Sunday, June 10, 2018

Dead Ducks I: Greenberg's "Pompetus of Love"

Anyone who has listened to classic rock radio should be familiar with Steve Miller's FM staple, "The Joker." A cryptic lyric from that hit song goes: Some people call me the space cowboy / Yeah! Some call me the gangster of love / Some people call me Maurice / Cause I speak of the Pompetus of Love. What the hell does this have to do with the subprime crisis? Perhaps nothing, but disgraced former AIG chairman Maurice Greenberg's attempts to salvage the House That Hank Built (AIG) did jog my memory of the song for some reason.

Quickly, let's look at two theories about Greenberg's actions. Being AIG's largest shareholder still, is he interested in preserving whatever value his equity holdings still have? Perhaps. After all, nationalizing AIG--which is what has ultimately transpired with Uncle Sam footing an $85 billion tab--has basically wiped out current shareholders. In yesterday's Financial Times, Greenberg opined that AIG only needed a "bridge loan" to temporarily tide the firm over instead of a "bailout." A bridge loan would not have resulted in the current situation of ownership being transferred to government-chosen representatives, which of course has instead transpired. So, capital preservation may have been part of Greenberg's motivations.

The second theory--the one I subscribe to more--is that having built up AIG and being unceremoniously dumped in 2005 presented Greenberg a chance to redeem his legacy. He offered to let bygones be bygones and help AIG but was rebuffed. Likely, then, it is more difficult for Greenberg to let go of past glories than anything else. In behavioural economics, there is this thing called the "endowment effect" in which those who possess certain things assign them a higher value than what others think they're worth. Ditto here. For Greenberg, think Sunset Boulevard via--you guessed it--Maurice's "Pompetus of Love." In the end, Greenberg's love for his creation would not save it: I really love your peaches, wanna shake your tree / Lovey dovey, lovey dovey, lovey dovey all the time.

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