How Edward Liddy Helped Pull the U.S. Back From the Brink
In fall 2008, the U.S. financial system faced its gravest crisis since the Great Depression as Wall Street firms that had engaged in high-risk transactions found themselves on the brink of insolvency. Contributing heavily to this volatile situation was the decline of the U.S. housing market, coupled with the inability of millions of Americans who had secured home loans, despite their poor credit history, to make good on their subprime mortgage payments. Financial services firms were forced to absorb massive losses caused by mortgage defaults. The result was a crisis of confidence that made banks reluctant to loan money. So pervasive did worries become about possible paralysis of the country’s financial system that ordinary Americans began to question their ability to access their personal bank deposits.
The poster child for reckless financial behavior was American International Group Inc., the world’s largest insurer and its 18th largest corporation. AIG had gambled heavily on risky financial instruments called credit default swaps that were tied to the subprime mortgage market. When the latter collapsed, it created a liquidity crisis for AIG that, barring outside intervention, would doom the firm. Deciding that AIG was too big to fail — that because of its size, AIG’s bankruptcy would threaten the core of the U.S. financial system — the federal government moved to bail out the insurance giant.
Beginning in mid-September 2008, the U.S. government embarked on the first of four bailout programs for AIG that eventually came to total, by some calculations, $182 billion. To guide AIG out of its death spiral, the Bush administration tapped CUA alumnus Edward Liddy (B.A. 1968) as the firm’s new president and CEO. Liddy, who had recently retired from a distinguished business career spanning four decades, including eight years at the helm of the Allstate insurance company, was invited to take the job by Treasury Secretary Henry Paulson, a colleague with whom he had served on the board of Goldman Sachs Group Inc. Liddy accepted the position as a public service, with an annual salary of $1.
Even after Liddy took the helm of AIG on Sept. 18, controversy dogged the unpopular rescue of AIG. It became intense in March 2009, when news broke that his predecessor had approved contracts to pay $165 million in bonuses to AIG employees, including executives in the financial products division that caused the firm’s implosion and necessitated the government rescue. Though Liddy had no role in setting the bonuses and publicly voiced his opposition to their terms, he was subjected to a firestorm of criticism because he felt bound to honor the contractual obligations to pay the bonuses.
The drama related to the bonus payments reached its zenith on March 18, 2009, when Liddy appeared before a House of Representatives financial services subcommittee to testify. According to The New York Times, he was met with “widespread condemnation.” One member of Congress declared that AIG stood for “arrogance, incompetence and greed.” Some congressmen called on Liddy to resign. According to the Times, Liddy “ended up being castigated by members of Congress who seemed unable to separate him from the financial turmoil he was brought in to calm.”
Nevertheless, Liddy stood his ground and set in motion a plan to stabilize the 116,000-employee firm and begin to pay off the massive loan financed by U.S. taxpayers. When he was satisfied that he had guided the firm to a position from which it could accomplish these goals, he tendered his resignation. On his last day on the job, Aug. 10, 2009, AIG reported its first profitable results in eight quarters — net income of $1.8 billion.\
Today Liddy lives with his wife, Marcia (B.A. 1968), in suburban Chicago. He is considering writing a book and perhaps teaching at a Chicago-area university to share the lessons that he has learned, particularly his experience at AIG.
On Oct. 20, CUA Magazine Editor-in-Chief Victor Nakas sat down with Liddy in his Chicago office to get his take on what it was like to be a key participant in one of the most dramatic and consequential periods in U.S. financial history.
Editor’s Note: Regarding some of the companies referenced in the interview that follows, Bear Stearns, JP Morgan Chase, Merrill Lynch, Bank of America, Lehman Brothers and Citigroup were all leading U.S. financial services firms. Fannie Mae and Freddie Mac are shareholder-owned companies created by Congress to provide liquidity, stability and affordability to the U.S. housing and mortgage markets.
