Nov 03, 2015 03:42 PM

Hank Greenberg on his Dealings with China, Take on Financial Crisis

(New York) – The life of Maurice "Hank" Greenberg, the former chief executive of American International Group, has been far from ordinary.

He served in not just one but two major wars of the last century, World War II and the Korean War, and afterward built AIG into an insurance giant.

He was forced to step down as its chief executive amid an accounting scandal in 2005, and two years later, he sued the former attorney general of the state of New York for defamation in a case that is still pending.

He also filed a lawsuit against the U.S. government over the terms of 2008 bailout of AIG, for which he scored a victory this June, albeit one not without costs.

"To me it's very clear: the regulators failed to regulate," he said of the 2008 financial meltdown.

Greenberg, who turns 90 this year, now has the aura of a wise old man, is unwavering in his clarity of thought and his opinions.

He established links to China a long time ago. He relaunched AIG's operations in China, which date back to 1919 but were halted in 1949. Now, his China-related time is spent mostly on Starr Companies, which acquired Shanghai-based, state-owned Dazhong Insurance Co., Ltd. last year.

Asked about the recent turmoil in China's stock market, Greenberg said, "What I don't understand is this: the year before the market went up by 150 percent and the correction was roughly in the 35-40 percent range. Why did everybody panic suddenly?"

Caixin spoke to the financial sage about his thoughts on the 2008 global financial crisis, the state of Chinese economy and the upcoming U.S. presidential election.

Excerpts of his interview follow.

Caixin: It has been more than seven years since the outbreak of the financial crisis. What is the most important lesson we should take from the crisis?

Maurice Greenberg: Well, to me it's very clear: the regulators failed to regulate. In the U.S., they were packaging many institutions such as banks and investment banks, which were packaging mortgages. They were being advertised as triple-A-rated by many rating agencies. Many rating agencies never even saw them. Nonetheless, they were packaged that way and being sold that way. In fact, overwhelmingly they were not (what the rating agencies said they were) and as a result, many of these instruments collapsed.

After the global financial crisis, there was a lot of debate on strengthening financial regulations. The U.S. passed the Dodd-Frank Act and Europe started macro prudential regulation. Are these reforms enough to prevent another crisis?

Sometimes, it's more than enough, depending on the regulator. You don't want to regulate to the point where you stop businesses from functioning, curb innovation and growth. There has to be balance. You need intelligent regulators. You need to pay the price to get the best regulators and try not to have people unqualified to be regulators. So you just have to upgrade the regulators and have commonsense regulation that doesn't curb innovation.

What are the potential risks as the Chinese economy goes through the current period of transition? It is a painstaking effort to strike a balance between more radical reform and maintaining socio-economic stability.

You can't eliminate risk. That's simply not possible. Also, China's economy is not independent of the global economy. As the global economy slows down, it also has an impact on the Chinese economy. But that's not unexpected. It's the No. 2 economy in the world and it's the largest population of any country. So of course you're going to have areas that are going to be more hard-hit than other areas. (There is an) impact on population, as things slow down. You have SOEs that are obviously going to slow down as well. They're essentially government owned. So the government has a responsibility to provide whatever they need in the way of capital.

Recently, the Chinese stock market crashed. The government tried very hard to bail it out. That was very controversial. In what kind of circumstances should the government intervene?

China is not a full market economy yet. Many investors in the Chinese market really don't have enough knowledge and experience to know when to invest and how to invest. There's a learning experience going on.

The government intervened in the market and got criticism for doing that. What I don't understand is this: the year before the market went up by 150 percent and the correction was roughly in the 35 to 40 percent range. Why did everybody panic suddenly? Markets do go up and down, that's part of what a market economy is. The government can't come in and say, "It's only going to go in one direction. It's only going to go up, it's never going to go down." That's simply not realistic.

That will change over time. In due course, as the economy matures more, the government will be more confident in the economy, the people who invest will have more experience, there will be less intervention. It takes time and it's not going to happen overnight.

Many investors worry about China's devaluation of the yuan. What is your opinion on this? Do you think depreciation will have any significant impact on the world economy?

As the global economy has slowed down, there have been pressures on different currencies. So when things slow down and business in China slows down, there's an attempt to increase the activity by lowering the value of your currency. In due course, that doesn't fly. If the government manages the currency, it makes investors uncomfortable. If the government's going to intervene, it undermines confidence.

Before the stock market and the yuan turmoil, people were confident in the government's management skills, but afterwards less so. Fed chief Janet Yellen mentioned her concerns about the Chinese economy and the government's management skills. So, is it a management problem?

In terms of the management of the currency, Zhou (Xiaochuan, governor of the People's Bank of China) – one of the best in the world – has done a great job. And I think his credibility in that area is unimpaired. He's a terrific person. I've known him for many years. He says what he thinks, and if those above him are ordering him to do something, he will fight back.

You can't compare this to the financial crisis we went through here in the United States in 2008. We failed in many areas. The regulators failed in their job. Not only failed, they ignored it. If something like that happened in China, we'd be all over the thing. So I think that China is an evolving market, and maybe it won't be a market economy in the sense that we think of a market economy for some time. But so what? It has to fit what it thinks is good for China, not what we think is good for other countries. It has to do what's best for China and its people. And foreigners have to understand that.

China intends to have the yuan included in the IMF's currency basket. What are the upsides and the downsides of this for China and for the world.

