AIG: the greatest recovery of all time?
Two years after the $180bn bailout of AIG marked the high water mark of the credit crisis, the insurer is clawing its way back, reports Stephen Foley
Tuesday 20 July 2010
Can the man from the Pru help salvage something for US taxpayers from their $180bn bailout of AIG? Hopes were certainly on the rise yesterday, as the government-owned insurance giant appointed former Prudential chief executive Mark Tucker to run the Asian division that is being prepared for flotation.
The appointment pitches the 52-year-old Brit into the boardroom psychodrama at AIG, under its fiery chief executive Bob Benmosche, and into the political controversies swirling around the company, whose name invokes public fury in the US.
The appointment is also laced with irony, since just months after Mr Tucker's successor, Tidjane Thiam, agreed to buy the division from AIG in a $35.5bn deal, only to be scuttled by the Pru's own shareholders, who balked at the price, and the AIG board, which refused to drop it. There have been boardroom ructions at both companies as a result of the debacle, but most especially at AIG, where Mr Benmosche has taken revenge on the executives who scuppered the sale.
Yesterday, the AIG boss lavished praise on his new signing. In a memo to staff he wrote that it was "critical that we put the best team on the field to ensure the success of AIA's IPO. Taking a company public is not easy, and we all will need to work well together to succeed."
The comments about the IPO come through Mr Benmosche's gritted teeth. He had been pushing not for an initial public offering but for AIA's sale to Prudential, so as to more quickly repay some of the $132bn that AIG still owes to the US taxpayer. A flotation will mean less money up front to pass on to the US government, and that will mean Mr Benmosche will have to answer for longer to the politicians whose anger over the collapse and bailout of AIG remains as acute as the public's.
Mark Wilson, AIA's current boss, will assist Mr Tucker for the next five months, but he has paid the price for crossing Mr Benmosche. Mr Wilson had opposed the sale to Prudential and advocated a flotation. So, had AIG's chairman, Harvey Golub, and Mr Benmosche bested him last week after putting an "it's him or me" ultimatum to the rest of the board. Mr Golub resigned and was replaced by a turnaround specialist called Steve Miller, who previously took car part maker Delphi through bankruptcy.
According to reports, Mr Benmosche, a former chief executive of AIG rival MetLife, has now threatened to resign on several occasions, most notably in a spat over government interference in AIG's pay policy.
While some observers have characterised Mr Benmosche's outbursts as tantrums, he has cultivated the image of a fighter battling for what is right for AIG's embattled employees and helped restore morale across a sprawling company that has often seemed listless since the ouster in 2005 of its long-standing boss Hank Greenberg. "I think Mr Benmosche's is the fire that cleanses," said finance industry analyst Bill Bergman of Morningster. "It is a double-edged sword because it does create uncertainty, but I think it is natural given the stakes and because AIG is staffed with very smart, strong-willed people."
The stakes are indeed high. The American taxpayer has owned 80 per cent of AIG since the moment, a few fraught and frightening days after the collapse of Lehman Brothers, that the Federal Reserve and the US Treasury decided they could not let the insurance giant go under as well. AIG, thanks to the activities of a few traders in its London-based financial products group, had been insuring banks' holdings of sub-prime mortgage-related derivatives, and if AIG disappeared and that insurance became worthless, all hell might break loose in the financial system, the government decided.
And so here we are, almost two years on, with AIG still standing, and with the remaining 20 per cent of the company still trading on the New York Stock Exchange, but with no clear idea still whether it will be able to fully repay the $132bn it owes the government through various different bailout structures.
Mr Benmosche and the Treasury, too, believe that taxpayers will, eventually, be made whole. The Congressional Oversight Panel, set up to audit the use of bailout money, reckoned last month that there would be an overall loss, which it pegged at $36bn. Analysts say that AIG's shares are nothing but option money, bets that not only will taxpayers be repaid but that there will be a strong and sustainable insurance business left at the end of the day.
How Mr Tucker performs at AIA is high on the list of factors that will influence that outcome. A strong valuation for the division when it floats – perhaps as soon as the autumn, although no date has been set – is important because the government swapped some of its bailout money for a stake in AIA last year. It also has a stake in Alico, another AIG division which is being sold. Together, the two account for $25bn of the US government's exposure. A further $26bn is in the form of loans, and $49bn more in preferred stock.
The Federal Reserve has also lent money to two special purpose vehicles, called Maiden Lane II and Maiden Lane III (after the Fed's New York address), into which have been transferred some of AIG's mortgage-related assets and other securities. While the value of these vehicles has jumped with the return to health of the financial markets, they will only be wound down over time.
"It is difficult to work through with any precision whether there is any value to the equity," added Mr Bergman. "Capital markets are fickle. First the Prudential deal looked like it was going to happen, then it didn't. The flotation of AIA is now contingent on their being a healthy IPO market. The sales of assets has proceeded more slowly than first expected. But there is an argument already that taxpayers have been well-served by waiting until offloading assets."
In other words, every day that the recovery of the financial markets and the wider economy progresses is a day that improves the prospects of American taxpayers getting their money back. If that recovery falters, all bets are off.
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