CUA Magazine: You were lured out of retirement to take the job as chairman and CEO of American International Group in September 2008 by Treasury Secretary Henry Paulson. Was it a hard sell to convince you to take over what even then must have seemed like a thankless task?
Liddy: I went into it with my eyes open, although it was more complicated than I thought. Remember what was going on in that environment: Bear Stearns had essentially failed and been purchased by JP Morgan Chase. Then in early September both Fannie and Freddie were nationalized by the federal government. The weekend before I went to AIG, Merrill Lynch was forced into the waiting arms of Bank of America. That Monday before I went to AIG, Lehman Brothers failed. It triggered a classic run on the bank. People were withdrawing billions of dollars out of their money market funds, or attempting to, and there was no liquidity. So with my knowledge and understanding of how the worldwide financial system works, my conclusion was that if AIG were to fail at that time, it would have been just cataclysmic to the financial system. When you now see Federal Reserve Chairman Ben Bernanke, Treasury Secretary Tim Geithner and others talking about that, they’re very honest in their assessment that we came really close to a financial apocalypse. So with all of that in the back of my mind, it was not a very hard sell. I believe you have two choices in life: You can either sit on the sidelines as an interested observer and critic or, if you have the capacity to help, you can get in the game and try to steer the course of the outcome. I believe in the latter.
I was enjoying retirement. Leaving my family in Chicago and going to New York was not at the top of my list. In fact, I remember well my wife saying, “Where was this on the retirement plan?” But I think the situation was so unique and it had the potential to turn out really poorly for the financial system, not just of the United States but of the world. So, it was a six- to eight-hour series of conversations and thoughts, and at the end of that day, I was on a plane going to New York.
CUA Magazine: So do you think that if AIG hadn’t been bailed out by the government, the financial system could have collapsed? And what would that have meant?
Liddy: Lehman Brothers was the largest bankruptcy in history. When it went bankrupt it had about $690 billion in assets. When AIG got in trouble, it had $1.1 trillion in assets. It’s one of the leading life insurers around the world, one of the leading annuity and save-for-retirement players around the world. If it had gone bankrupt, the fear that it would have engendered in the United States could have been very extreme. I went into this with a fairly open book about exactly what to do with AIG and how to save it. The more I got into it, the more convinced I became that the policymakers who made the decision to throw AIG a rescue line made the right decision, because the bankruptcy of Lehman Brothers and then AIG on top of it would have been a disaster. If AIG hadn’t been saved, I don’t think we would be anywhere near where we are today in terms of being on the road to recovery.
CUA Magazine: When you took over AIG, you were arguably one of the most famous business leaders in America in the midst of this country’s greatest economic crisis since the Great Depression. What was it like to be in that situation?
Liddy: It was fascinating to have a seat at that table and to recognize that perhaps you’re playing a small role in the shaping of history. My approach to life is to take really large, seemingly unmanageable problems and break them into a series of distinct little problems that you can solve. So my goals when I went to AIG were: Don’t let the company fail, stabilize the situation, protect the policyholders so no policyholder loses a penny. Make sure that the very strong franchises that comprise AIG remain strong so that they become assets that can be disposed of or taken public. And then find a path to pay back the taxpayer. Much of that was accomplished in 11 months. And the way we did it was just one issue at a time. Let’s decide what our strategic goals are. Let’s take those goals and break them down into a series of smaller steps and let’s achieve a successful outcome on each of those small steps. It worked reasonably well.
CUA Magazine: When you took over, did you have in mind roughly how long you anticipated staying and how long you thought it would take to achieve these strategic objectives?
