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.
Thursday, October 28, 2010
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.
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.
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.
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.
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.
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.
Tuesday, May 25, 2010
Dominating the board of directors – no longer business as usual at AIG
Probably the best part of being an author is getting to discuss the issues you write about with an informed group of people. That was the case at the Metropolitan Club in Washington, D.C., where I was the luncheon speaker last week, talking to a very sophisticated audience that knows both Wall Street and Washington.
There were lots of questions—Hank Greenberg may be gone from AIG, but everyone still wants to know what he is doing and how he is doing. While I spoke about many facets of AIG, most of the questions were about Greenberg. One question I hadn’t heard before was: Is there any connection between Greenberg’s settlement with the SEC and the fraud case again him, which was filed back in 2005 by then-New York Attorney General Eliot Spitzer? A judge recently called that case “devastating” and told Greenberg’s lawyer he saw big problems with establishing a defense. In August 2009, Greenberg agreed to pay $15 million to settle SEC accusations that he altered AIG's financial records to inflate its earnings.
At the time, the SEC did not talk about whether the settlement might have any impact on the related civil fraud charges brought by Spitzer. I noted that in that settlement with the SEC, Greenberg publicly declared that he never engaged in fraud and had no responsibility over accounting issues. That irritated the SEC, which said corporate leaders can’t use accounting gimmicks and sign off on distorted financial reports. Greenberg then released a subsequent statement saying that the size of his fine was “a reflection of the importance of the charge to the SEC.”
I also was asked about last year’s bonus controversy, which I think is finally becoming old news. And even though AIG seems to be on the road to recovery, I was asked if the company still plans to rebrand itself. My answer was probably not, since key subsidiaries, both the Asian ones and ALICO are being sold off and the core business has been renamed Chartis. So AIG remains only as the name of the holding company.
Perhaps the most interesting part of the event was when I was chatting after lunch with people who wanted their books signed. Someone mentioned that when Greenberg was CEO, he put Barber Conable, former congressman and head of the World Bank, as head of the audit committee of AIG’s Board of Directors. Conable reportedly then hired another accounting firm to advise the committee. (PwC had been AIG’s long-time auditor) and Greenberg reportedly strongly objected. People probably don’t remember that the audit committee said that it couldn't vouch for AIG's accounting in 2001 and 2002. The committee said it couldn't be sure that the audits had been carried out according to normal standards or even that PwC was in fact "independent," according to the Washington Post.
Today, because of Sarbanes Oxley, boards are much more independent. And thanks to the current crisis, they will be even more independent. All the D&O insurance in the world won't protect directors and their reputations. Challenging a CEO instead of signing off on whatever he wants is becoming the norm. The Wall Street Journal reportedly recently that a special board committee at AIG, which includes directors with experience in restructuring and workout situations, has engaged investment-banking firm Rothschild as an independent adviser. If AIG’s board had been that independent, proactive, and knowledgeable in financial matters ten years ago, it could have stood up to Greenberg’s domination of the board and AIG today just might be in a very different place.
There were lots of questions—Hank Greenberg may be gone from AIG, but everyone still wants to know what he is doing and how he is doing. While I spoke about many facets of AIG, most of the questions were about Greenberg. One question I hadn’t heard before was: Is there any connection between Greenberg’s settlement with the SEC and the fraud case again him, which was filed back in 2005 by then-New York Attorney General Eliot Spitzer? A judge recently called that case “devastating” and told Greenberg’s lawyer he saw big problems with establishing a defense. In August 2009, Greenberg agreed to pay $15 million to settle SEC accusations that he altered AIG's financial records to inflate its earnings.
At the time, the SEC did not talk about whether the settlement might have any impact on the related civil fraud charges brought by Spitzer. I noted that in that settlement with the SEC, Greenberg publicly declared that he never engaged in fraud and had no responsibility over accounting issues. That irritated the SEC, which said corporate leaders can’t use accounting gimmicks and sign off on distorted financial reports. Greenberg then released a subsequent statement saying that the size of his fine was “a reflection of the importance of the charge to the SEC.”
I also was asked about last year’s bonus controversy, which I think is finally becoming old news. And even though AIG seems to be on the road to recovery, I was asked if the company still plans to rebrand itself. My answer was probably not, since key subsidiaries, both the Asian ones and ALICO are being sold off and the core business has been renamed Chartis. So AIG remains only as the name of the holding company.
