lose the arbitration case.How many other CEOs would have done the same thing? Sad to say, not many. Not many at all. Say what you want about Hank Greenberg, but the man deserves some credit for reining in the out-of-control risk-taking at AIGFP back in 1993. (I'm a little disappointed that the Post series doesn't make fun of Sanford Bernstein for titling its 1998 report on AIG: "American International Group, Inc.: The Emperor of Financial Services." But I can make my peace with that.)