March 19, 2009

Letting Ed Liddy Twist in the Wind

When the public furor over AIG´s $165 million in bonuses was unleashed this past week, did the politicians and former CEOs involved in this never-ending fiasco acknowledge their responsibilities? Not in the slightest.  Instead, they stepped aside and watched AIG´s new CEO, Ed Liddy, twist in the wind. 

Only President Obama, reflecting the outrage ordinary citizens felt about the bonuses, was willing to say, “I´ll take responsibility. . . It is appropriate when you’re in charge to make sure stuff doesn’t happen like this.”

Where were Treasury Secretary Tim Geithner, Federal Reserve Chairman Ben Bernanke, Senator Chris Dodd, and former AIG CEOs Hank Greenberg and Martin Sullivan?  All of them were missing-in-action, running for cover, and unwilling to take any responsibility for the fiasco they helped to create.  Only the recently-appointed Liddy – who is working ninety hours a week for $1.00 per year – is willing to take the heat.  For those who are outraged over CEO compensation, Liddy earns $0.0002 per hour to take this abuse.

He doesn´t deserve it.  Ed Liddy is a good man, trying to salvage an impossible situation. He has nothing to gain and a lot to lose in terms of his stellar reputation.  “Six months ago I came out of retirement to help my country,” said the 63-year-old Liddy, who guided Allstate Insurance to great success as its CEO.

When the bankruptcy of Lehman precipitated the financial crisis, Paulson, Bernanke and Geithner worked as a triumvirate to keep AIG from a similar fate.  Reluctantly, they agreed that the U.S. government would inject $80 billion into AIG. In exchange, Paulson demanded that the government receive 80 percent ownership of AIG and the right to replace then-CEO Robert Willumstad with a new leader.

Paulson immediately reached out to Liddy as the only person in the country with the leadership and knowledge to turn AIG around.  Not only did he have a successful track record, he was known for his integrity and ability to straighten out very complex financial matters.  Having retired just months before, Liddy was embarking on a new career in private equity management, while serving on the boards of Boeing, Goldman Sachs, and Kroger.

Ed Libby isn´t charismatic or flashy, but he is as honest, practical and solid as anyone I know.  His Chicago roots and Midwestern values shine through every minute. I came to admire him as a colleague on the Goldman board, where he did an outstanding job as chair of the audit committee. 

Shortly after he retired from Allstate, Liddy and I talked about what was next in his career.  Becoming CEO of another insurance company was the last thing on his mind.  Only Paulson´s persuasive powers and the opportunity to serve his country caused Liddy to take on the thankless task of bailing out AIG.  While he didn´t know the specifics of AIG´s problems, Liddy sensed what deep trouble AIG was in after decades of its loosely run conglomerate culture and the under-pricing of risk.

On a day´s notice he left his home in Chicago, rented a modest apartment in New York, and threw himself into this enormous task.  He immediately felt the public´s wrath for a company meeting held at a California spa, but that was nothing compared to the abuse he is taking now.

The architect of AIG was Maurice “Hank” Greenberg, who was chairman and CEO of AIG for 37 years from 1968 to 2005. Greenberg managed AIG´s 165 businesses for growth and short-term profitability instead of financial soundness and solid risk-management – the hallmarks of Allstate under Liddy. In 2005 a major accounting scandal forced Greenberg to resign. He was replaced by his longtime colleague, Martin Sullivan, who lasted less than three years until the AIG board brought in retired Citigroup executive Robert Willumstad last June to keep AIG from imploding.  

Neither Greenberg nor Sullivan has taken any responsibility for the multitude of messes that led to AIG´s downfall. Greenberg even has had the audacity to suggest that all these problems came about after he retired and that he would like to take over the company once again.  The truth is that Greenberg has clear responsibility for the culture of AIG that led to these problems.

In response to the public outrage over the bonus payments, the politicians are having a field day, while avoiding any responsibility themselves.  Until confronted by a reporter, Senator Chris Dodd disclaimed the fact that the incentive provisions of the stimulus bill which he authored included an exemption for any arrangements made prior to February 11, 2009.

Clearly, this problem should have been handled much better in the first place.  The general public is justifiably outraged over compensation payouts for executives in companies that American taxpayers have to bail out. The leaders´ job is to own their mistakes, not to duck their responsibilities and focus the blame on the one person who can turn AIG around.

Next time around Ed Liddy may think twice about taking a $1 per year job to serve his country.