One of the great differentiators of the United States is its bankruptcy laws. While individuals and companies don’t hesitate to sue each other if it is worth their time and dollars, corporate creditors don’t have to waste time in litigation to take possession of and dispose stressed assets to recoup and move on. Steve Miller has not only experienced this at close quarters but has written an entire book on the career that he built doing turnarounds. Titled The Turnaround Kid, it captured his learnings fixing companies such as Chrysler, Delphi, Bethlehem Steel, etc. But the spotlight shone brightest when he was appointed on the board of AIG post the credit crisis, eventually becoming its chairman. In this informal chat, Miller talks about his time at AIG, his concerns about the world and his outlook for the US economy.
What is your take on the current global business environment?
Well, nobody ever loves the way business is. The degree of optimism changes from time to time. I actually think that conditions are going to improve in terms of the fundamentals. We have gone through a long recession since 2008. Now, confidence is coming back in many parts of the world and consumers are once again starting to spend. So, there is general optimism.
Secondly, the price of oil has fallen by half. I don’t think we have begun to see the implications of that massive change in the most basic energy input. For consumers, it is more money in their pockets because they don’t have to spend so much on gasoline for their cars. But that’s the positive impact. For energy and industrial companies, it is going to be very disruptive, as their revenues have fallen by half. One of my co-diners last night was talking about how grateful Scotland must be that they turned down the separation [from the United Kingdom] because had they separated, their oil revenue would have fallen by half and they would be facing a crisis right now.
So, in some sectors, winners and losers may change but this is going to play out over time in some dramatic ways that we probably haven’t even thought about. Thirdly, there are concerns about the disparity of income between the rich and the poor. And as the global economy has permitted greater accumulation of wealth for people in high positions and, hence, the ability to make investments, it has also left behind many people in the world. That political pressure may cause some uneconomic responses, the most basic being that if you try to raise taxes to cover the gap, you will drive them away and lose revenue rather than gain revenue, resulting in some very destructive effects on your economy. This is what François Hollande found in France when he tried to raise taxes too much.
Fourth, it is becoming much more difficult to manage a big company — it has products it can sell anywhere in the world but there are varying regulations, controls and taxes based on jurisdiction. So, you have these tremendous forces of globalisation on one hand and political, national-boundary separations on the other. And this is becoming a bigger and bigger struggle.
When you talk about this dynamic shift in terms of the oil price, the corollary is that you would have unemployment because shale was a big investment in the US. Will that aggravate unemployment?
I believe the best thing about a free economy is the ability to put people to work where they are needed. I keep thinking, a hundred years ago somebody had said in America, “90% of our population work on the farm today, producing food. But with these new tractors and mechanisers tilling the land, we are not going to need all these farmers. What are we going to do with all these people?” The answer is: they went into factories and services; the economy absorbed them. As long as you permit a free, flexible economy to adjust rather than try to protect it, this will happen. As far as shale goes, people are still using oil, and shale, in the American context, is the most efficient way to get oil rather than buying it from somebody else.
Yes, shale development will slow down. Maybe you will not have as many jobs in North Dakota as people were planning. But, nonetheless, there were going to be plenty of jobs created in the economy by people who don’t have to spend on gas at the pump. Instead, they will spend it on other goods and services. In a free economy, things will adjust and there will be jobs. It won’t be part of one sector or one geography but will be widespread. Shale is not going away. You still want the oil and shale is a very efficient way to get it. There just won’t quite be as much new development in shale as there might have been three months ago.
You talk about the potential of the free economy to absorb excess labour. Where is the employment generation going to come from?
The problem is that, in general, we make it very expensive for businesses to hire American workers. Another part of our American problem, if you will, is our global tax system. We punish companies who bring investment dollars back from overseas into America. The tax system says, leave it overseas. That is not helpful for American jobs either. I think if we could clear the way for those two problems, the excess cost imposed on business for healthcare and the punitive taxes on people who repatriate their overseas resources, then I think a lot of the questions about where the jobs are going to come from will go away. I am more worried about global uncertainty, the increased acts of terrorism and the impact it is going to have on the politics with every major developed country becoming more protective of their borders. This we got to see in France, Germany and other places and I am very sad about this development.
Along with Lehman Brothers, AIG got all the bad press during the credit crisis. When you got the offer to turn around AIG, what was going through your head?
AIG guaranteed oodles of insurance just before the crash happened. The values of mortgages went down and there were collateral calls at AIG that could not be honoured. You either had to bail out AIG or let AIG pull down Goldman Sachs, Chase Manhattan, Citibank, Bank of America and everybody else. Because of the obligations, we had to honour the pool of mortgages that they had all accumulated. So, we were at the centre of the crisis. Based on that, the government did the bailout and then decided to completely change the board of directors. I was one of the people who were called upon and it was based on my experience in finance, turnarounds, all that. Why did I agree? My main reason was that I wanted a front-row seat at this huge collision of our private and public sectors, as we kind of figured how to regulate this in a way that could prevent the issues that we had but at the same time doesn’t destroy the whole industry by overregulation. And a year after I went on board, our chairman Harvey Golub resigned. As I say, I went to the men’s room at the wrong time and when I came back, I was chairman. But it has been a wonderful journey.
Was the decision to keep AIG going a close call?
I did think we were going to go through liquidation and so there would be no more AIG. We had hired Bob Benmosche, who thought that there is enough value so maybe we could rebuild this company. And we said let’s give it a try — and we succeeded fabulously. So, I run around now and take credit for it but it was Bob who did the work. I went in because I thought this is going to be pretty interesting. I have, as the chairman, made it my priority to work with our regulators. Not only the Federal Reserve that regulates us because we are a systemically important financial institution but our hundreds of regulators all over the world. And I spend time meeting them and talking to them with two simple objectives.
