In part one of an exclusive interview, former NYSE chairman Richard Grasso opens up to Allan Dodds Frank about the AIG bonus debacle, what Eliot Spitzer did right, and why Citibank is too big to fail.
Plus, Part II: Grasso on Madoff and why the SEC looked the other way.
For nearly five years, former New York Stock Exchange Chairman and CEO Richard Grasso suffered as the poster child for the issue of executive compensation.
In the wake of news stories about his own previously undisclosed compensation, Grasso left his job at the Big Board under pressure — tarnishing much of the reputation he had built in more than three decades at the NYSE, including eight years as chairman and CEO.
“AIG has received, or has the ability to receive, close to $170 billion in public money; and meanwhile we’re railing about $160 million, which is one-tenth of 1 percent of that.”
In 2004, then-New York Attorney General Eliot Spitzer sued Grasso to try to recover more than $180 million in overall compensation that to the NYSE chairman that Spitzer claimed was unjustly paid. In the face of public ridicule, Grasso spent four years and millions of dollars fighting Spitzer before winning his case (and the right to keep the money) in a decision by the New York Court of Appeals last year. That decision by the state’s highest court prompted Spitzer’s successor, New York Attorney General Andrew Cuomo – the same man pursuing bonuses granted to AIG executives — to drop the Grasso case.
In a wide-ranging interview this weekend with The Daily Beast’s Allan Dodds Frank, Grasso said that while he deserved bonus money, the AIG employees in the company’s financial-products unit — and many other Wall Street figures who lost billions of dollars for investors — do not. Plus, clawing back those bonuses from the people who got them, his former nememis Spitzer's attack on AIG, and why the company would have been better off if Hank Greenberg had stayed in charge.
Let’s start with bonuses at AIG and executive compensation in general. What’s your take on what’s happening now and what should be done?
It’s got to come back to a basic premise: If the American people believe that you’ve done a good job, then the rewards should be bountiful. But if you don’t do a good job—and when an entity has done a bad job—then to reward failure just doesn’t rub the American mind-set right. And it’s understandable, the outrage. There might have been a middle ground in terms of renegotiating those contracts. If you now listen to the dialogue between AIG and its lenders, where the lenders are being asked to take discounts on the debt that’s outstanding, the question becomes: shouldn’t the managers of the [financial-products] division have taken a discount on their stay bonuses? And the much broader question: Shouldn’t the counterparties in those [credit-default swaps] have taken a discount on their contracts?
Just to be clear: You think these bonuses may be uncalled for, but one difference between your situation and theirs is that you weren’t losing money. You were being paid for performance delivered.
I think that’s the differentiating factor. The American people, people on the assembly line or someone who’s driving a bus, they look at somebody like me, who’s from the streets of Queens, and started after the Army at $81 a week. That’s what America’s about: You can start at the bottom and lift yourself to the top and you can reap the rewards if the entity that you have is successful. When I ran the stock exchange, it was the most successful it’s been in its 200-plus-year history. And I was rewarded for success; I would not have been rewarded if we failed. We were profitable—we had $1 billion in cash, we had no debt. The board basically said, “This is the result of good leadership and leadership is to be compensated.” What the American people don’t understand is how Merrill Lynch or AIG or Lehman Brothers can reward people, and the entity fails. Not only do the shareholders lose, but the entities lose.
What do you think the CEOs particularly, or the 15 bankers who were marched into the White House last week, should be doing about their own compensation?
I think they’ve already gotten the message loud and clear. I know most of the people fairly well that went into that meeting. And these are very smart, very politically sensitive people, and, by the way, investor-driven chief executives. You can’t get away from the basic premise: Your investors, your employees, the American people always accept large compensation if entities are successful. But they can never accept large compensation payouts to entities that are failing or have failed.
And what about these clawbacks? For instance, let’s say at one of these institutions, there were big debts created that didn’t blow up in the year the executives were being compensated. But two years later, they all went off like timebombs.
I think clawbacks would be very appropriate if there was misconduct or laws violated or principles of the entities violated. But you have to go back to the construct of compensation plans. They were written and approved and hopefully understood by compensation committees. So you can’t rewrite the rules after the fact. But I would fully support clawbacks if any of the people who received large payouts broke the law. Or if they broke the principles and operating procedures of their companies, or in some way violated a fiduciary trust to their companies. But just because the compensation payout was misaligned with the current year versus future years—that’s a flaw in the compensation plan which should have been the oversight of the compensation committee and the board itself.
What do you tell Congress as it fans the flames of populist sentiment against AIG and other bonuses?
I think you have to pare back the onion. And in doing that, let’s get away from the heat of the rhetoric. It’s very au courant to say there should be no bonuses, there should be no planes, there should be no perks. I think it’s important for Congress to have a strong bully pulpit on the subject, and then look to the governance mechanisms of public companies to do the right thing. And I think directors of publicly traded companies have gotten this message loud and clear.
Are you concerned that one of the side effects of this political furor might be that many of the employees might be hurt unfairly?
