Many are to blame for the financial crisis and plenty of reports and analyses have been written detailing assorted causes and assigning responsibility. Overlooked in accepted versions of events are two fateful decisions and their context: Eliot Spitzer’s overzealous drive to oust Hank Greenberg from heading AIG, and Arthur Levitt’s governance reforms implemented at AIG shortly thereafter.
The ouster of Greenberg and transformation of AIG are pivotal events because before the ouster and reforms, AIG wrote few of the credit default swaps that became the centerpiece of the crisis, but wrote increasingly risky and unhedged swaps thereafter. Many informed people consider it extremely unlikely or nearly impossible to imagine that, had AIG still been run by Greenberg under its traditional governance structures, the swap business at AIG could have gotten so out of hand.
In that telling, Spitzer’s aggressive tactics to have Greenberg ousted and Levitt’s ambitious reforms were at least indirect contributing causes of the crisis and its severity. The actions and ideas therefore deserve greater scrutiny than they have been given.
In Spitzer’s case, it’s important to highlight how he took many steps that were at least dubious as a matter of prosecutorial ethics; in Levitt’s case, the reforms were extreme departures from traditional corporate governance. Potential lessons include the importance of prosecutors not overstepping their bounds and the value of adhering to some traditions in the development of corporate governance. Read More