Perhaps the most interesting part of the event was when I was chatting after lunch with people who wanted their books signed. Someone mentioned that when Greenberg was CEO, he put Barber Conable, former congressman and head of the World Bank, as head of the audit committee of AIG’s Board of Directors. Conable reportedly then hired another accounting firm to advise the committee. (PwC had been AIG’s long-time auditor) and Greenberg reportedly strongly objected. People probably don’t remember that the audit committee said that it couldn't vouch for AIG's accounting in 2001 and 2002. The committee said it couldn't be sure that the audits had been carried out according to normal standards or even that PwC was in fact "independent," according to the Washington Post.
Today, because of Sarbanes Oxley, boards are much more independent. And thanks to the current crisis, they will be even more independent. All the D&O insurance in the world won't protect directors and their reputations. Challenging a CEO instead of signing off on whatever he wants is becoming the norm. The Wall Street Journal reportedly recently that a special board committee at AIG, which includes directors with experience in restructuring and workout situations, has engaged investment-banking firm Rothschild as an independent adviser. If AIG’s board had been that independent, proactive, and knowledgeable in financial matters ten years ago, it could have stood up to Greenberg’s domination of the board and AIG today just might be in a very different place.
Friday, April 30, 2010
Will a U.S. Government Selloff of AIG Shares Help Investors?
During my 12 years as an executive at AIG, my salary was never great, but all of us knew that our stock holdings would make up for that many times over. We were destined to become millionaires if we hadn’t already. Well, we all know how that turned out.
Just yesterday, Bloomberg reported that the SEC is looking into whether AIG’s former general counsel deemed the stock worthless when negotiating executives’ compensation. She reportedly told the U.S. pay czar in January that employees preferred cash to common stock. I can certainly understand that sentiment.
Still, that “worthless” stock is now up about 34% for the year. And the market reacted favorably to last week’s Bloomberg report that the government is considering a two-year plan to dispose of its’ nearly 80% stake in the company. I’ve been holding on to my shares, despite the doubts of my investment advisor, and all of us who have stuck it out this long have to be wondering what a government exit will mean. The sale of stock by the government won’t change the number of shares outstanding, so mathematically, there would be no impact on earnings per share. But AIG would be able to operate independently again.
John Frankola of Vista Investment Management has been watching AIG stock closely. He says, “From a transactional perspective, the U.S. government’s sale shouldn’t change the value of AIG. However, since most investors perceive the government’s ownership and influence as negative, there is a possibility that AIG will be viewed in a more favorable light, which could move the stock price higher.”
For me, the biggest issue has always been why the government had to take 80% of the company to begin with. Former CEO Hank Greenberg has argued repeatedly if the government would bring its share down to 30% or so, AIG could attract investment from sovereign wealth funds and others.
Frankola agrees that in hindsight, the government’s decision to take 80% ownership in AIG was a disaster for shareholders, especially compared to other deals struck later. He says, “It’s easy to make an argument that the stock would be much higher today if the government took a less punitive ownership interest, the satisfaction of claims against AIG (like those of Goldman Sachs) were settled at a discount to face value, and they waited for a recovery in prices before forcing management to unload assets.”
Frankola offers a negative overall assessment of AIG: “In my opinion, for long-term investors who lost the majority of their investment in AIG, there is little hope for a significant recovery. Even if AIG returned to its previous peak earnings level, long-time shareholders would likely experience a stock recovery to just 20% of their previous value, due to the 80% dilution resulting from shares issued to the U.S. Considering the recently announced sales of two of AIG’s best businesses (which means less earnings potential going forward) and the sale of stock by Greenberg in the mid-30s (unquestionably the person who knows AIG best), the current price likely provides a good exit point for long-suffering investors.”
Even so, I prefer to remain one of those stubborn AIGers who still believe in the dream and that there will be a greater recovery. I’d like to hear what you think.
Just yesterday, Bloomberg reported that the SEC is looking into whether AIG’s former general counsel deemed the stock worthless when negotiating executives’ compensation. She reportedly told the U.S. pay czar in January that employees preferred cash to common stock. I can certainly understand that sentiment.