One: we understand why we have increased regulatory scrutiny for insurance companies; it is because AIG demonstrated to the world that a big insurance company can be toxic. We were unregulated and so we were able to take all this risk. Now, we are regulated. We couldn’t replicate 2008 even if we wanted to — the Fed won’t let me do that. So, now that safety has been guaranteed, what are my objectives? The first objective is to make sure that regulators treat insurance companies differently from banks. The temptation is to say you are all financial institutions. So, we are going to have a capital measurement and restrictions on leverage, based on what works for banks. But a bank is very different from an insurance company. A bank gets its money with overnight demand deposits that can disappear at very short order and that drives what kind of assets you can carry as a bank.
In an insurance company, most of our money comes from life insurance. People don’t run out and die if they are worried about us, they can’t undo life insurance. That allows us to take longer-term assets with the confidence that our funding will be stable. We don’t resent being regulated. But don’t give me a bunch of bank rules — give me insurance rules. And we are making a lot of progress on getting regulators to differentiate between insurance and banks.
The second objective, besides different regulations from banks, is global consistency. I don’t mean everybody should have the same regulations. But don’t have them totally in conflict so that we can’t possibly comply with two different sets of regulations. So, if we can get global harmony on one hand and insurance-appropriate regulations on the other, then I would say I have done my job and AIG has kind of paid back for the agony we brought to the world back in 2008. Every month, I meet personally with our principal financial regulator at the Fed, Lauren Hargraves, one-on-one. I have her sit at our board meetings every month.
Is that a prospect that other insurers would relish — having a regulator sitting in at their board meetings?
Most of them don’t want to go there. For us, it works because of who we are. Having brought on all this misery, I have decided I am going to help the regulators do a better job. And it saves us a lot of time rather than us having to explain to the regulator what we decided in the boardroom. They can see with their own eyes that the board is active and thinking through all these issues. They are a second set of eyes and they do push back on some things and we talk about it and come to a resolution. Finally, clients and customers say AIG, aren’t they the ones that almost went bankrupt six years ago? What is my reassurance that it won’t happen again? Well, if the Fed has approved my capital structure, my dividend plans, then to a client it means that these chaps probably aren’t crazy, otherwise the Fed would have objected. So, it is a seal of approval that we get from the Fed, which has value to us.
Can you tell me what it takes to turn around a company this size? What are the takeaways for a CEO or someone who has such a job at hand?
What it takes is fresh eyes, whether it is the board or the CEO, because the great thing about fresh eyes is that you don’t have to justify what you did two years ago. You don’t have to apologise for the mess that has been created. Your one focus is to figure out how to get out of the mess. And it is not that I am smarter than whoever was there before. I am not. It is just that I am free from having to apologise. I say that we need to get back on our feet and ask how we are going to do that.
Secondly, a lot of people say that if this company got into trouble, it must be full of bad employees and management. That is not true. Usually, there are very good people in the company. They know their craft, they know what to do. They just need a new direction.
Thirdly, companies in trouble quite often have a very bureaucratic organisational structure; you have to get ten signatures to do anything. You have got a management structure where everybody is responsible in a way but nobody is really responsible. So, a lot of times, I have gone in and just streamlined the organisation to make it more efficient and push down the responsibility. I say I am going to put you in charge for this division, go make it great. Don’t come and ask me everything. I think you are capable of doing it anyway. The bigger decisions, come and check with me, but basically this is what I see — if you agree, just go do it. I don’t have a team that goes with me to take over it. I go in by myself and find the talent that is there. Sometimes, it is two or three layers down. I give them responsibility and promote them because those are the creative entrepreneurial types. Those are the basic rules for turning around companies. That is general advice but that is kind of how it works.
The last point is: take a decision. A lot of companies, when they get into trouble, study this or that. They are not quite sure which way they want to go. I am not smart enough to know what is right but I say we are going that way. The mere fact that you made a decision gets the organisation to say okay, we are going to go that way. It gets the juices flowing, it gets some focus on how we are going to get there instead of which way we should look. You never have enough time to study it to know exactly what is right. Making a decision is more important than making the precisely right decision.
So, in AIG’s case, is it about coming back to its roots and sticking to the things you need to focus on rather than getting adventurous? You did sell a lot of assets.
Our business, just by virtue of being in insurance property, casualty, life and retirement, is complicated enough. We didn’t need to be in aircraft leasing or some of the other things. In aircraft leasing, it is a bad fit for an insurance company because by nature it is a very highly leveraged business. So, if you own an aircraft leasing company, you have got $40 billion of heavily leveraged assets. It is appropriate to that industry but when it is blended into your balance sheet, you look like you’re a little overleveraged and ratings agencies start to look down on you. AIG got into it long ago because they had a triple-A rating and they could do whatever they wanted. In our more sober current situation, we have to be more careful. So, that is why we got out of it.
Will there be more surprises like a Lehman Brothers or an AIG? Or can we sit back and safely assume that there will not be any such shocks?
In our current regulatory environment, I don’t see financial services being a big problem. You will still have corporate bankruptcies in industry. Maybe there will be an oil company that got overleveraged and found that oil wasn’t staying at over $100. I think the regulatory environment will prevent those kind of things in financial services. So I am an optimist from that point of view.
The biggest thing I worry about from a financial standpoint is our government’s accumulated huge obligations from pensions, healthcare, public workers and from everything else. We just saw my former hometown of Detroit going through bankruptcy for just that reason. And we have some states such as Illinois and California that are fiscally very irresponsible and at some point will be unable to continue raising the money to service those obligations. I worry more about that than I do about the private sector.
