Friday, January 7, 2011

Bet Again on AIG? Count Me In.

I lost $2.5 million on AIG stock in 2008. But I still want to be among the first to purchase new shares of the company in the next couple of weeks. That’s when the U.S. Treasury is aiming to sell at least $15 billion of its AIG holdings in the beginning of a series of stock offerings.

Am I crazy? I don’t think so. I believe in AIG because I spent years working with the legendary former CEO Maurice “Hank” Greenberg. I know the strength of the company including its longstanding ties to international markets. Despite all that AIG has gone through, I still think the company has a solid foundation.

Treasury Secretary Timothy Geithner’s recent congressional testimony indicates he also sees value in AIG. “The restructuring,” Geithner told the Congressional Oversight Panel for TARP, “will accelerate the government’s exit on terms that are likely to lead to an overall profit on the government’s support for AIG, including the value of Treasury’s interests in AIG held outside of TARP.”

That’s right, Geithner said the U.S. taxpayer will likely make a profit from the AIG bailout.

On the other hand, the Congressional Budget Office still estimates that the AIG bailout under TARP will cost the Treasury about $14 billion. Still, this is down about 50 percent from its earlier estimates.

It is a far cry from the headlines of the past years. AIG is “Wall Street's biggest basket case,” was typical. The federal bailout eventually reached $185 billion. But that’s still peanuts compared to the damage that AIG’s failure could have been caused on both Wall Street and Main Street. It had excelled at insuring corporate risks, conducting complex financial transactions, and investing in stocks, bonds and industries around the world while at the same time providing consumers with life and car insurance as well as investment products.

Yet most financial experts disagreed with the bailout. For example, The Wall Street Journal, fueling the tea partiers and conspiracy-thinkers, wrote in March 2009: “AIG now stands as a monument to the folly of regulatory panic.”

But the Journal recently offered an update, reporting that AIG was “one of the market’s top performers in 2010.” It had a “nearly 97 percent gain” last year.”

Before I get too carried away gloating about this turnaround, let me unequivocally state that no one wants or should ever expect a federal government bailout. Greenberg even said that his baby should go bankrupt because that could have offered a clearer path to recovery.

But the bailout was the right thing to do at the time—and I said so then.

I even insisted that the controversial bonuses were worth it. They helped retain the expertise needed to unwind the complex financial products that got AIG into such dire trouble. While other financial experts could have been found, by the time they familiarized themselves with the specific deals, billions more could have been lost. These bonuses were also contractual obligations, and lawsuits could have resulted if they were not paid.

Right now, I have faith in AIG. I know its history of creating unique insurance products for people and institutions that no one else wanted to insure. It started with the founder Cornelius Vander Starr, when he established an insurance agency in China. Starr was the first and only Westerner to sell insurance to the Chinese. AIG had this market to itself until the Communists took power in 1949.

Greenberg re-opened China for AIG in the ‘70s. In addition, he pushed the company to specialize in products like offering kidnapping insurance in unstable countries.

Today, AIG has a good strategy. It has restructured, with two core businesses—Chartis, its property and casualty arm, and SunAmerica, the domestic life company also supplying retirement products. Chartis remains the largest property/casualty insurer in the world.

The markets recognize this turnaround. In November, AIG held its first bond offering since the crisis and raised $2 billion. More recently, a consortium of banks granted AIG a $3 billion credit line, replacing the government credit line.

So when the AIG shares go on the block, I will be there. Even with the pain of losing hundreds of thousands of dollars still fresh in my mind.

As originally appeared on

Thursday, October 28, 2010

Why AIA’s successful IPO could become a nightmare for Prudential

The demand for AIA (AIA) shares is expected to be high tomorrow as the company makes its trading debut on the Hong Kong stock exchange after a remarkably successful IPO, which valued the company at $30.5 billion. The IPO set records as the largest in Hong Kong and the largest ever in the insurance sector as cornerstone investors made strong commitments. A Reuters poll is forecasting AIA will start trading Friday at HK$21.79 each, nearly an 11 percent premium on its IPO price. At that price, the market capitalization of AIA will be roughly $33.9 billion.

