Did Spitzer and Levitt Stoke the Financial Crisis?
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.
Some of Levitt’s Reforms Implemneted at AIG in Late 2005–Leading to the 2008 Crisis
having shareholders nominate directors
separating roles of chairman and chief executive officer
having no or few management directors on the board (AIG eventually had only 2 management directors of 18 total)
holding “executive sessions” that exclude any management directors
eliminating the executive committee, “often a symbol of board cronyism”
mandating retirement of directors at age 73
barring any former chief executive officer from serving
Query: while such reforms had Levitt’s intended effect of limiting the traditional discretion and power of CEOs—would they also increase the chances that a board could lack requried business sense?
Sptizer Steps In Pursuing Greenberg: Dubious Probity
reached conclusions before completing investigation
bad-mouthed Greenberg in speeches to groups of other citizens
pressured AIG’s accountants and outside directors into turning against Greenberg
became joint partners with the law firm supposedly representing AIG in triangulating against Greenberg
threatened criminal prosecution to obtain an advantage in a civil matter
made disparaging public comments on national television about Greenberg and AIG before investigation was completed and before any case was filed
engaged in unilateral communications with the judge presiding in a pending case
badgered an author of an op-ed piece that questioned Spitzer’s conduct along these lines
Query: rules of prosecutorial ethics are scarcely intended to stop the ouster of CEOs whose ouster might cause or worsen a global financial crisis, but the constraints are intended to protect proper defenses whose exercise is not only obviously fundamental but also sometimes fortuitously instrumental.