Still, that “worthless” stock is now up about 34% for the year. And the market reacted favorably to last week’s Bloomberg report that the government is considering a two-year plan to dispose of its’ nearly 80% stake in the company. I’ve been holding on to my shares, despite the doubts of my investment advisor, and all of us who have stuck it out this long have to be wondering what a government exit will mean. The sale of stock by the government won’t change the number of shares outstanding, so mathematically, there would be no impact on earnings per share. But AIG would be able to operate independently again.
John Frankola of Vista Investment Management has been watching AIG stock closely. He says, “From a transactional perspective, the U.S. government’s sale shouldn’t change the value of AIG. However, since most investors perceive the government’s ownership and influence as negative, there is a possibility that AIG will be viewed in a more favorable light, which could move the stock price higher.”
For me, the biggest issue has always been why the government had to take 80% of the company to begin with. Former CEO Hank Greenberg has argued repeatedly if the government would bring its share down to 30% or so, AIG could attract investment from sovereign wealth funds and others.
Frankola agrees that in hindsight, the government’s decision to take 80% ownership in AIG was a disaster for shareholders, especially compared to other deals struck later. He says, “It’s easy to make an argument that the stock would be much higher today if the government took a less punitive ownership interest, the satisfaction of claims against AIG (like those of Goldman Sachs) were settled at a discount to face value, and they waited for a recovery in prices before forcing management to unload assets.”
Frankola offers a negative overall assessment of AIG: “In my opinion, for long-term investors who lost the majority of their investment in AIG, there is little hope for a significant recovery. Even if AIG returned to its previous peak earnings level, long-time shareholders would likely experience a stock recovery to just 20% of their previous value, due to the 80% dilution resulting from shares issued to the U.S. Considering the recently announced sales of two of AIG’s best businesses (which means less earnings potential going forward) and the sale of stock by Greenberg in the mid-30s (unquestionably the person who knows AIG best), the current price likely provides a good exit point for long-suffering investors.”
Even so, I prefer to remain one of those stubborn AIGers who still believe in the dream and that there will be a greater recovery. I’d like to hear what you think.
Wednesday, April 21, 2010
A Devastating Twist for Hank Greenberg
This is a bad week for Hank Greenberg. He must be pretty stunned after his hearing Tuesday before a New York State Supreme Court justice. For years, Hank Greenberg has been saying he didn’t bring down AIG, but now he’s facing a “devastating” case in a lawsuit accusing him of using bogus transactions to improperly inflate the company’s finances and mislead analysts. This isn’t just a personal matter for Greenberg--the entities he controls are AIG’s biggest shareholders and he advises current CEO Robert Benmosche.
The New York Times is reporting that Justice Charles E. Ramos said the fraudulent transactions AIG was involved with were “a criminal enterprise” and called the case against Greenberg “devastating.” Up until now, Greenberg has won most of the cases and legal maneuvers he’s faced since his ouster from AIG in 2005. The biggest was between AIG and SICO, a Bermuda-based holding company, over who owned a disputed $16 billion block of AIG stock. In that case, a jury sided with Greenberg.
The irony about this week’s hearing on sham transactions is the case was originally brought by Elliot Spitzer. Many thought Greenberg would walk away from this, and it would become yet another example of how Spitzer overreached in going after corporate executives. But Judge Ramos indicates this case could now be heading to an appellate court. If Greenberg wins, his reputation is finally restored. But this week, he took one of his biggest hits since he was forced out of the company he built.
The New York Times is reporting that Justice Charles E. Ramos said the fraudulent transactions AIG was involved with were “a criminal enterprise” and called the case against Greenberg “devastating.” Up until now, Greenberg has won most of the cases and legal maneuvers he’s faced since his ouster from AIG in 2005. The biggest was between AIG and SICO, a Bermuda-based holding company, over who owned a disputed $16 billion block of AIG stock. In that case, a jury sided with Greenberg.
The irony about this week’s hearing on sham transactions is the case was originally brought by Elliot Spitzer. Many thought Greenberg would walk away from this, and it would become yet another example of how Spitzer overreached in going after corporate executives. But Judge Ramos indicates this case could now be heading to an appellate court. If Greenberg wins, his reputation is finally restored. But this week, he took one of his biggest hits since he was forced out of the company he built.