Liddy: When I went in, I did not have a specific timetable. It wasn’t: OK, I’ll do it for six months. You have to be flexible enough to recognize that there are intervention or inflection points in anything you do. To exit before you have one of those inflection points is not the right thing. But to stay too long commits you to waiting until there’s another one. So I went into it not knowing how long it would take. I assumed that we would be able to sell some assets more quickly than we in fact were able to. The marketplace in the fourth quarter of 2008 was awful, and in the first quarter of 2009 was worse still. We set in motion a plan that will take three to five years to come to fruition. If people stick with the plan, I think taxpayers will in fact get most, if not all, of their money back. And although AIG won’t still be the same as it was, there’ll be some of the pieces that comprised AIG still out there as companies on their own. And that’s a good outcome for policyholders and for employees.
CUA Magazine: Although you agreed to take this job for a salary of $1 a year, you probably were on the receiving end of more criticism for taking on this task than some business leaders endure in a lifetime. And members of Congress, when you went to testify before a House subcommittee in March, were especially harsh on you. Did your view of the American political process change after going through this experience, being criticized for something that you hadn’t caused?
Liddy: I think it did. I would have hoped that more people in Washington would have recognized that people like me — people in various companies who came on board to help solve this financial crisis — were there as part of the government team. The intersection of politics and big business is a difficult place because the currency of the institutions is radically different. The currency in business is market share, shareholder returns, customer care and employees. In Congress maybe it’s more about votes, getting elected and macro policy. So trying to get some sort of common ground where Congress can understand what big business is trying to do and big business can understand what government is trying to do — sometimes it’s very hard. I was disheartened by much of what I saw in Washington, where I thought we’d have a chance for an honest dialogue and an exchange of ideas. It really was not that. There are some great people who serve this country extremely well in both the House and the Senate, however.
CUA Magazine: Do you think that if there hadn’t been this furor that arose over the paying of bonuses that had been set even before you took over, the government bailout of AIG and everything that followed that would have been less controversial and there would have been smoother sailing for you?
Liddy: If it wasn’t AIG and it wasn’t the paying of bonuses, it would have been something else, either Merrill Lynch or Bank of America or Citi. To a certain extent the country needed a cathartic event. There’s rage and fury and it builds and builds, and then it needs to erupt. The AIG bonus payments were the eruption. After that, things began to calm down. The country had to get that out of its system. And once it got it out of its system, then institutions were able to go back to the business of fixing the issues at hand and moving forward. So now you see financial institutions like JP Morgan Chase, Goldman Sachs and Morgan Stanley doing very well. AIG is stable — fragile but stable. It’s got excess liquidity instead of being in the hole from a liquidity standpoint. Its policyholders and business franchises have been protected. There’s a plan in place to repay the taxpayers.
CUA Magazine: During your testimony on Capitol Hill, you appeared very calm. You were shown on TV going over to talk to some of the people who were there to protest. And you were featured on “60 Minutes,” which is well known for going for the jugular. You seemed to handle that very well. Is that part of your makeup — that you’re able to take the tough language and tough messages from other people without getting rattled, and also, able to deliver a tough message?
Liddy: When you’re 62 years old and you’ve been in business 38 years, you have a certain experience set that helps you deal with pretty much any situation that comes your way. I believe that you can have your point of view and I can have mine. They can be entirely different. It’s OK if we disagree as long as we each understand and respect each other’s point of view. So I try to go into everything based on that. If you disagree with me, I’ll sit down and I’ll explain my point of view. I may not be able to convince you but at least you will understand it and you’ll see that there’s logic to my thinking. A couple of people said, “Well, as soon as you went into the chamber, you walked right up to people who were there to protest against you.” I don’t know any other way to do it except to sit down and explain my point of view. I think people who are successful over a long period of time understand the group dynamics of a situation like that and can turn it to their advantage.
CUA Magazine: There were these public statements that members of Congress were making about AIG, criticizing it. But given your philosophy about talking through differences with people and explaining your point of view and understanding theirs, did you as the head of AIG meet offline a lot with senators and congressmen?
Liddy: Yes, either I would or members of my staff would, particularly with the leaders of the various congressional committees. We would work very hard to make sure that they understood exactly what our strategy was. You’ve put your finger on a very important issue. There’s the political and public side on display in Washington, and then there’s the more private side. We had a lot of the public side, but we had a lot of the private interaction as well.