Clearly there are always unintended consequences of any legislative or regulatory act that’s taken in the heat of battle. Congress, with the leadership of the president, is saying: Let’s take a reasoned, dispassionate look at all this. Let’s not simply react to the $160 million in payouts that were made to AIG. If you focus just on those retention payments, you’re missing the forest for the trees. Remember that AIG has received, or has the ability to receive, close to $170 billion in public money; and meanwhile we’re railing about $160 million, which is one-tenth of 1 percent of that. I think we have to be looking at the broader picture.
I’ve heard rumors that at NBC all the employees are going to be asked to take a 5 percent pay cut because of the whole performance issue. I’m wondering whether companies are going to use the current political environment as an excuse to cut costs rather than managing in a way that’s more equitable.
I understand your point and I think it’s a point to be concerned about. I would think that great leaders of public companies would not hide behind current malaise to do things that they otherwise wouldn’t do, or to do things that are strategically unwise. There are unintended consequences where you have corporations that are using this period to simply arbitrarily cut costs. This period will pass.
Do you have a feeling that what New York Attorney General Andrew Cuomo and Connecticut Attorney General Richard Blumenthal are doing with regard to AIG bonuses is similar to what Eliot Spitzer did to you?
I think the two are very different because what we have in the case of AIG that is glaring to the public is an entity that failed, an entity that was once worth $200 billion. That was the market cap of AIG at its peak valuation that virtually dissipated into the night, suddenly paying huge bonuses to people at the same time. This public entity saw its valuation go down the drain. The two are very different because I was in a public company that took no private money and had no public shareholders, but it was a very different time -- a time when it was a populist cry to attack compensation without looking at whether that compensation was earned or not. Here, I think, we have a period where a lot of people got paid a lot of money at entities that failed. The New York Stock Exchange, the day after I was fired, had $1 billion dollars in cash, a market share of 82 percent, no debt, its biggest list ever, its biggest foreign list ever, and was on top of the world in terms of exchanges both here and around the globe.
Do you think Citibank should be treated the same as AIG? They’ve had a pretty dismal collapse.
I think Citi is a different case than AIG. It is a consumer institution, it is a commercial and industrial institution, and it’s a global franchise that has counterparty concerns. Is Citibank too big to fail? I think we would all have to say it is.
Do you think Spitzer was right about how AIG was being run?
You can’t compare the two. The [Hank] Greenberg era went on until March of 2005. So you draw a line between pre- and post-Greenberg. The one thing I know about the pre-departure period: When Greenberg built AIG, he wasn’t a chief executive sitting at Pine Street, at the top of that building. He knew the risk book around the world every morning. My own experiences with Hank lead me to believe that the book that was written in London would never have been written had Greenberg been CEO of AIG.
Is that because if you made a mistake he would be on the phone screaming at you? He knew what was going on, right?
He knew what was going on and he never, in my experience, took risk that was indefinable. And that, I think, is the difference. I’m speculating.
Didn’t the fear of not being able to withstand the examination from your boss, namely Hank, and how he analyzed risk versus how you analyzed it—wasn’t that a dominant factor in how AIG had been run, pre and post-Hank?
No question. Hank Greenberg wanted to know the risk profile every day of AIG. And if he thought that if that risk profile put the entity in jeopardy in any way, he wasn’t going to take it on.
How do you think [former Treasury Secretary] Hank Paulson did in trying to work this out?
I think he was dealt a very bad hand, and, under the worst of circumstances, did a terrific job.
And how do you think it will shake out, the Bush administration versus the Obama administration?
I don’t think you can put any of this at the doorstep of the Obama administration; they inherited it. The good news is that you have some continuity of oversight with Tim Geithner having moved from the New York Fed to the Treasury position. And you’ve got [FDIC chairman] Sheila Bair, who was—I’m very proud to say—an officer at the New York Stock Exchange during my period; she’s done a phenomenal job. With [Federal Reserve chairman Ben] Bernanke, there’s continuity there. You can’t assess the performance of the new team for a good 12 months. And knowing the capacity and intellect and focus of the people that are in the leadership roles, I feel very good.
What about Congress?
I think Congress is going to step back and do a lot of soul searching—whether they do it in front of the cameras or not—as to the proper balance of oversight and congressional intervention. This whole plan of a systemic risk regulatory agency—that got kind of roughed out before the House on Thursday—is going to take on momentum; it’s something that’s obviously needed; I think it’s got to be an entity that has the ability to make decisions. What you do get worried about is if it’s a collective of a group of agencies— that’s as much as saying no one’s going to be in charge but we’re going to find ourselves in a bureaucratic gridlock. You have to have an agency that is a decision maker, with a decision maker at the top. And given the types of people who will support it—from Ben Bernanke, to Tim Geithner, to [SEC chairman] Mary Shapiro, to Sheila Bair—I feel very good about what they’re proposing. And I think that Congress has got to be there—whether it’s Barney Frank in the House or Chris Dodd in the Senate—and use the bully pulpit, but let the regulators do what they must do. If you turn the page back to years past, it was not a lack of regulation. It was a lack of enforcement of the regulation.That period is over.
RELATED: Part II: Grasso on Madoff and why the SEC looked the other way.
Allan Dodds Frank is a business investigative correspondent who specializes in white collar crime.
