Timothy Carney
AIG head’s $3M in Goldman stock raises apparent conflict of interest
By: Timothy P. Carney
Examiner Columnist
April 9, 2009
Edward Liddy, CEO of government-run AIG, still owns more than $3 million of stock in Goldman Sachs, which has pocketed $13 billion or more of the $170 billion federal officials have spent bailing out the ailing Wall Street insurance giant.
Liddy is managing a company that receives taxpayer dollars to pay other financial firms, with Goldman Sachs the top recipient. While there is no reason to believe Liddy is influencing AIG actions to unfairly benefit Goldman, the situation represents a potential conflict of interest that would never be allowed in a government agency, but is permitted in the strange public-private chimeras like AIG spawned in this age of bailouts.
Liddy, according to an AIG spokeswoman, “views his role as CEO in essence as a public service.” Liddy has been charged, in effect, with protecting the unstable American economy and taking care of the taxpayers’ money.
As we saw with the political eruption over the bonuses his company paid out last month, Liddy needs government approval for his actions. The federal government owns 79.9% of AIG, and so Liddy, in effect, works for the government. In theory, then, Liddy works for the American people.
Yet he is not covered by the same ethics and financial disclosure rules that govern real government employees, specifically, conflict of interest rules don’t apply to him. Thus, Liddy observed in a recent Washington Post oped that “my annual salary is $1. My only stake is my reputation.”
But he has acute financial stake in one of AIG’s counterparties—namely, his $3.2 million personal investment in Goldman Sachs.
Liddy served on Goldman’s board of directors until September 2, 2008, when Treasury Secretary Hank Paulson called on him to take the reins at newly bailed-out AIG, now 80% owned by the federal government.
Goldman’s 2008 proxy report states that Liddy, on February 11, 2008, owned 27,129 shares of Goldman stock, about two-thirds of which were restricted—meaning that if he sold them, he would have to pay severe tax penalties.
An AIG spokeswoman confirmed for the Examiner that Liddy still owns all these shares - both the restricted and the unrestricted stock - many of which were received as compensation for his service on the board.
Goldman’s 2009 proxy report states that Liddy will be allowed to sell his restricted shares on May 31.
The potential conflict of interest is this: Goldman had bought billions of dollars in credit default swaps from AIG. AIG’s insolvency means the company cannot repay in full all of its counterparties, like Goldman.
As a result, the Federal Reserve bailouts of AIG have been, in effect, payments from the Fed to AIG’s counterparties, relieving AIG of its debts to these counterparties. Which specific route AIG takes to dig itself out of its hole directly affects Goldman—and in turn, affects Liddy’s multimillion-dollar investment in Goldman.
AIG spokeswoman Christina Pretto said the company’s dealings with other financial institutions “are handled in the normal, day-to-day course of business and rarely, if ever, rise to the level of the CEO. AIG was not involved in the discussions with counterparties” on how to discharge AIG’s debts to these counterparties. The Fed itself, made those decisions, Pretto said, leaving Liddy out of the mix.
But John Berlau, director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute, sees a problem, arguing that counterparties like Goldman have been coddled in AIG’s collapse.
“It’s not much of a stretch to say that under Liddy’s tenure, the company’s and taxpayers’ money has been looted to pay off AIG’s business partners such as Goldman, preventing any effective reorganization,” Berlau said.
Did Treasury Secretary Hank Paulson worry about the potential conflict of interest when he tapped Liddy to run AIG? Paulson, himself, had to shift all of his significant tax holdings into a blind trust upon leaving Goldman for Treasury in 2006.
Why didn’t Paulson or his successor at Treasury, Timothy Geithner, make Liddy sell his Goldman stock?
Berlau sees a lesson here for government management of TARP recipients and automakers: “The whole AIG experience demonstrates the fallacy that the government can efficiently sack CEOs and replace them.”
Again, there’s no evidence Liddy has ever put his own (Goldman’s) interest ahead of the shareholders’ (the taxpayers’) interest. But owning millions of dollars of stock in the leading potential beneficiary of your subordinates’ actions wouldn’t fly in government—why is it fine at AIG?
Timothy P. Carney is The Washington Examiner's Lobbying Editor. His K Street column appears on Wednesdays.