When I’d go back and forth between New York and my home in Chicago, I’d always fly commercially and I would walk right down the middle of the terminal at O’Hare or Reagan International or La Guardia. And I probably had upwards of 300 times when people would recognize me and want to chat about something. I would say 298 of those people were incredibly appreciative and positive. The reason I tell you that is, it’s interesting when you are just talking to the common man what they perceive. When people looked at the hearings in Congress — I had several of them — most people understood the fury that was directed at me wasn’t necessarily directed at me, it was directed at the situation. So making certain that you don’t take everything personally and you recognize that, as some people would say, “it’s just business,” is really an important part of maintaining your cool in those situations.
CUA Magazine: In your private dealings, did you have the impression that members of Congress really did understand the depths of the problem and the solutions, and that the outward politicking was quite a different matter?
Liddy: I’m not sure that anybody anywhere understood the depth or the nature of the problem. There’s no book that you can go to that says, “When liquidity freezes, there’s no credit and the worldwide financial system is on the verge of collapse, go to chapter 8 and follow these directions.” It would be too callous to say people were making it up as they went, but the need for quick, thoughtful action in some cases was absolutely vital. The financial system works on confidence and trust. If either of those two things is injured, it can come crashing down with frightening speed. I would say that Washington represented a complete spectrum. Some people got it in great detail and were very constructive on how to think about the issues and solutions; others struggled with its complexity.
Liddy shaking hands with protesters as he arrives for a congressional hearing on March 18, 2009.
Photo: Roll Call Photos
CUA Magazine: Do you think the media did a good job in educating the American public about what was occurring or were they perhaps contributing to the problem by either oversimplifying or misleading people in some fashion?
Liddy: There were a lot of culprits in this financial crisis, too long to list. But the media was clearly one of them. The news cycle is now 24 by 7. When you have a cycle that’s 24 by 7, driven by ratings, and news outlets competing for the latest story, that is a recipe for disseminating information that may not reflect all the facts. To the extent the media gets it wrong or they don’t focus on the right thing, that then feeds unease and distrust in Washington. Because what gets written in a national newspaper then gets syndicated and winds up in every paper in the country. And someone in Congress will see it or their constituents will call, and that can unleash a firestorm about something that may not even bear any semblance to the facts.
I’d really like to see some thoughtful, introspective analyses about what caused the financial crisis and who contributed to it. I don’t know what institution could be so objective as to do that, but I think it could be helpful for the national political consciousness to understand what did happen. We caused this crisis and we exported it to the rest of the world, so to the extent the rest of the world is mad at us, they may be justified.
CUA Magazine: What are the main lessons that you took away from this experience? Do you think something like this can happen again?
Liddy: I think things like this could happen again. It won’t be exactly the same thing. But for any system that’s based on trust and confidence, if things occur — wars, pestilence, catastrophes, whatever — that shake confidence in the system, they can damage it quite significantly and very, very quickly. I think there’s enough attention paid to what brought us to the brink this time, so that the potential for this kind of crisis to happen again is probably limited. But that’s not to suggest that you can’t have crises caused by other things.
My general takeaways are as follows: You cannot make any progress in solving problems if you don’t have good people working on them. You need the best and the brightest in a time of crisis. And you need a team approach. You need people who trust each other, who have shared values, who will work together for the greater good, not for their own personal aggrandizement. I think you absolutely need specific plans and you need to implement those plans with urgency and speed. You can and should study things, but at some point when you have enough information to know what you don’t know, you have to make a decision and move. And this crisis, I think, proved that in spades. The actions taken by the United States government, and indeed governments around the world, with respect to insuring certain assets, backing up certain transactions, providing commercial paper funding, things that had never been done before — I think those moves were really wise. And the lesson is, decide what you think is the right solution and implement it. If you have to look back, that’s fine — but move when you’re in these crisis situations.
