Tuesday, March 15, 2011

What the demise of China Media Express says about the demise of Hank Greenberg and AIG

I met Hank Greenberg in late 2000.  He was chatting mostly to Ajit Jain – the Berkshire Hathaway reinsurance impresario and I was a spare wheel.  But Hank was I thought the most impressive person I had ever met.  He name-dropped shamelessly (he had had just flown back to New York on a private jet after “chatting” with Li Peng).  But he was so far ahead of me on so many issues it made me feel dumb.  He even looked – at least in the brief conversation – as if he were considerably smarter than Ajit Jain – and Ajit is no intellectual slouch.

I was just out of my league...

Anyway there is a view around AIG – a view that I shared – that AIG was built in the mold of Hank  and it required Hank – a certified genius and an unbelievable workaholic – to keep it all together.  AIG you see had a single risk control mechanism: Hank.

In this view Elliot Spitzer by causing the demise of Hank Greenberg caused the demise of AIG – and by extension the demise of the entire financial system.

I thought that might be going a bit far – but it is hard to argue against the proposition that AIG got much more risky without Hank around.

And the stories were legion too.  I know someone who was on a trading floor for AIG in Taiwan.  There was a big error and it potentially exposed AIG to hundreds of millions in losses.  Everyone was kept silent because if it leaked then people would front-run AIG closing their position and thus increasing their losses.  People slept at their desks.

But the next morning – fresh off the private jet from New York – there was Hank.  He had come to take control of the situation – and he stood behind traders as they solved the problems for minimum losses.

Hank was the man.

Now Hank is only a couple of percent the man he used to be.  His multi-billion dollar holding of AIG has been reduced to its last few hundred million.  His main asset is Starr Asia – a holding company for a variety of Asian investments (and some old AIG stock).  It was through Starr that Hank made his investment in China Media Express (CCME).

At peak Starr's investment in CCME was worth over $60 million.  This is nothing to the Hank of old – but the new diminished Hank probably thinks that $60 million is a lot of money.  It might even be a reasonable proportion of Hank's fortune.  As recently as January 2010 Starr dropped another $30 million into CCME.  And by that time CCME was a controversial company.

The demise of CCME

I wrote that China Media Express was either  (a) one of the best businesses in the history of capitalism or (b) one of the most brazen frauds in the history of capitalism.

Given the auditor has resigned and is suggesting fraud, the company is suspended and well – all sorts of other ugliness – we know which now.  It was one of the most brazen frauds in the history of capitalism.

And we know who was the biggest victim: Hank Greenberg.

And given Hank's much diminished status this was not chump change.  It was a meaningful hit.

If your one-man-risk-control unit can be fooled by something so obvious then why couldn't it also be fooled by someone offering 25 bps extra carry by double-levering life insurance statutory funds into the AAA strips of subprime securitizations?

China Media Express – apart from being a really fun story – punctures the last Hank Greenberg myth – a myth that I personally believed.


PS.  I think we can conclude that Ajit Jain really was the most impressive person at that table.  I sure as hell wasn't.


David Merkel said...

It's a small world. I recently reviewed Roddy Boyd's book on AIG, "Fatal Risk." Here's the review:


I regard Roddy as a friend, getting to know him through our discussions on AIG.

Well, what has Roddy been up to lately? CCME.


Fascinating stuff from him, and you. Keep up the good work.

Anonymous said...

no wonder my fund manager friend would only invest in big cap Chinese companies.

Rahul Deodhar said...

I wonder what was the AIG board doing when it heard of extensive dependance on Greenberg.

Anonymous said...


I think you have to credit the possibility that Hank _was_ the most impressive person at that table... but ten years later old age and life's stresses have taken their toll.

We have no trouble believing an athlete's skills can greatly diminish in a year or two - why not a businessman in a decade?

Bumpkin said...

Dear Mr. Hempton,
After some resentment about the style[1], but not content, of select few of your articles I have finally given in. Yes, you are worth my time, every time.

[1] Maybe you can explain to me why most shorts ruin their public welcome, so to speak, with excessive irony and sarcasm - both literary weapons to be used with extreme care and skill.

Boyd Is Da Best said...

Mr. Boyd's book is a must read and yes, his expose (on the ground) of CCME was an incredible read.

Mr. Hempton, take a bow, yourself. You're far too modest. Wasn't CACG halted today as well?

On the Greenbergs (none are related), old Ace of Bear Stearns put Hank to shame on a trading desk. Reporter Herb, would have been fired his first day.

They say good things come in 3's. CCME, CAGC, who's next?

Anonymous said...

Shareholders of China Agritech (CAGC) should be paying very close attention. The logical fallacy of "argument from authority" has been painfully exposed at CCME. Investors who "outsource" their thinking, believing that if Greenberg was in the stock it HAD to be good, have only themselves to blame.

