against the longstanding control of their economy by the minority “ overseas Chinese ” — people of Chinese origin born in Malaysia . Rioters in the streets of Kuala Lumpur demanded reforms . Government responded with a law giving priority to Bumiputra in areas from hiring in the work place to equity ownership of certain kinds of businesses , including foreign insurance companies .
CSI obtained some temporary exemptions but continued to push for a permanent solution . An opportunity arose in the mid-1990s during the World Trade Organization ’ s ( WTO ) negotiations on a global agreement on trade in financial services , including insurance . Many countries in the WTO agreed to reduce discrimination against foreign companies in service industries , including reducing or ending foreign ownership caps .
Throughout the administration of George H . W . Bush and the first administration of Bill Clinton , international negotiations over the financial services agreement had been tense . The United States refused to ratify several versions because the agreement remained too protectionist . In 1997 , however , to seal the WTO ’ s financial services agreement , the United States and the European Union brokered a grand bargain that many other countries supported . In effect , the US was willing to forego its unilateral power to punish unfair trade practices in order to secure fair access of its financial services firms to other markets .
The issue came to a head in the final days before the WTO financial services agreement was to be signed . The United States requested that Malaysia eliminate its foreign ownership restrictions , including those applicable to AIG . Malaysia countered by offering to modify its policy going forward to allow foreign ownership at 51 %. But it also proposed that it be permitted to apply , to any company not then in compliance , an even lower percentage cap .
This proposal was a clear attack on AIG , to which it solely applied because of its series of temporary exemptions . The United States , along with European allies , resisted and aggressively negotiated to persuade Malaysia to withdraw the proposal . The argument was simple : international trade agreements were intended to expand trade while this proposal would curtail it by sanctioning a partial expropriation of foreign insurers .
Ambassador Barshefsky , the US Trade Representative , stressed that Malaysia was then the emerging economy among South East Asian countries . Its positions were watched closely and often followed by its neighbors , such as the Philippines and Thailand . If Malaysia could get away with a regressive tactic in a trade liberalization deal , those countries might follow suit . The US could not afford to let that example stand . Nor , of course , could AIG .
Greenberg dispatched AIG ’ s government relations officer , Oakley Johnson , to Geneva , where diplomats , officials and trade representatives from scores of countries were gathered . They expected only to hammer out a few final details , but the Malaysia ownership issue remained a sticking point . Johnson ’ s message raised the stakes : he informed Timothy Geithner , then a deputy Treasury Department official for international trade , that AIG could not support the agreement unless it addressed the Malaysia divestiture rule directly .
Ambassador Barshefsky ’ s staff , along with Geithner and his colleagues , developed a compromise proposal to address what participants named the “ AIG issue .” They proposed a proviso that any WTO member , including the United States , would be allowed to discriminate against countries that forced the localization or expropriation of a foreign insurance company . To its credit , the European Union threw its weight behind this solution . Soon most major countries supported it too , as more in keeping with the open trade philosophy to which they had committed . For Johnson , this compromise solution was appealing , although it was not the pure renunciation Greenberg had sent him there to get .
Johnson informed the group that he could not give AIG ’ s assent until he had spoken with Greenberg . Earlier that day , a Friday in December , Johnson had called to apprise Greenberg of developments , and let him know that they would need to speak the moment any breakthrough emerged . Greenberg would be aboard AIG ’ s jet later that night and assured Johnson that it was outfitted with a newlyinstalled telecommunications system so that he could talk on the phone while in the air — a novel technology at the time .
By 11:00 p . m . Geneva time , trade negotiators had all agreed to the US compromise proposal on the AIG issue , and Malaysia finally capitulated . All that remained was securing AIG ’ s support . US delegates were leaning hard on Johnson for an answer . He rang the air phone , but the new system did not work . The international delegation was assembling in the hall . From Washington , Geithner ’ s boss , Lawrence Summers , called Johnson directly , seeking the final go-ahead , noting that everyone was growing impatient . The government was eager to have AIG ’ s support .
Johnson stood firm , insisting that he could not give AIG ’ s support without getting clearance from Greenberg — and that he was trying earnestly to reach him but having technical difficulties . Geithner then arranged with his counterparts for a two-hour extension of the final deadline . Greenberg ’ s assistant , Shaké Nahapetian , suggested that Johnson send a fax to the airplane where it could be read on the pilot ’ s screen in the cockpit . Johnson wrote out an imperfect summary of the situation and faxed it to the plane . Greenberg replied as expected : “ I would prefer Malaysia to drop the divestiture rule entirely , but if this compromise proviso is the best that can be done I will not hold up the agreement over it .” With that , Johnson threw AIG ’ s support behind the agreement and the ceremonial signing was undertaken at close to 3:00 a . m . local time .
Greenberg resigned himself to further negotiations with the Malaysian government that he calculated would eventually lead to permanent resolution of the issue . Three years later , Greenberg returned to Malaysia to negotiate for another fiveyear renewal . Under the renewal , AIG maintained its commitment to sustain its investments in the country ’ s infrastructure . In exchange , its historic branch would be unaffected by the foreign ownership laws until 2005 .
The end result was imperfect , but the grand bargain held , a triumph for open trade in services . The WTO agreement on trade in services defined new opportunities for the world : open access to markets , increased foreign ownership thresholds , and fair treatment to existing and prospective foreign companies in domestic markets . Today , trade in services is a multi-trillion dollar global enterprise .
This article was adapted from The AIG Story ( Wiley 2013 ), by Maurice R . Greenberg and Lawrence A . Cunningham .
www . MoAF . org | Winter 2017 | FINANCIAL HISTORY 27