CUA Magazine: What would you say to those people who argue that the government should have intervened not at all or minimally?
Liddy: I think taking action was far better than not taking action. It’s clear that when the government gets involved on such a wholesale basis, particularly in one industry such as financial services, that unleashes its own unintended consequences, and there is a price to be paid for that. But if the government had not been aggressive in getting involved the way it did, the price that this country would have paid would have been far greater. Now, I think we have to have sufficient discipline to say, “OK, this was the crisis, we solved it … no more,” and we should look at this as an isolated event and don’t use it as a conveyer belt to get government involved in more industries and more businesses in the future.
The United States system of capitalism is the greatest engine of growth the world has ever seen. And it has helped create what, I believe, is the greatest country the world has ever seen. If we tinker with that, each little change that we make may appear to be of limited consequence, but when we accumulate all those changes, if we’re not careful, we will damage the goose that laid the golden egg. The American spirit of democratic capitalism, where anybody can accomplish anything, is really unparalleled, certainly in recent history. I just hope that we have the good sense to modify it as appropriate so that we can avoid these kinds of crises in the future, but don’t go too far and wound it so badly that it is not the incredible engine of growth that we have had since World War I and, in particular, since World War II.
CUA Magazine: You said in your farewell letter to AIG employees that “America has lost confidence in corporations. Restoring that confidence is the first step toward regaining our footing in the global economy.” Do you see that loss of confidence as something that can be fixed in the short term?
Liddy: Right now there is a spirit of anti-big in the United Sates — anti-big government, anti-big business, anti-big media, anti-big world. People are afraid of those things that are so big that they can have a disproportionate impact on their lives. I think the “anti-big” phase will pass or will moderate. I’m not sure how long it will take and its length may really be a function of what happens with things that are on the horizon. When does the unemployment rate get down from double digits? When do people’s homes begin to increase in value? When do people stop worrying about “Am I ever going to be able to retire?” There are so many exogenous factors that have an impact on when people do feel less fearful of “big.”
I’m not a believer in large systemic changes. The United States is based on a system that is designed for a certain amount of inertia — and that’s both our greatness and our weakness. You can’t change too quickly. That may be a good thing. When you are in the heat of battle, you may think, “This is a great solution.” But at the end of the battle, or when you are in a different situation where you can think more clearly, you may have a completely different solution. I think we need some cool heads to come up with appropriate solutions and engage the country in a spirit of a positive debate.
CUA Magazine: Do you think we’re on the right path now as far as putting the economic house in order in the United States?
Liddy: I think so, although I worry about how well thought out the stimulus package was — not the need for a stimulus package, but are we really spending the money on things that will in fact stimulate the economy to the greatest extent possible?
I worry that we’ll take on things like health care or environmental issues, which are important, but will have a tab due at some point in time. And we’ll have a hard time paying the bill because the economy will be slower to rebound than people think. There’s an awful lot on our national agenda right now. I worry a little that right now as a country we’re just trying to do so much and we don’t have the financial resources to do it. I liken it to a family: You can’t live beyond your means. You have to decide: What is it going to be? Are we going to upgrade the house this year or are we going to pay for two college tuitions? You have to make choices. You can’t do everything.
CUA Magazine: Do you have any closing thoughts to share on your experience at AIG?
Liddy: People frequently ask me: Would I do it again? My answer is, given the same set of circumstances, I would. If you think you can help when the situation is really bleak, you just can’t sit on the sideline and say, “Ain’t it awful?”
Maybe that’s one of the good things about attending an institution like Catholic University or getting a Catholic education — you realize that there’s more to life than just you. And there is, I think, a belief that everyone’s got to do something to give back. You can’t just take, take, take. As my wife said, “Maybe this is your time to give back in an arena that you’re comfortable with.” So, I would, if asked to do it again.