And in other news, an 8k filing has revealed that the hardest working man in finance, SBAY's James T. Crane has suddenly resigned. SBAY has still not filed its 10Q originally due on Feb 15th.

We'll miss you Jimmy!

John Hempton said...

The Folorn Investor wonders why shorts use irony or mocking tone. Seriously if I do something strictly by the numbers it disappears to the bottom of the well.

If you get the numbers quickly the rest is obvious.

CAGC was obviously a fraud the moment you saw $6 million in machinery to make and move 213 thousand tonnes of fertilizer per annum.

But if I said that I doubt it would have had as much impact as gently teasing out what that means.

I got lots of one paragraph proof that companies are frauds. I might try a few out. But I suspect mocking works better.


Unknown said...

Kicking a man while he's down, John ;-)

Did you see the 13-F filed by CV Starr, by the way?

I think the list of stocks they owned cast much doubt on their China experience.

Hilltop? China Cord Blood? Concord Medical? They all seem to be a gamble.

CORPORATION COM 060505104 5,069 Shares 380,000 Sole 380,000
INC COM 432748101 21,291 Shares 2,146,280 Sole 2,146,280
FLY LEASING LTD SPONSORED ADR 34407D109 15,213 Shares 1,113,700 Sole 1,113,700
ISHARES INC MSCI BRIC INDX 464286657 41,761 Shares 850,000 Sole 850,000
ISHARES TR S&P 500 INDEX 464287200 82,694 Shares 655,000 Sole 655,000
ISHARES MSCI TR MSCI EAFE IDX 464287465 41,162 Shares 707,000 Sole 707,000
EQUITY INDEX F EMR MKT ETF 922042858 44,535 Shares 925,000 Sole 925,000
CORP SHS G21107100 3,876 Shares 964,116 Sole 964,116
HLDGS INC COM 169442100 48,240 Shares 3,045,455 Sole 3,045,455
HLDGS LTD SPONSORED ADR 206277105 25,663 Shares 3,472,667 Sole 3,472,667

John Hempton said...

People don't get irony. This post was cross-posted at Naked Capitalism.

People took seriously my quip that Hank is only a couple of percent the man he used to be.


UR said...


Unfortunately one of the problems with irony/sarcasm is that quite a few people just don't get it - especially when the message read w/o these subtle spices supports in some sense their way of thinking (or taking it non-seriously would undermine their sense of self-security they get from being stiffs).

Anonymous said...

I recently watched a video of a lecture given by Value Partner's Cheah Cheng Hye at Columbia buisiness school on investing in China. He's been at it for years and said he said he still gets taken in by fraud. There are people that are masters at smiling at you and making you believe in their stories. Even good old fashion kicking the tires will not always prevent mistakes and he doesn't believe in concentrated portfolio when investing in china.

HG just had a bad day perhaps. Or the cultural clash is too much for him to even comprehend that such fraud is possible.

Unknown said...

The "irony" comment probably wasn't directed at me. But in just case, I was posting the 13-F to get a comment on the quality of their other stock selections. Any comment? ;-)

VIT said...

Enjoyed your article.

Sean said...

Actually, Starr re-upped in October 2010.


John Hempton said...

I sort of forgot about that - but that drove the stock from 8 to 22 which gave me my opportunity to put my SMALL short on.

By then I had aready decided it was a fraud.

Anonymous said...

A mere $ 60 million is chump change compared to how much a few Chinese companies cleaned out Dick Blum, TPG as well as Carlyle. Oh and also Rockefeller & Co.

Do a little digging and you'll find out.

Anonymous said...

Good to read your article. Enjoyed the drama here. I am wondering whether you look at Sino-Forest (TRE CN). Any insights on that?

kristiina said...

Oh, man, there are some things i'd rather not be reminded of. And yet, i only forget at my own peril: everything human is infested with idiots. The comments on your cross-posted article on NC just brought home that.

I used to wish i could be someone hated by idiots, but i've never had the skills to make that happen. But you seem to have struck a perfect balance between dry facts and writing style that separates wheat from chaff. I have limited interest on the analytical side, but read your blog sometimes simply for the entertaining style. It is just hard to digest that there can be people who are not getting the fun of it. I may be an idiot myself, but I can appreciate your writing skill.

Nifty said...

To The Forlorn Investor; your comment that 'you are worth my time, every time' sounds so condesending towards JH and big-noting of yourself. If your so FIGJAM why are you reading Internet blogs?

I appreciate the Aussie style of being right, being self depreciating, and taking the piss all at the same time.

Onya John

Anonymous said...

Hi John, thanks for the informative posts on CCME throughout the course. I'm curious as per your thoughts on analyst coverage in the small cap China space. Complicit? Or unlucky? Thanks again.

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