Thursday, April 15, 2010
Robert Benmosche-- AIG’s third great leader?
For 86 years, AIG had just two leaders—C.V. Starr, who started the company in Shanghai in 1919 and ran it for nearly half a century, and Hank Greenberg, who spent 37 years building AIG into one of the world’s largest companies. Starr created AIG by taking an unprecedented gamble that an American could make money selling insurance to the Chinese. Greenberg diversified the company, growing it into the most successful insurer in history. Now it appears AIG has finally found its third great leader—the man who somehow has been able to revitalize a company that was virtually left for dead.
After Greenberg was forced out in 2005, three men took over AIG in quick succession, as the company nearly collapsed before being bailed out by the government. None of those CEOs was able to gain the confidence of the government, investors, or the public. Then, last fall, the former head of MetLife was called out of retirement for perhaps the most thankless CEO job in America.
At first, it seemed as though Robert Benmosche would be yet another short-term CEO mired in controversy. He was attacked for running the company from his vineyard in Croatia, and in November, after just three months on the job, he threatened to quit because he didn’t want the government telling him what to pay employees. It didn’t help when he publicly complained about the “crazies down in Washington."
Now, less than six months later, there’s been a remarkable turnaround. Over the past month, the company sold off two major businesses, bringing in more than $51 billion to help pay back its government bailout money. Standard & Poor’s has even raised its outlook for A.I.G.’s credit rating. Last week, Benmosche told Bloomberg News he expects to be around at least another year or two. Shares of AIG rose nearly one percent afterwards.
Benmosche’s success got me thinking about how similar he is to Greenberg. They are both very self confident and have a large ego, which I consider the perquisite of a great leader. They both use rewards to motivate people. When I worked for Greenberg, salaries weren’t great, but you could make a fortune in stock. Benmosche took Metlife from a mutual to a public company, which meant employees could get stock options and make more money. Almost from the moment he joined AIG, Benmosche argued fiercely with the government pay czar to get his employees the compensation he felt they deserved. He also recently implemented a new performance system designed to better compensate exceptional performers.
I haven’t worked with Benmosche, but we know he’s blunt and has a hands-on style. He’s been visiting employees around the world and holding town meetings. Greenberg was extremely hands on with everyone and everything, from who got to eat in the corporate dining room to what the company had to do to make its quarterly earnings. Greenberg was hard driving and it wasn’t uncommon for him to yell at people. Benmosche can’t spend too much time in New York for tax reasons, so I’m guessing he doesn’t micromanage things at headquarters.
Both men are creative, visionary, and have that “never say die” spirit. Even after Greenberg was pushed out of the company he spent his life building, he showed a fierce loyalty to AIG, and has worked to get the government out of the company. In his short tenure, Benmosche has also fought the government and resisted pressure to sell parts of AIG at fire sale prices.
Obviously the two men became leaders of AIG at very different points in their career. Benmosche is 65 years old, and seemed happy making wine in Croatia until he was asked to turn around the company. His tenure at AIG will end up being only a fraction of Greenberg’s. But if Benmosche can continue the kind of progress he’s made at AIG since August, he’ll be seen as the man who saved the company Starr and Greenberg spent nearly a century building.
After Greenberg was forced out in 2005, three men took over AIG in quick succession, as the company nearly collapsed before being bailed out by the government. None of those CEOs was able to gain the confidence of the government, investors, or the public. Then, last fall, the former head of MetLife was called out of retirement for perhaps the most thankless CEO job in America.
At first, it seemed as though Robert Benmosche would be yet another short-term CEO mired in controversy. He was attacked for running the company from his vineyard in Croatia, and in November, after just three months on the job, he threatened to quit because he didn’t want the government telling him what to pay employees. It didn’t help when he publicly complained about the “crazies down in Washington."
Now, less than six months later, there’s been a remarkable turnaround. Over the past month, the company sold off two major businesses, bringing in more than $51 billion to help pay back its government bailout money. Standard & Poor’s has even raised its outlook for A.I.G.’s credit rating. Last week, Benmosche told Bloomberg News he expects to be around at least another year or two. Shares of AIG rose nearly one percent afterwards.
