AIG Breakup LIkely

I wish I had the time to analyze this deal, but my travel schedule is cutting into blogging time, In addition, I don’t have a feel for whether the units mentioned in this article are merely suffering in accord with the crappy financial environment, or may have suffered additional, perhaps lasting damage.

Two observations: First, every time AIG has retraded its deal the US taxpayer has come out worse, so my assumption in the absence of conflicting evidence is that this is more of the same.

Second, many observers refer to AIG as “nationalized” due to the government’s 79.9% ownership. But has the Federal Reserve, for instance, asked board members to submit letters of resignation? Power is not simply a function of standing, but also of will, and the powers that be seem to have exercised just about no influence, save the ouster of CEO Robert Willumstad and raising a stink about fancy parties. Note the desire expressed to keep AIG afloat. In context, it could just as well mean preserving their standing as a private concern, rather than merely operating as a business. If AIG were truly nationalized, rating agency downgrades would not be an issue; the firm would be treated as state owned, hence state backed and deserving of an agency-type rating.

Informed reader comment encouraged. From the Financial Times:

AIG and the US authorities are in advanced discussions over a radical restructuring that would split the stricken insurer into at least three government-controlled divisions in an attempt to keep it afloat, according to people close to the situation.

The restructuring, described by one insider as a “controlled break-up”, could lead to the end of AIG’s 90-year history as a stand-alone global insurance conglomerate. It also could provide a template for carving up other troubled financial groups – such as Citigroup – should they be brought under government control…

Under the plan, the government would swap its current 80 per cent holding in the insurer for large stakes in three units – AIG’s Asian operations, its international life insurance business and the US personal lines business. A fourth unit, comprised of AIG’s other businesses and troubled assets, could also be formed.

In return, the authorities would relax the terms, or even cancel a large portion, of a $60bn five-year loan to AIG and convert $40bn-worth of preferred stock into shares, in an effort to ease the company’s burden.

If the plan goes ahead, AIG would remain as a holding company for now. But people involved in the talks say that company could disappear if the government decides to recoup taxpayers’ investments in the insurer by selling or listing the three divisions separately…..

However, people close to the situation said AIG was on track to announce the overhaul on Monday, when it is expected to report a $60bn loss with its fourth-quarter results….

One of AIG’s most prized assets, American International Assurance, its Asian business that was once valued at $20bn, attracted lukewarm interest. Potential bidders have been deterred by turbulent conditions in insurance and credit markets.

The sale of AIG’s US personal lines business, which had been close to being acquired by Zurich Financial, has also run into trouble as funding markets remain under pressure, according to people familiar with the process.

The two divisions are likely to split off. The third unit to be carved out, American Life Insurance Company, is a global life insurance company with operations in more than 50 countries and a large presence in Japan.

It remains unclear whether the US life insurance business and Foreign General, AIG’s international property and casualty insurer, will be included in one of the three divisions or sold separately. International Lease Finance Corporation, AIG’s large aircraft leasing business, is likely to be given a government credit line and put up for sale.

Print Friendly, PDF & Email

31 comments

  1. Richard Kline

    Can we, please, get ON with this? Carving up AIG is a tip-top priority. It may be wonderful for ‘national prestige’ and political donations for a metastisized carbuncle like AIG to exist, but the thing was the worlds largest used tire dump (speaking metaphorically) even before it caught fire last September. There is no excuse or justification for an entity of this size to exist. And can we just finally fire the self-serving scum still running that outfit? They’ve absconded with too much of enough from the public-guarantee till since Paulson said “I do, er . . . we will.” Yes, yes, they are exploiting boneless Federal stupidity here, but just because what they are doing is barely legal is no excuse.

    Break them on the Wheel, and do it NOW! And the profits from selling these pieces should be returned to the public—but it doesn’t sound like that’s the plan. Oh the _losses_ are intended to stick to those Federal guarantees, but can anyone say otherwise than that the present picture appears for the profits to slide out the door with former stakeholders? Madness: when does the madness end?

  2. Anonymous

    Slice and dice it up anyway you want, any proceeds still will not cover the outstanding debt and would only make things worse as the counter-parties to insurance bets (CDO CDS worth $440 billion in 2008)kick in creating another Mr. Toad’s Wild Ride.

    Who are they trying to kid? Whadda frigg’in mess.

  3. Yossarian

    I read about this yesterday in the WSJ. What I do not understand (and perhaps someone here can help) is the underlying motive for the gov’t’s many steps to protect and ‘save’ AIG.

    In the WSJ it says that one of the goals, if not the main goal, is to preserve AIG’s credit rating so it can retain access to capital from various institutional lending sources (that are, as I understand it, NOT the US gov’t). How is it possible for a company that has received an amount of federal capital that is many times its new net value to maintain an acceptable credit rating? And, if AIG lost $60 billion in the 4th qtr, where did the taxpayer money go?

    I am not an economist, simply a citizen trying to understand and self-teach a bit.

    Also, I agree with Yves re: the 80% equity holding. The way I see it, simply holding a majority (or super majority) of common stock is hardly nationalization. The act of nationalization implies both a management aspect as well as – by default – a floor being set for losses by private investors. The US ate up tons of stock, but it simply diluted the remaining private holdings…seems counter productive…and, more importantly, it looks like a waste of money.

    Again, any insights are helpful…I desperately want to fully understand the extent of what’s happening.

    love this blog…

  4. d4winds

    The most irritating word in the new order’s lexicon has come to be “nationalization”; it has meant, does mean, and will continue to mean “bail-out–then repeat.”