I think China should be included in the SDR basket. It's the second largest economy in the world and I think it should be part of it. There's no question about it in my mind. If it's not included, it's political and has nothing to do with economics. Not being included is the downside.

We are recently hearing more complaints from investors, such as rising labor costs, stricter regulations of foreign investment and barriers to entry in certain sectors. Will there be less American investment in China?

Yes, labor costs maybe higher but, that's natural. It's happened in other countries as well. Companies invest where they get the best return for their investors. China would do the same thing.

But depending on the industry, it could favor local companies over foreign ones. There is some discrimination in China, particularly in the areas where SOEs operate. That's not a good idea. If you want to get the best from a foreign company that brings technology and new ideas, you can't have regulations that harm their growth in the country. We have an insurance company in China. I must say, by and large, we've been treated pretty fairly. We've been there long time.

But some companies don't spend enough time trying to understand China and how to operate in a country like China. It's part of your job to understand how to do business in a country in which you're competing against local companies and other foreign companies.

You worked closely with former premier Zhu Rongji and helped to bring China to the world and the WTO. What is your advice to current leaders for integrating China into the world economy.

I think it's important that China become integrated in the global economy that way. The second largest economy in the world shouldn't be on the outside looking in. But China's also got to take the responsibilities that go with being part of that community. It has to meet the same standards that others do. You can't say, "I will take the best of what you're going to give me, but I'm not going to give you back anything." Zhu Rongji understood that. He was a great leader. And China benefited from his leadership and from being in the WTO.

What should China do regarding the Trans-Pacific Partnership?

I think there is more opposition in our country to the TPP than in foreign countries. The TPP will not come into being until the new administration, I believe, is in place. If China wanted to come into the TPP, they know what they have to do. You can't have industries that are government controlled, and be part of a free-trade agreement. I do think it's in the national interest of both countries to have a free-trade agreement. But it may take a long time to negotiate.

Why do bilateral investment treaties (BIT) take so long? Is there a way to accelerate the process? And what's your prediction on the BIT negotiation between the U.S. and China given that the presidential election will take place next year?

The problem is that both sides have a laundry list of areas that they don't want to make subject to that agreement. I think there ought to be a group that is appointed in each country to meet on a continuous basis to resolve these issues, not just have meetings a couple of times a year like now.

A BIT between China and U.S. also depends on both countries. They have to also make available their part of the agreement. And you can't say one side should open its markets to technology companies: the reciprocal is not taking place in China.

It's very difficult to predict. We have a Congress currently that is almost in a revolutionary stage. They can't agree among themselves. The Republican Party is pretty much split. The Democratic Party is opposed to trade agreements, believing that it affects them adversely. It's going to take a strong leader in the president to bring us together.

You have advised a number of presidents, in both parties. Who will you advise next?

I predict that the current leaders of the Republican Party – the ones with the highest polling rates – in my judgment will not be the next president. I could be wrong obviously, but we'll see. But those of you who watched that circus last evening it was obvious that Hilary Clinton did the best of all of them. And Bernie – whatever his last name is – was probably second. If you have the backing and the knowledge, you can run. But it doesn't mean you're going to be elected. But you never know, it's a democracy. Who would have believed that Donald Trump would be running?

Are you concerned about the outcome of the election?

No. We have had some very good presidents over our history, and some poor ones. But that's what democracy is all about. We survive the poor ones and we benefit from good ones. We're going through a period here that a majority of the public that's speaking out now about this are unhappy with the political system. That's how Donald Trump gets to be out front in the poll right now, but common sense will take place, as people go to the voting booths.

What are you going to tell him, or her, about dealing with China?

To me, China and the U.S. are the two most important countries in the world right now. It's in China's national interest and our national interest that we have a constructive relationship. We are living in a world that not only has just economic problems but also geopolitical problems which are growing with intensity and concern. Is the world safer if China and U.S. were closer together, or China and Russia closer together? Where do children from China want to go to school? Where do Chinese want to invest? So why should China have a closer geopolitical relationship with Russia, than with the U.S.?

Some think China is repeating every major mistake that Japan has made, that we'll fall into the same trap.

I don't think so. China and Japan are much different. Japan has an aging population, but the Japanese have not let immigrants from other countries come in. I always thought that the natural factory for Japan would be China, as the manufacturing arm of Japan, because Japan is not going to change its culture very easily. China has a population of 1.4 billion, it's not in the same league population-wise as Japan. So I don't view that as something to be concerned about.

How did your early experiences in the army influence you? Did it help your career?

I enlisted in the army when I was 17 years old. I was bored in high school, and I served in Europe from Normandy, linking up with the Russians in Linz, Austria. I came back out of the army, had to finish high school, which was a very difficult year and a half. After being in a war, going back to high school, I don't envy anybody having to do that. Then, I went onto college and law school. When I finished law school, almost on the day the Korean War broke out, and I had stayed in the reserves because I needed the money when I was going to school. I was recalled about two months after the Korean War broke out. They needed field officers. I found myself on an airplane going to Korea. I spent about 14 months in the coldest winter I've ever spent in my life. I commanded a company. I was a captain when I came back. I think you learn something about leadership. I learned that you never ask anybody to do what you wouldn't do. Not everybody feels that way about it. I run my life that way, and have done so since the army. I don't ask any employees to do what I wouldn't do. I work long hours. I have a brief case almost every night. I don't finish until about 11 o'clock. That's been my life since I went to work for Starr and ran AIG. That's me. You either give up your soul and complete attention, or you shouldn't do it.

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