Benmosche’s success got me thinking about how similar he is to Greenberg. They are both very self confident and have a large ego, which I consider the perquisite of a great leader. They both use rewards to motivate people. When I worked for Greenberg, salaries weren’t great, but you could make a fortune in stock. Benmosche took Metlife from a mutual to a public company, which meant employees could get stock options and make more money. Almost from the moment he joined AIG, Benmosche argued fiercely with the government pay czar to get his employees the compensation he felt they deserved. He also recently implemented a new performance system designed to better compensate exceptional performers.
I haven’t worked with Benmosche, but we know he’s blunt and has a hands-on style. He’s been visiting employees around the world and holding town meetings. Greenberg was extremely hands on with everyone and everything, from who got to eat in the corporate dining room to what the company had to do to make its quarterly earnings. Greenberg was hard driving and it wasn’t uncommon for him to yell at people. Benmosche can’t spend too much time in New York for tax reasons, so I’m guessing he doesn’t micromanage things at headquarters.
Both men are creative, visionary, and have that “never say die” spirit. Even after Greenberg was pushed out of the company he spent his life building, he showed a fierce loyalty to AIG, and has worked to get the government out of the company. In his short tenure, Benmosche has also fought the government and resisted pressure to sell parts of AIG at fire sale prices.
Obviously the two men became leaders of AIG at very different points in their career. Benmosche is 65 years old, and seemed happy making wine in Croatia until he was asked to turn around the company. His tenure at AIG will end up being only a fraction of Greenberg’s. But if Benmosche can continue the kind of progress he’s made at AIG since August, he’ll be seen as the man who saved the company Starr and Greenberg spent nearly a century building.
Wednesday, March 17, 2010
Why AIG should NOT hold back bonuses
The news that AIG will hold back $21 million in bonuses may be sweet to the outraged American public that now owns most of the firm, but it’s bad for business.
It’s easy to hate the employees of AIG’s financial products unit that helped set off the global financial meltdown. But, despite their bad decisions, some of them have been making only a dollar or two a year for two years now. And they themselves lost fortunes when AIG’s stock dropped nearly 70% in one day. Without those bonuses, there’s little incentive for them to stay at their jobs. A lot of good people have already left.
It’s critical that AIG retain talent in this unit because AIG still has a trillion (yes, trillion) dollars in credit swap derivatives. These investments are actually turning around and should bring in profits over the years ahead.
AIG also needs to worry about lawsuits. A year ago today, I had an OpEd published in the Wall Street Journal stating:
(These bonuses) are part of legally binding employment contracts between these executives and AIG. Even if Mr. Liddy (then CEO of AIG) wanted some way out of awarding these bonuses, under current law he could not. If he tried, AIG would be sued by the executives.
And that’s what we can expect now, with an attorney representing a dozen AIG employees calling the holdback “a breach of their contract and a violation of the Connective Wage Act.” As a Wall Street Journal article points out, AIG potentially risks paying out double the amount it withheld in bonuses if it is found liable for violating wage laws. AIG acknowledged this risk a year ago, but apparently, it can’t ignore the demands from federal pay czar Kenneth Feinberg.
Feinberg told Fox Business News yesterday that in the next few weeks he’ll be prescribing pay guidelines that will be "tough medicine" for AIG and the other four companies that received help under TARP. He said, "Congress decided that since the American people saved these companies and are the chief creditors of these companies, they have a right to have a say, in just these five companies in individual compensation."
Maybe Feinberg has the right to make these demands, but they won’t help AIG hold onto the talented people needed to rebuild the company. And if AIG has to pay out on those employee lawsuits, it will have an even harder time paying back taxpayers.
It’s easy to hate the employees of AIG’s financial products unit that helped set off the global financial meltdown. But, despite their bad decisions, some of them have been making only a dollar or two a year for two years now. And they themselves lost fortunes when AIG’s stock dropped nearly 70% in one day. Without those bonuses, there’s little incentive for them to stay at their jobs. A lot of good people have already left.
It’s critical that AIG retain talent in this unit because AIG still has a trillion (yes, trillion) dollars in credit swap derivatives. These investments are actually turning around and should bring in profits over the years ahead.
AIG also needs to worry about lawsuits. A year ago today, I had an OpEd published in the Wall Street Journal stating:
(These bonuses) are part of legally binding employment contracts between these executives and AIG. Even if Mr. Liddy (then CEO of AIG) wanted some way out of awarding these bonuses, under current law he could not. If he tried, AIG would be sued by the executives.
