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.

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.

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.

Writing: No Time for Writing

Writing: No Time for Writing

When I began this blog last June I anticipated that I would have something to say every other week or so as I observed interactions between Hank Greenberg and AIG. But less than two months later in a stunning move the US government seized control of AIG in an $85 billion deal intended to stave off bankruptcy. I tried to keep up with events, but everything snowballed. Within a few short weeks I felt like we were collectively Alice, falling down the rabbit hole and emerging into a totally different world.

AIG has been through four bailout plans since September 2008, and we still are not sure it’s going to work. The stock market has taken a nose dive to a 12-year low last week of 6,547. AIG, whose shares were worth more than $65 before Greenberg was forced out were priced at an unheard of 42 cents per share last week after posting a loss of $61.7 billion for the fourth quarter of 2007. Citibank shares dropped 95% in 12 months to a low $1 per share, and bounced only on news that the firm had been profitable for the first two months of the year. Today the Dow flirted with its 7,000-point ceiling – the first two-day climb since early February -- but ended up short at 6,930.

Wiley, the publisher of my book Fallen Giant: The Amazing Story of Hank Greenberg and the History of AIG, took note of these events and persuaded me to write new chapters for the booak that will recount the events from Hank Greenberg’s last day as AIG’s CEO to its very delicate current position. Wiley plans to release a paperback edition of Fallen Giant this summer, which will include these new chapters.

So I have been busy writing, but with no time to write this blog. Please tune in next week, when I expect to surface from my author-ly duties and return to my role as unofficial AIG watcher and commentator. In the meantime let’s hope the Dow continues its forward March.

Politcal Posturing May Kill AIG

AIG is on its way to being named poster child of the year for egregiously bad public relations. Activities that contribute to the likelihood of winning this award: first, the company throws a $440,000 days-long party on the West Coast about the time that two of the last three ousted CEOs of AIG are trying to explain to a Congressional Oversight Committee that it certainly wasn't their fault that the company got in trouble. Meantime, AIG was planning a second party, also on the West Coast, but the outcry over the first led to its cancellation. Then there was an uproar over the partridge shoot in the English countryside that AIG hosted around the same time.

Leading the list of those downsized at AIG should be the PR team. That department clearly deserves an award for incompetence and mismanagement of core corporate communications. They failed on two counts. First, given the timing, it was terribly dumb to have these parties at this moment in time, since they provide those lawmakers trying to protect the citizens' money a unique opportunity to lambast the company they bailed out. (I suppose you can't use as an excuse that with a company in crisis mode, it is not surprising that nobody remembered to cancel the parties scheduled long ago.) Second, they failed to keep their new key business partner – the Government – in the loop. Yet without these kinds of activities, AIG may not survive. Let me explain.

To show you the absurdity of having to repond to politicians who frankly are grandstanding at this point, Edward Liddy, AIG GEO, announced that the company would cancel 600 conferences and meetings because they “weren't essential to business”. This was in response to the request of Attorney General Cuomo (an AG beginning to have the tinges of Eliot Spitzer about him as he holds a press conference in front of Federal Hall and announces: "The party is over. No more hunting trips. No more luxury resorts. They are not going to have the party and leave the hangover for taxpayers." How could Cuomo or Liddy possibly know how many of these events were or were not essential to business?

Take the party that caused the original uproar - the $400,000 party at a California resort. It was probably planned at least a year ago. It was not a party for AIG employees but an annual party for highly successful insurance agents of AIG American General, an AIG company. All agents were self-employed. The party was held to reward them for success, keep their spirits high and motivate them to do even better in the next year. Like it or not, that is the way business is done. And the same is true for most of the other events.

Customer and talent retention is even more important now that a weakened AIG is fighting to keep its business from going to competitors, and struggling to keep and motivate employees when the stock is worthless, bonuses are minimal and costs must be kept at a bare minimum. Other ways need be found to keep them happy. Social events work, even if it does appear to the outside eye like Nero fiddling while Rome burned. But if AIG loses large customers and top talent how will it make the money to ever repay the $$$ billions government loan?

And what doesn’t make the headlines, or even the news, is that the events are not financed by taxpayers’ money as they have been so loudly accused. Those funds are coming from the coffers of the hundreds of successful and profitable businesses that operate under the AIG umbrella. Almost all of government money is going to pay for the credit swaps that sunk the company - not for hunting parties.

It is time to cease hectoring AIG and let the company get on with recovering and building a strong business.

Greenberg Could Have Prevented AIG's Near Bankruptcy

Last week was the most extraordinary week in Wall Street history. This may sound like hyperbole on my part but many financial and economic historians carry it a step farther—it is the most remarkable week in the economic history of the United States.

Lehman Brothers falls, the greatest brokerage firm in the world – Merrill Lynch as well, and not because she received a great offer but because the management, led by former NY Stock Exchange CEO John Thain, fears its very survival. Others, like Morgan Stanley, are scrambling for merger partners so they can survive in some form.

But the granddaddy of them all is not an investment bank, but an insurance company. American International Group, until last week the world’s largest insurance company, the largest airline lessor in the world, and lots of other things, which teetered like Lehman all week. When private investors wouldn’t rescue it, arguments were fierce over whether the government should let it fail or step in to save it because of the dramatic impact virtually everyone agreed its bankruptcy would have around the world. Finally, on Wednesday night, with AIG already having lined up bankruptcy lawyers to get to work the next morning, the Federal Reserve Bank stepped in to save it with an $80 billion loan at an exorbitant interest rate of 12%, and also announced it would issue warrants to own a little less than 80 percent of AIG.

While I liked neither the interest rate nor the government acquiring the company, it was a thousand times better than bankruptcy. Selfish it may be, but as a stockholder there was at least a chance of getting some value back. And sure enough by Friday, the stock had nearly doubled in value.

Other doomsayers were not so happy. Hank Greenberg, who favored the loan, decried the government taking over the company. With the government’s move approaching nationalization in many eyes – Greenberg could not have been pleased since he has had lots of experience with AIG units being nationalized by foreign governments around the world over the years. He was joined by many others.

But why, the novice asks, was AIG in trouble to begin with? Greenberg noted on one of his numerous TV appearances last week that 90 plus percent of the businesses of AIG were solvent, profitable and needed no help. Only one unit was the culprit—AIG Financial Products, the unit based in London that had issued credit swaps relating to real estate, and that ultimately generated billions of dollars of losses. I question whether the credit swap business started after Greenberg left AIG as he claims. But there is no doubt in my mind that if he were still there it wouldn’t have happened.

Martin Sullivan, his protégé and successor had thirty years of deep experience in insurance. But he didn’t really know finance. The next CEO Robert Willumstad knew finance but not insurance. Only Greenberg knew both and understood this complicated company like nobody else. After all, he put much of it together. He would have seen the impending crisis and would have taken steps to avoid or mitigate it. Sure, there would have problems. But not the problems of apocalyptic proportions we faced this week. In short, we desperately needed Hank Greenberg.