Larry Ribstein argues that the last round of post-bubble financial enforcement cost us billions.
He also suggests that if Eliot Spitzer hadn’t chased Hank Greenberg out of AIG, the company wouldn’t have become a toxic black hole.
The WSJ puts yesterday’s $15 million SEC settlement with AIG’s Hank Greenberg into perspective:
More than four years later [after Eliot Spitzer filed fraud charges against Greenberg], the federal government has decided that it cannot even make a civil case for fraud against Mr. Greenberg, never mind a criminal one. The SEC has essentially settled with Mr. Greenberg on the charge that he was the CEO at the time that “material misstatements” in earnings occurred. As the WSJ notes, the mistatements “add up to less than 1% of AIG’s net income during the period at issue. . . [and] represent less than 10% of the restatement AIG filed to justify the Greenberg firing demanded by Mr. Spitzer. The impact on retained earnings was roughly $250 million, when AIG’s total retained earnings at the time were approaching $70 billion.”
On the other hand, consider the costs of this prosecution. As the WSJ notes, the charges led to Greenberg’s removal from AIG, which led directly to loss of its AAA credit-rating, a foundation of its financial business. It also left the company Greenberg had built without his firm hand or a competent successor. The result was AIG’s disastrously increased bets on the housing market. As I noted (discussing Michael Lewis’s recent article on AIG):
Lewis’s article does break new ground in explaining in more detail why this happened. Lewis blames everything on Joe Cassano, head of AIG Financial Products, whom Lewis dubs “the man who crashed the world.” According to Lewis, Cassano was not a financial wizard – just a back office guy with “a real talent for bullying people who doubted him.” He became ascendant when the man who put him in power, and who could control him (Hank Greenberg), was forced to resign by Eliot Spitzer (so, hey, let’s blame all this on Spitzer).
The bottom line: if Joe Cassano was the “man who crashed the world,” Spitzer was the guy who gave him the keys to the car. And all this for his supposed non-fraudulent responsibility for a barely material (if that) accounting mistake, plus, of course, the boost to Spitzer’s then career.
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