AIG's Game Plan: 3 to 5 Years of Recovery
In this season of financial and economic confusion, perhaps nothing has been quite so confusing as the saga of American International Group, once the world's largest insurance company and now a ward of the federal government. Today, chief executive Edward Liddy gamely trooped back before the House Committee on Oversight and Government Reform to try to explain just where AIG is going and how long it will take to get there (news story; live blog).
According to Liddy, the goal is to restructure the company; wind down the controversial Financial Products unit; sell or spin off some insurance divisions; pay back the money borrowed from the Treasury Department and the Federal Reserve; and emerge as a strong, profitable company, thereby maximizing the value of the taxpayers' 77.9% stake in the company. That should take three to five years, he estimated.
The relationship with AIG is far more complicated than any other the government has entered during this crisis; the only possible comparison is Citigroup, where the Treasury is a major preferred and common shareholder -- and the Treasury, the Federal Deposit Insurance Corporation and the Fed are all guaranteed a pool of Citigroup assets. I've written a detailed review of all four AIG bailouts so far, but the summary is this:
- The Treasury has given AIG $70 billion in exchange for preferred stock on generous terms.
- The Fed gave AIG a credit line of about $25 billion to $30 billion.
- The Fed created two special-purpose entities with about $50 billion in funding to buy troubled assets from AIG.
- AIG put some insurance assets into some other special-purpose entities; the Fed paid about $30 billion to $35 billion for a stake in those entities.
- AIG gave the Treasury convertible preferred stock equivalent to a 77.9% ownership stake in the company; that stock was placed in a trust whose three trustees are obligated to manage it in the interests of the taxpayer.
What makes this unusual is that the government is both AIG's major creditor and its major shareholder. Pre-crisis, AIG's market value had been as high as $200 billion; a significant portion of that was due to its Financial Products unit, which was contributing a large share of profits earlier this decade. Then Financial Products lost tens of billions of dollars. So far, the government has lent AIG about $180 billion in one form or another, under different terms and via different entities. So what you have, using some vague estimates, is an insurance company worth $50 billion to $100 billion (the value of everything has fallen by 30 to 40 percent since the crisis began) that has $180 billion in debt-like obligations.
The government will get that money back only if AIG can generate cash flows and liquidate assets worth $180 billion. And only after AIG generates that $180 billion will the government's equity stake be worth anything. (Right now, AIG trades at about $1.60 per share, but that's purely option value -- the small chance that things will work out well in the long term.)
Put another way, the cash lent to AIG is gone - much of it went to pay back counterparties to derivatives trades, such as Goldman Sachs and Deutsche Bank -- and it's unlikely that AIG's insurance assets are worth enough to pay it back anytime soon. And some of the money went to specific purposes, such as buying toxic assets from AIG, that are virtually certain to lose money.
So the only hope of getting the taxpayers' money back is to continue operating AIG for several years so the insurance operations can make money and the market for insurance assets can recover -- which means we'll have AIG to kick around for a while. The strategy for AIG is basically the same as the strategy for any company: try to make as much money as possible; sell assets if you can get a good price, but otherwise hold on to them until the market improves.
Liddy's problem is that he will get criticized whatever he does. Rep. Edolphus Towns asked: "Does liquidating the assets in the midst of a bear market make sense? Will this plan maximize the returns for the company in today’s economic climate?" Obviously, no. But because Liddy was hired to try to break up the company for cash, he has to try.
However, the idea that AIG could raise enough money to pay back the government (that is, buy back its preferred shares and repay the credit line) and remain a strong company we would want to own 77.9% of seems fanciful to me. The arithmetic just doesn't work, and the prospect of AIG returning to its former money-making glory seems remote -- for one thing, its brand has been essentially destroyed (although it will still be seen on Manchester United's shirts at the Champions League final in two weeks). And I think it would be good if everyone understood that going in.
May 13, 2009; 4:57 PM ET
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