This is encouraging news for AIG, which sold a 58 percent stake in its Asian life insurance unit last week and has the option to issue more shares. AIG can sell roughly a billion additional shares during AIA’s first month as a listed company, potentially taking the total amount raised in the IPO to $20.5 billion and cutting its stake to 33 percent. The demand for a piece of AIA is also welcome news for U.S. taxpayers, since AIG plans to utilize the AIA sale proceeds to repay much of its Federal Reserve loan.

But there is one big loser in all of this – Britain’s Prudential plc (PUK), which tried to buy all of AIA in May (not just 53 percent of it), for $35.5 billion. The deal fell through after Prudential shareholders got nervous and forced the board and new CEO Tidiane Thiam to lower its offer to $30.4 billion. While AIG’s initial valuation of AIA was only slightly higher than Prudential’s second offer, exercising the option to sell more shares will easily bring in more money than the deal it walked away from. And while AIA is subject to a lockup after the IPO, it will be allowed to sell 50% of its remaining shares 12 months after the listing and the other 50% after 18 months.

So first of all, Prudential has to be kicking itself for not offering AIG more money. The market is showing $30.4 billion was just too low and AIG was right to abandon the deal even though AIG CEO Robert Benmosche wanted to do it. But his directors were against him on this one. And even more worrisome for Prudential, it has now turned its Asian life insurance operations into a potential takeover target for AIA. A few years down the road, the predator could become the hunted.

Prudential and AIA are the two biggest international insurers in Asia and the only companies with branches across the continent. Bloomberg Businessweek reports Prudential agents have been outselling their AIA competitors due in part to AIG’s woes, but with AIA reborn as an independent company, that gap should narrow. After all, AIA is the only life insurer in China that is wholly owned by a foreign company, continuing AIG’s long history there. AIA’s new CEO, Mark Tucker, has said he wants to triple AIA’s value. He not only used to work for Prudential but was Thiam’s boss. With more than 15 years experience in Asian markets, Tucker has to be just the kind of guy who might relish a run at his old company.

Wednesday, September 8, 2010

Corporate pressure on governments - what BP could have learned from AIG

There’s yet another reason for Americans to hate outgoing BP CEO Tony Hayward. The Gulf Oil spill villain has flatly refused a request by U.S. senators to testify next month about his company's role in the release of the Libyan terrorist who bombed Pan Am Flight 103. Hayward didn’t even bother to invent an excuse – he just said BP has nothing to add to earlier statements.

It’s incredible that it took the Gulf oil spill for Congress to call BP on the carpet for the release of the man convicted of killing 270 people when Flight 103 blew up over Lockerbie, Scotland in 1988. BP admitted in late 2007 it told the British government that "We were concerned about the slow progress that was being made in concluding a prisoner transfer agreement with Libya. We were aware that this could have a negative impact on UK commercial interests, including the ratification by the Libyan Government of BP's exploration agreement."

I doubt we’ll ever find out the whole story of how BP influenced the UK and Scottish governments, based on my experience with AIG. I worked as the insurer’s global troubleshooter in the 70s and 80s and saw firsthand how a huge corporation can pressure foreign governments. But AIG, which had a reputation of being tough with foreign governments, was less tough when it came to the Chinese. CEO Hank Greenberg told me to get us invited to China after Nixon’s historic visit in 1972.

So we hired Chase, which was ahead of the game, to help us. It was a long, slow process and a careful one, influenced by our long history in China. (AIG got its start in Shanghai in 1919 and was quite successful until being expelled by Mao in 1949). We knew you could not push the Chinese too far like we did other governments. While we used a stick occasionally, we found the carrot far more effective.

For example, after I helped AIG reestablish operations in China, Greenberg couldn’t do enough to ingratiate himself with the country’s leaders. He even bought the original doors to Beijing’s Summer Palace from a Paris antique dealer so he could return them to the Chinese. Those efforts paid off when Greenberg personally negotiated the final details of China’s admission to the World Trade Organization with Chinese Premier Zhu Rhongi in 2001. It’s mindboggling that the U.S. government allowed a CEO to take the lead role in finalizing this critical trade pact.

