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.
Friday, February 26, 2010
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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