A conversation with Hank Greenberg: Don’t scapegoat China, he warns, and watch for gold to rise

Bill Clinton had been baiting China for a couple years. Hank Greenberg, Henry Kissinger, John Whitehead and Brent Scowcroft sat with Jiang Zemin in Beijing and the Chinese leader’s irritation was palpable. The mood between the countries was deteriorating and when the four seasoned China hands got back to the United States they sat with Clinton and let him know the corrosive effect that anti-China rhetoric was having and how concerned they were about what it might do to America’s most important post-Cold War strategic relationship.

“And now,” Greenberg told me yesterday, “I worry we will do it again. I worry that we are becoming protectionist, that we are going to scapegoat and go after China at just the moment we most need to build a constructive relationship.”

You might think that Greenberg, 83, would be settling in to comfortable retirement after having been forced to leave the company he built, AIG, thanks to what he still sees as unjustified pressure from the now-tarnished Elliott Spitzer and then watching as the new management of the financial services giant drove it to the edge of extinction. But that’s not in his nature and when I sat down with him yesterday he was as animated, insightful, forceful and full of ambitious plans as I had ever seen him in the 20 years we met.

On China, from which he just returned weeks ago, he is fairly confident the Chinese can manage the current economic downturn and stave off the most serious consequences of social unrest that it might provoke. Still, he does expect that the year ahead will be rough and he observes forcefully that It will only be made tougher if we go after the Chinese hard on managing their currency, a particular irony he sees coming from the United States, which seems hell-bent in his eyes on producing inflation as we have not seen it in almost three decades.

As for the global economy, his expectation (like mine) is that we will see one or two or even three more dips before this downturn is over and that the current “stimulus” effort and the brewing next stage of the financial rescue are unlikely to forestall these consequences. Commodity prices will fall, inflation will rise and we will find it harder to borrow. Indeed, he became the third seasoned observer of the global economy in three days to tell me that gold was going to be a big beneficiary. Greenberg suggested it could hit $2,000 an ounce, more than twice its current value. The weak dollar is going to be around a long time.

Much of his animation and understandable animus, not surprisingly, is directed at those who he feels played a role in the downfall of AIG. The managers who took over AIG were simply were not, in his estimation, up to managing financial risk as they needed to be — and the cost was undermining a firm that had been a rock-solid AAA giant of Wall Street for decades. Then came the government takeover of the company. It, too, has gone badly from the start with over $30 billion of the $85 billion allocated to the company instantly being passed straight through to counterparties, the largest of which was Henry Paulson’s old firm Goldman Sachs. Greenberg ruefully notes that the only external firm represented in the room when the deal was worked out was Goldman Chairman Lloyd Blankfein. 

Now, Greenberg is trying to persuade the government that rather than selling off pieces of AIG to achieve the liquidation, as was Paulson’s stated goal, the taxpayers would be better served by restructuring the financing that AIG received by spreading out the required payback and reducing the U.S. share of the pie to a considerably smaller piece. Then, he argues, the United States might be able to sell the company intact. This, he feels, will get a better price for taxpayers because it is the path that is likely to give the company the best real chance to grow again. Greenberg himself has said he might be interested in buying back the company he built — so his views on this have to be seen as those of an interested party. But it does leave anyone with a memory of Greenberg’s legendary mastery of the insurance world and his building of the firm over many decades wondering: What really is in the best interest of all of us who actually now are the owners of the firm? A fire sale when prices are sure to be depressed just by virtue of the market’s dark mood and how such sell-offs are perceived by potential buyers? Or keeping the firm intact and focusing on restoring value and growth? We’ve already spent the money. Being a little patient and finding a way to get the assets into the hands of people who really know how to manage them might actually work out better for us in the long run.

When asked about the management of the financial rescue, Greenberg grew reflective and frustrated. He sees many more bank failures ahead, tough times in consumer credit markets, and a vastly restructured financial world in which the day of trader-dominated firms is over, and fee-based advisory services drive surviving businesses. Most importantly, in this scenario the United States has lost an important strategic resource as both its oceans of liquidity and engines of liquidity have shrunk dramatically. This last point is a significant one. American power in the last few decades has been largely driven by our access to capital, fueling growth. Now, a chastened, fundamentally diminished system is going to make materially less capital available for years to come in the United States — even as markets elsewhere in the world gain a relative edge. 

Greenberg believes a new super-regulator may be needed, not the Fed, not the SEC, but one run by experienced market professionals, as well as better coordinating mechanisms among developed nations (or however big a group can agree to such standardization). He is not for big government, but recognizes that the era of “leave it to the markets” is over. “Will we become a social democracy? I don’t think so. It’s not in our genes. But we might be for the next 8 or 10 years or so.”

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