AIG was always careful of Chinese sensitivities, but at times, we made mistakes. Once, when we were about to deliver a proposal, our lawyer told us the translator we had hired on the cheap used old Chinese, which named our company American International “Clique” Instead of “Group.” We found a good translator and eventually had the proposal accepted.

Nothing AIG did in China ever remotely approached BP’s efforts to use the British government to bolster its oil exploration deal with Libya. I’m glad the U.S. Senate is trying to get to the bottom of things, but BP’s stonewalling will make that very unlikely.

Thursday, August 5, 2010

AIG Continues Recovery But Second Quarter Revenue May Be Lower

Tomorrow, AIG releases its second-quarter results and analysts predict a 99-cent-a-share profit, which would be down from this period last year. Revenue is expected to drop by about a third. Since AIG’s general insurance and domestic life insurance businesses account for about half its revenue, we’ll want to look closely at how those divisions are performing.

Still, overall, the AIG story is positive. Bloomberg reports AIG has reduced the debt it owes on a Federal Reserve credit line by about $3.5 billion over the last three months. One unit, American Life Insurance Co., reported partial results for the second quarter - net income tripled in the six months ended May 31 to $694 million. And AIG is being helped by the stabilization in mortgage assets held in the Maiden Lane entities created in 2008 to remove AIG’s toxic securities.

You can credit a lot of AIG’s recovery to CEO Robert Benmosche, who has finally brought stability and firm leadership. But the big question remains – will AIG be able to pay back taxpayers? AIG is planning to sell Alico to MetLife and put AIA Group up for a public offering. AIG has no choice but to sell its non-core businesses so it can pay down the Fed credit line. But in the long run, that’s only going to make it more difficult to earn revenue and increase profits.

AIG may now be winding down that divestment strategy. AIG previously said it was considering spinning off its property-casualty insurance business, and now reportedly it plans to keep it. I think after AIG gets rid of Alico and completes the AIA IPO, it needs to stand firm, and concentrate on growing its business.

In June, the Congressional Oversight Panel predicted the government will likely remain a significant shareholder through 2012 and said U.S. taxpayers "remain at risk for severe losses." But Fed Chairman Ben Bernanke has told Congress he thinks AIG will repay everything. AIG stock is up about 32% since the beginning of the year and value investors are recommending a buy. If this kind of progress continues, taxpayers could even make some money when the government unloads its 80% ownership.

Friday, July 2, 2010

No apologies from the man who crashed the world

When I read Joseph Cassano’s prepared testimony for the Financial Crisis Inquiry Commission, there was one phrase that really hit me: “it was the right thing to do.” Cassano, the man whose credit default swap shop at AIG went so haywire it triggered a global financial catastrophe, actually said this twice. It was the reason AIG decided to stop writing deals with subprime exposure in 2006. And it was also why he volunteered to take no bonus for 2007. In nine pages of prepared remarks, there were no apologies, no remorse, no contrition.

Fortunately, when Cassano sat down in front of the congressionally appointed commission yesterday in Washington, he didn’t read the self-serving document, which was too complex for anyone but himself to understand. And he was gracious enough to tell the commission they shouldn’t blame his team at the Financial Products Unit, saying, "Don't criticize them, criticize me."

Well they did, but it took a lot for the commission to get Cassano to admit he did anything wrong. When Cassano was asked if he made any errors, he said, “When I think about the single error that may have been made by me I think how when I retired I didn't volunteer to be the chief clear, chief negotiator for the collateral calls.” Cassano went on to say if he hadn’t left he could have gone to the counterparties and “negotiated a much better deal for the taxpayers than what the taxpayers got.”

Wow. One error from the man who crashed the world, as Michael Lewis dubbed him in his brilliant Vanity Fair piece. And if only he had had stayed at AIG, I guess everything would have turned out so much better.

I commented on Cassano’s testimony on Bloomberg television, saying I was really angry because Cassano not only walked away from AIG with $300 million; he was paid a million dollars a month to consult for AIG afterwards because they needed him to unwind their deals.

After two years of silence, Cassano finally spoke this week, now that he doesn’t have to worry about charges. Afterwards, his lawyers said Cassano hopes his testimony “helps to correct the serious misinformation now buried in the public discourse about AIG FP." But he can’t rewrite history, and the only thing Cassano accomplished was to give the public a good look at the hubris that led to AIG’s downfall.

