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.

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.

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.