And that’s what we can expect now, with an attorney representing a dozen AIG employees calling the holdback “a breach of their contract and a violation of the Connective Wage Act.” As a Wall Street Journal article points out, AIG potentially risks paying out double the amount it withheld in bonuses if it is found liable for violating wage laws. AIG acknowledged this risk a year ago, but apparently, it can’t ignore the demands from federal pay czar Kenneth Feinberg.
Feinberg told Fox Business News yesterday that in the next few weeks he’ll be prescribing pay guidelines that will be "tough medicine" for AIG and the other four companies that received help under TARP. He said, "Congress decided that since the American people saved these companies and are the chief creditors of these companies, they have a right to have a say, in just these five companies in individual compensation."
Maybe Feinberg has the right to make these demands, but they won’t help AIG hold onto the talented people needed to rebuild the company. And if AIG has to pay out on those employee lawsuits, it will have an even harder time paying back taxpayers.
Monday, March 1, 2010
Selling off a crown jewel
In its race to pay back billions in bailout funding, AIG has agreed to sell one its biggest assets, American International Assurance (AIA), the only wholly foreign owned insurer in China. AIA was founded in Hong Kong back in the forties and has been a tremendous moneymaker for decades.
AIG had planned to raise $20 billion from a planned IPO for its Asian life insurance business, so accepting Prudential of Britain’s offer of more than $35 billion is a no-brainer. AIG CEO Robert Benmosche says the deal will allow AIG to repay taxpayers more quickly and give the company "greater flexibility" with its restructuring plans. The reaction from analysts is this move will eliminate some of the pressure on AIG. Certainly, there are few CEO’s facing more pressure than Benmosche.
But I see the sale as yet another tragic chapter in the AIG saga. Founder C.V. Starr was an American who started his company in China in 1919 and built it into a worldwide empire, a remarkable achievement. Now, AIG has been forced to sell off one of its crown jewels, a vibrant company that had nothing to do with the mistakes that led to AIG’s near collapse and bailout.
It would have been nice to see AIG retain one of its most profitable operations in a growing region, eventually bringing in enough revenue to help pay back taxpayers. But right now, there’s little patience for AIG, and I can’t blame Benmosche for taking advantage of a good offer.
AIG had planned to raise $20 billion from a planned IPO for its Asian life insurance business, so accepting Prudential of Britain’s offer of more than $35 billion is a no-brainer. AIG CEO Robert Benmosche says the deal will allow AIG to repay taxpayers more quickly and give the company "greater flexibility" with its restructuring plans. The reaction from analysts is this move will eliminate some of the pressure on AIG. Certainly, there are few CEO’s facing more pressure than Benmosche.
But I see the sale as yet another tragic chapter in the AIG saga. Founder C.V. Starr was an American who started his company in China in 1919 and built it into a worldwide empire, a remarkable achievement. Now, AIG has been forced to sell off one of its crown jewels, a vibrant company that had nothing to do with the mistakes that led to AIG’s near collapse and bailout.
It would have been nice to see AIG retain one of its most profitable operations in a growing region, eventually bringing in enough revenue to help pay back taxpayers. But right now, there’s little patience for AIG, and I can’t blame Benmosche for taking advantage of a good offer.
Friday, February 26, 2010
The Number One Thing AIG Needs for Recovery
The AIG rollercoaster ride had investors screeching after today's news that it lost nearly $9 billion in the fourth quarter of 2009. Yes, the loss was due primarily to billions of dollars in restructuring costs, and yes, AIG warned us the road to recovery would have some big dips, but still, the number was bigger than analysts expected and the stock fell in early trading. Ironically, earlier this week, AIG was actually the top percentage gainer in the S&P 500 following a Bloomberg article trumpeting the “end of the AIG death spiral.”
But investors may be worried that AIG’s insurance business isn’t bouncing back as much as it needs to for the company to pay back the government. Still, I think AIG is making real headway.
CEO Robert Benmosche is the first leader since Hank Greenberg who knows what he’s doing. He’s aggressive and outspoken, and most importantly, he won’t allow himself to be bullied into selling off divisions that should become profitable in the long term. For example, Edward Liddy, the last CEO, sold off AIG’s headquarters art deco building for a fourth of its value. Benmosche isn’t going to make panicked decisions. He’s not about taking the easy way out and in many ways, he reminds me of Greenberg.
