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.