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