Thursday, June 3, 2010

AIG's Asian Gamble

The collapse of the AIG-Prudential deal could turn out be more promising than the original agreement for the British insurer to buy AIG’s largest Asian life-insurance business, AIA, for $35 billion dollars.

First, it shows that AIG’s board is far more independent than during the Greenberg era. Benmosche battled a highly contentious board over the original Prudential deal until he was able to push it through in March. But this time, he couldn’t get his way. AIG’s board hung tough and refused to accept Prudential’s lower offer. It was reportedly unanimous except for Benmosche.

The big question is why AIG’s board turned down $30 billion, which is more than is being predicted for any IPO. Who knows what went on in that board room, but most interesting reason I have heard is that some directors thought they could eventually sell AIA for a lot more to the Chinese. And already we’re hearing reports that Assicurazioni Generali SpA, Europe’s third-biggest insurer, may be interested in buying parts of AIG’s operations in Asia.

The directors might also prefer to sell off slices of AIA gradually in an IPO, while the business continues to grow. So, over the long haul, they could beat the Prudential price. Since the U.S. government owns nearly 80% of AIG and could have vetoed the board’s refusal to take the lower offer, it suggests they buy this argument.

In fact, Treasury Secretary Timothy Geithner praised the company’s decision to walk away from the Prudential offer. He told reporters yesterday,”A.I.G. is now free to pursue a bunch of other options to help maximize the return, reduce any risk of loss to the taxpayer. They have got a very strong management team, a much stronger board in place, making incredibly impressive progress frankly in restructuring that entity.”

Geithner’s faith in AIG is pretty remarkable, reflecting the turnaround Benmosche has been able to pull off since he took over last August. AIG’s board is betting the company will do even better and Geithner is letting that bet ride. Of course, the taxpayers who provided the stakes don’t have a say. I personally would have bet on Benmosche over his board, but I applaud Geithner for not interfering. We’ll see how well AIG can do with AIA and let’s hope neither taxpayers nor investors come up short.

Thursday, May 27, 2010

Benmosche makes a big promise, but can AIG deliver?

"I'm confident you're going to get your money back, plus a profit." That was AIG CEO Robert Benmosche’s pledge to a Congressional Oversight Panel yesterday. This wasn’t the Benmosche who said last fall he was prepared to tell Congress to "stick it where the sun don't shine." But despite his conciliatory performance, afterwards panel chair Elizabeth Warren told the Wall Street Journal she was frustrated by the lack of detail to back up his projections. She started the hearing by calling AIG “a corporate Frankenstein, a conglomeration of banking and insurance and investment interests that defied regulatory oversight."

I’ve been very impressed with Benmosche’s ability to turn AIG around this year and I was also impressed yesterday that he was able to restrain himself during an inquisition by the people he once called “crazies.” He did get a bit testy at one point when asked about the testimony of Cliff Gallant, a KBW Inc. analyst who cut the stock to “underperform” last month because he thinks meeting U.S. obligations may wipe out common shareholders. Gallant is predicting AIG shares could be worth $6 within a year. Benmosche said of Gallant’s analysis, “You’ll have to see if he understands the company as well as I do,”

I appeared on Bloomberg TV to analyze yesterday’s hearing and told Mark Crumpton that I agree that Benmosche will be able to pay off AIG’s debt in full. The company has great prospects because it’s honed down a gigantic operation into two basic areas: Sun America, a life insurance business, and Chartis, the property & casualty operation, which made a great deal of the $1.45 billion in profits announced in the first quarter of this year. Benmosche is turning AIG into a smaller company with a great core business.

Once the government pulls out, a lot of great things will happen; foreign investments funds will move in along with other investors, and AIG will continue to make money, pay the government back, and grow the company into a reasonable size.
Benmosche will continue to face tough questions along the way, but it appears he now realizes he just can’t say whatever he thinks when it comes to Washington. The best thing for him, taxpayers, and AIG’s investors will be when the U.S. government is paid back and AIG can run its business with only normal regulatory supervision.