But for AIG to recover fully, the most important thing that can happen is for the government to start cutting back on its ownership. Right now, taxpayers own nearly 80% of AIG, and as long as that continues, stock growth will be limited. Greenberg has advocated dropping government ownership to 20 or 30%. If that happens, AIG can attract more capital, especially from overseas, and invest and grow businesses. And taxpayers will be paid back sooner.
Another reason AIG needs to get rid of its government bosses is to make compensation more competitive. Sure, right now the public is outraged over bonuses going to the same people who set off a global financial meltdown. But overall, AIG probably isn’t rewarding many of its employees well enough. AIG was never the kind of company that paid the highest salaries in the industry, but employees could make millions from stock options. Imagine being an AIG executive who worked there for twenty years, making a relatively modest salary, but building up a comfortable nest egg in stock. Then, he goes to bed one night and the next day he wakes up to find 95% of his money is gone. If he’s still at AIG today, what’s his incentive? More than sixty executives have left since the rescue. A few months ago, Benmosche threatened to quit over the issue of pay restrictions, but fortunately reconsidered.
I’m optimistic AIG is going to recover fully and will be able to eventually pay off most of the bailout money. But until the government relinquishes majority ownership, AIG won’t have the independence it needs to become the global Goliath it once was. And we can expect more gut-wrenching days ahead for investors.
But investors may be worried that AIG’s insurance business isn’t bouncing back as much as it needs to for the company to pay back the government. Still, I think AIG is making real headway.
CEO Robert Benmosche is the first leader since Hank Greenberg who knows what he’s doing. He’s aggressive and outspoken, and most importantly, he won’t allow himself to be bullied into selling off divisions that should become profitable in the long term. For example, Edward Liddy, the last CEO, sold off AIG’s headquarters art deco building for a fourth of its value. Benmosche isn’t going to make panicked decisions. He’s not about taking the easy way out and in many ways, he reminds me of Greenberg.
But for AIG to recover fully, the most important thing that can happen is for the government to start cutting back on its ownership. Right now, taxpayers own nearly 80% of AIG, and as long as that continues, stock growth will be limited. Greenberg has advocated dropping government ownership to 20 or 30%. If that happens, AIG can attract more capital, especially from overseas, and invest and grow businesses. And taxpayers will be paid back sooner.
Another reason AIG needs to get rid of its government bosses is to make compensation more competitive. Sure, right now the public is outraged over bonuses going to the same people who set off a global financial meltdown. But overall, AIG probably isn’t rewarding many of its employees well enough. AIG was never the kind of company that paid the highest salaries in the industry, but employees could make millions from stock options. Imagine being an AIG executive who worked there for twenty years, making a relatively modest salary, but building up a comfortable nest egg in stock. Then, he goes to bed one night and the next day he wakes up to find 95% of his money is gone. If he’s still at AIG today, what’s his incentive? More than sixty executives have left since the rescue. A few months ago, Benmosche threatened to quit over the issue of pay restrictions, but fortunately reconsidered.
I’m optimistic AIG is going to recover fully and will be able to eventually pay off most of the bailout money. But until the government relinquishes majority ownership, AIG won’t have the independence it needs to become the global Goliath it once was. And we can expect more gut-wrenching days ahead for investors.
Thursday, February 11, 2010
Did Goldman’s Greed or Government Ineptitude Doom A.I.G.?
For those of us who have been wondering just how Goldman Sachs managed to bully AIG into paying billions for losses in the mortgage market that hadn’t yet occurred, The New York Times has given us a gripping behind-the-scenes look.
The Feb. 6th article shows just how aggressive Goldman’s demands were in 2007 and 2008 to cover potential losses in mortgage securities. But AIG wasn’t a complete pushover. It argued that the securities it insured were worth more than Goldman estimated, and even asked Goldman to return one and a half billion dollars. AIG never would have become a global insurance giant without building a reputation for being very tough on paying out claims, but this time Goldman Sachs gained the upper hand.
