The Economist September 17th 2016 2 tion, faster population growth among peo-
ple in the lower reaches of the income distribution will automatically shunt everyone above them further up the income ranks, even without any improvement in their fortunes. To see why, imagine a simple world populated by 750m poor Southerners and 250m rich Northerners. Imagine that incomes do not change over the next 20 years, but the South’s population doubles. That would increase its share of mankind from 75% to over 85%. For that simple reason, in the 75th to 85th percentiles of the global income distribution poor Southerners would replace rich Northerners. Any comparison of this income bracket with the same bracket 20 years before would thus show a big decline in fortunes, even though no one is worse off. Turbulent deciles In reality, better-off Latin Americans and Westerners of modest means dominated the 75th-80th percentiles of the global income distribution in 1988. By 2008, rich Chinese had encroached upon this income bracket. The flat incomes shown by the elephant chart do not, then, reflect the stagnant fortunes of Trumpians and Brexiteers. They instead reflect a comparison between the original Latin American and Western occupants of this income bracket and the Chinese who jumped into it 20 years later. None of this will be new to readers of Mr Milanovic’s academic work. He and his co-author, Christoph Lakner, were quite clear about the shifting composition of the troublesome deciles. Their journal article also included an alternative chart, which does what many people assumed the elephant chart had done: it illustrates how each income group in each country in 1988 fared over the subsequent 20 years. In its shape, the chart looks recognisably elephantine. But the top 1% do markedly less well in this alternative chart than in the more famous one, and even the worst performing groups (now around the 90th percentile) boast income growth of 20% or more over 20 years. Both charts show that China’s middle classes and the world’s rich have gained handsomely in the era of globalisation. It also remains true that the lower middle classes in rich countries have fared less well. The elephant shape remains, even if its dimensions are different. The Resolution Foundation’s critique added little to the original academic papers (except a reason to go back and read them). But it clarified a misunderstanding shared by many of the pundits and drumbeaters who made such a noise about the rampaging chart. Like the elephant George Orwell described in a famous essay about his time as a colonial policeman in Burma, this one was shot chiefly to silence a crowd. 7
Finance and economics 71 Hank Greenberg
Final claims NEW YORK
An insurance legend has his day in court in a fight to save his name
A
QUEUE began forming early. By the time the doors swung open at 2pm, there was a mob. After11 years of legal skirmishes, including eight pre-trial appeals, the case of the people of the state of New York versus Maurice (Hank) Greenberg, a former chief executive of AIG, once the world’s largest insurer, and against Howard Smith, AIG’s former chief financial officer, began at last on September13th. Mr Greenberg was one of the last to arrive. Still spry at 91, he wore an elegant dark suit, sporting the red-and-white pin from his recent induction to the French Légion d’Honneur. As he sat, looking attentive and relaxed, it was indeed his honour at stake. Opening, David Ellenhorn, counsel for the state of New York, accused Mr Greenberg and Mr Smith of concocting two sham transactions to mask problems in the company’s core insurance operations. These took place between 2000 and 2003, when AIG was perceived by the stockmarket as that insurance rarity, a firm capable of producing high growth at low risk. Even at the time, however, there were whispers of problems. The most prominent of the controversial transactions occurred after AIG’s share price briefly plunged following a quarterly financial disclosure. A trend of declining reserves was tarnishing AIG’s reputation for underwriting prowess and mitigating risk.
Hank has legacy issues
In response, Mr Ellenhorn said, Mr Greenberg called the chief executive of General Re at the time, Ronald Ferguson, to initiate a deal that enabled AIG to pay $5m to bolster the appearance of its reserves. Two General Re executives pleaded guilty to federal charges as a result of the transaction. Five other executives from AIG and General Re were subsequently found guilty in a trial. The verdict was later reversed and charges dropped, but the defendants acknowledged fraud. The second transaction was prompted by losses in a car-warranty business run by Mr Greenberg’s son, Evan. Mr Greenberg was irate, Mr Ellenhorn said, and took complete control of the organisation. An offshore company secretly controlled by AIG was used to disguise underwriting losses as an investment. Mr Ellenhorn said Mr Greenberg “designed, created, negotiated and implemented every aspect” of both transactions. His direct involvement reflected how important he believed the underlying issues to be, particularly because they could have an impact on AIG’s share price, which Mr Greenberg saw as an external report card on AIG and himself. None of the state’s accusations, responded Mr Greenberg’s lawyer, David Boies, could be substantiated by an individual or a document. The state’s case, he added, is “devoid of any admissible evidence”. Also, the transactions were too small to have a material impact on AIG’s results, and thus to have legal relevance. Resolving these claims will take many months. Perhaps the oddest aspects are the potential penalties. The state seeks to recover past bonuses and bar the defendants from senior roles in public companies and the securities industry. Given the defendant’s age, Mr Boies responded, the ban is superfluous and any return of bonuses would be unjustified given the company’s performance at the time. Mr Ellenhorn countered that Mr Greenberg continues to run an important insurer, C.V. Starr, that buried within its operations is control of a securities firm, and that he remains sprightly. None of this suggests unbridgeable differences between the two sides. But that may be because the penalties should not be viewed literally. Both sides accept the case is really about Mr Greenberg’s legacy. He needs to be found accountable, said Mr Ellenhorn: that would send a message to other CEOs that they cannot get away with fiddling with the books. The importance of the charges being heard, moreover, pales beside a possible inference from a guilty verdict. That might raise the suspicion that Mr Greenberg condoned accounting fraud to mask deteriorating earnings and risk-control shortcomings. That, in turn, might make some wonder whether the AIG that blew up during the global financial crisis, after his departure, had long been a house of cards. 7