This Wall Street Journal ($) article on Friday (USA Today article here) reports that government authorities led by New York Attorney General Eliot Spitzer are finalizing a settlement with American International Group under which the company would settle civil business fraud charges for between $1 and $1.5 billion. The anticipated deal does not settle similar civil claims against AIG’s co-defendants in the case, former chairman and CEO, Maurice “Hank” Greenberg and former CFO Howard Smith.
Spitzer has probably maximized his political benefit from persecuting AIG and particularly Greenberg, and AIG — by offering up to Spitzer a number of sacrificial lambs, including Greenberg — has already avoided an Enronesque experience. So, the proposed settlement is really not surprising. However, it still is important to step back and assess what happened here, particularly in view of — as Larry Ribstein notes — the appearance of regulatory extortion.
Spitzer publicly demonized a pattern of structured finance transactions at AIG that had been in place for years. Rather than undertaking a measured regulatory review of the complex transactions — which, by the way, were not even clearly material to AIG’s $80 billion plus equity value — Spitzer threatened AIG with a criminal indictment, which would probably have put AIG out of business (remember Arthur Andersen?). Then Spitzer went on television to pronounce that the AIG transactions were “wrong,” “illegal,” and fraudulent even though it was not yet clear what the charges were, much less whether they were true. AIG’s board quickly cratered and unceremoniously showed the door to Mr. Greenberg, who was primarily responsible for creating huge amounts of shareholder wealth over the past generation. Mr. Greenberg was not even able to present his side of the story before AIG’s board bowed to the Lord of Regulation and characterized the transactions as “improper.”
In short, Spitzer used public allegations of business fraud to charge, try and convict easy and popular targets — i.e., a big company and its allegedly greedy leader — even before he announced that he wasn’t going to pursue criminal charges against Greenberg. Much of the mainstream media has embraced this public relations abuse while portraying Spitzer as the defender of noble egalitarianism fighting against the forces of corrupt capitalism.
As noted recently here in regard to Enron case, many legitimate business transactions — most notably structured finance transactions that most prosecutors and journalists neither understand nor do the homework necessary to understand — are unfairly and incorrectly portrayed as complex business frauds in the wake of such seemingly simple morality plays. Completely ignored in the process is the fact that such transactions build wealth in companies for the benefit of shareholders, and that such transactions are usually reviewed and approved by multiple professionals who are experts in such transactions. Rather than protecting shareholders or any meaningful public purpose, Spitzer’s investigation of those transactions in regard to AIG — as noted here and here — simply damaged AIG and its shareholders.
Meanwhile, with the inviting prospect of greater political rewards resulting from the favorable publicity of knocking a wealthy businessman off his perch, Spitzer has dispensed with any notion of prosecutorial discretion in regard to his investigations of business. Although Spitzer’s political campaign and his media friends portray him as a hero to shareholders and the common man, my sense is that the AIG case offers powerful evidence of precisely the opposite.