The Times article seems to support the recent contention by former AIG CEO Hank Greenberg in the Wall Street Journal that Goldman Sachs was a major contributor to AIG’s fall. At the height of the housing bubble, Goldman Sachs created derivatives backed by subprime mortgages, in effect, betting the market would collapse. AIG took that bet by insuring Goldman against its losses. When the bubble burst, Goldman demanded AIG payments as the value of those securities dropped just 4 percent, even though their underlying payment streams remained intact.
But Goldman Sachs is not the only villain. Government missteps also contributed to the collapse of AIG. The government pushed AIG to pay Goldman Sachs and other banks in full immediately, but if it had just guaranteed those funds, AIG might not have needed a bailout or a much smaller one. Those hundreds of billions of dollars in derivatives AIG wrote are actually worth something now. The government bailout resulted in AIG making $14 billion in payments to Goldman and billions more to other banks.
Today, an astounding 79.9 percent of AIG is owned by the government. No other U.S. company had to turn over so much of its organization. Look at Citibank: it was deeply troubled too, but the government owns much less (36 percent.) Treasury Secretary Henry Paulson has to be faulted for this decision. To the outsider, it looks like he began to regret letting Lehman Brothers go bankrupt and thus saved AIG, but at a huge price to the stockholders. And then to make matters worse, he put Edward Liddy in charge of AIG, and he was just in over his head. His only experience was running Allstate, a domestic auto insurance company
AIG has received $180 billion in taxpayer money, paid off Goldman Sachs 100 cents on the dollar, and now Goldman is making record profits. AIG has started to rebound a bit, but can it ever recover from being “nationalized,” as Greenberg has put it? Yes, AIG made a tremendous mistake by getting into the business of insuring something it couldn’t cover, but did it have to pay by giving up its independence? The Times says the SEC is now looking into whether Goldman’s demands for AIG payments “improperly distressed the mortgage market.” That should prove interesting, but perhaps the federal government should be contemplating how its actions nearly ruined what was once one of the world’s most successful companies.
The Feb. 6th article shows just how aggressive Goldman’s demands were in 2007 and 2008 to cover potential losses in mortgage securities. But AIG wasn’t a complete pushover. It argued that the securities it insured were worth more than Goldman estimated, and even asked Goldman to return one and a half billion dollars. AIG never would have become a global insurance giant without building a reputation for being very tough on paying out claims, but this time Goldman Sachs gained the upper hand.
The Times article seems to support the recent contention by former AIG CEO Hank Greenberg in the Wall Street Journal that Goldman Sachs was a major contributor to AIG’s fall. At the height of the housing bubble, Goldman Sachs created derivatives backed by subprime mortgages, in effect, betting the market would collapse. AIG took that bet by insuring Goldman against its losses. When the bubble burst, Goldman demanded AIG payments as the value of those securities dropped just 4 percent, even though their underlying payment streams remained intact.
But Goldman Sachs is not the only villain. Government missteps also contributed to the collapse of AIG. The government pushed AIG to pay Goldman Sachs and other banks in full immediately, but if it had just guaranteed those funds, AIG might not have needed a bailout or a much smaller one. Those hundreds of billions of dollars in derivatives AIG wrote are actually worth something now. The government bailout resulted in AIG making $14 billion in payments to Goldman and billions more to other banks.
Today, an astounding 79.9 percent of AIG is owned by the government. No other U.S. company had to turn over so much of its organization. Look at Citibank: it was deeply troubled too, but the government owns much less (36 percent.) Treasury Secretary Henry Paulson has to be faulted for this decision. To the outsider, it looks like he began to regret letting Lehman Brothers go bankrupt and thus saved AIG, but at a huge price to the stockholders. And then to make matters worse, he put Edward Liddy in charge of AIG, and he was just in over his head. His only experience was running Allstate, a domestic auto insurance company
AIG has received $180 billion in taxpayer money, paid off Goldman Sachs 100 cents on the dollar, and now Goldman is making record profits. AIG has started to rebound a bit, but can it ever recover from being “nationalized,” as Greenberg has put it? Yes, AIG made a tremendous mistake by getting into the business of insuring something it couldn’t cover, but did it have to pay by giving up its independence? The Times says the SEC is now looking into whether Goldman’s demands for AIG payments “improperly distressed the mortgage market.” That should prove interesting, but perhaps the federal government should be contemplating how its actions nearly ruined what was once one of the world’s most successful companies.
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