  5. Anonymous

    AIG insured everything under the sun….banks, currencies, countries, private contracts….too bad they didn’t properly fund them.

    At the very least a downgrade happens or at worst default ensues. Who is left holding the bag, sure looks to be the US taxpayer. Downgrade(s) or default start a chain reaction, US bonds then the dollar will record the event.

  6. Anonymous

    AIG is the reason why Zimbabwe Ben and TaxEvader Geithner are going after Citibank. Its the insurance portions of their businesses.

    Forget the banking portion.

    Those insurance units go belly up and then the USA really has problems.

    No one wants to admit that the insurance payments they make are going into a black hole of a ponzi scheme and the US gov’t is trying desperately to keep its finger in the dike.

  7. Scott Frew

    Let’s see. AIG’s market cap is $1.24 billion. That means that I and evvery US citizen who reads this has roughly a $3.24 ownership stake at current market prices, and that the non-government-owned share of AIG–what’s in private hands–is worth $249 million and a little change. So we’re going to swap $40 billion of preferred for exactly how much common? I like smoking mushrooms as much as the next guy, but I prefer that our policymakers have some tiny grasp on reality between 9 and 5. That would appear to be asking too much here though, apparently. Never mind. Which way for the gas?

  8. Anonymous

    We need to break up AIG and the big 6 banks, or rather, let them fail.

    People should write the house and senate committees on small businesses, and say that the bailout of the big 6 banks is hurting small banks accross the country. The committee members on the small business committees probably haven’t taken a lot of campaign contributions from the big banks, so they can probably safely oppose them. Also, write to state community bank organizations.

    There are the house Reps on the small business committe:

    Democratic Members

    Chairwoman Nydia Velázquez of New York
    Congressman Dennis Moore of Kansas
    Congressman Heath Shuler of North Carolina
    Congresswoman Kathy Dahlkemper of Pennsylvania
    Congressman Kurt Schrader of Oregon
    Congresswoman Ann Kirkpatrick of Arizona
    Congressman Glenn Nye of Virginia
    Congressman Mike Michaud of Maine
    Congresswoman Melissa Bean of Illinois
    Congressman Daniel Lipinski of Illinois
    Congressman Jason Altmire of Pennsylvania
    Congresswoman Yvette Clarke of New York
    Congressman Brad Ellsworth of Indiana
    Congressman Joe Sestak of Pennsylvania
    Congressman Bobby Bright of Alabama
    Congressman Parker Griffith of Alabama
    Congresswoman Deborah Halvorson of Illinois

    Republican Members

    Ranking Member Sam Graves of Missouri
    Congressman Roscoe Bartlett of Maryland
    Congressman Todd Akin of Missouri
    Congressman Steve King of Iowa
    Congressman Lynn Westmoreland of Georgia
    Congressman Louie Gohmert of Texas
    Congresswoman Mary Fallin of Oklahoma
    Congressman Vern Buchanan of Florida
    Congressman Blaine Luetkemeyer of Missouri
    Congressman Aaron Schock of Illinois
    Congressman Glenn Thompson of Pennsylvania
    Congressman Mike Coffman of Colorado

    These are the Senators on the small business committee:

    Democrats (11)
    Republicans (8)

    Chair – Mary L. Landrieu (LA)

    John F. Kerry (MA)
    Carl Levin (MI)
    Tom Harkin (IA)
    Joseph I. Lieberman (CT)
    Maria Cantwell (WA)
    Evan Bayh (IN)
    Mark L. Pryor (AR)
    Benjamin L. Cardin (MD)
    Jeanne Shaheen (NH)
    Kay Hagan (NC)

    Ranking Member – Olympia J. Snowe (ME)

    Christopher S. Bond (MO)
    David Vitter (LA)
    John Thune (SD)
    Michael B. Enzi (WY)
    Johnny Isakson (GA)
    Roger Wicker (MS)

  9. David

    AIG shareholders have lost 99% of their investment if they bought prior to 2008. Is it really a priority to ensure that the last 1% is wiped out?

  10. Anonymous

    The act of nationalization implies both a management aspect as well as – by default – a floor being set for losses by private investors.

    If that’s what nationalization is, then it’s a pretty good argument for not nationalizing. The bad management of Fannie And Freddie indicates that the government is no better at finding competent managers that the private investors were. A taxpayer backstop for incompetent management merely prevents a dead cat bounce by taking longer to reach bottom.

  11. Anonymous

    “AIG shareholders have lost 99% of their investment if they bought prior to 2008. Is it really a priority to ensure that the last 1% is wiped out?”

    It is an absolute priority that bondholders and counterparties are haircut, so those parties do not inflect losses on taxpayers.

  12. donebenson

    As a retired analyst who used to follow [and own] AIG, my impression is the separate insurance operations are decent, and could be sold for fair prices in a less hostile environment. The holding company is a complete mess, due to the financial engineering of derivatives, etc. done there.

    So, it would make sense to me for the holding company to become a ‘bad bank,’ and the underlying insurance operations separated, and owned by the gov’t until the economic climate improves. Then they could be sold. If one goes back 5 or 10 years, the stock price back then was roughly valuing the insurance operations minus the disastrous deals in the holding company.

    As Volcker said about the U.S. banks,-that they need to return to the old ways of banking that was done 20 years ago [and more like the Canadian banks today], so should/could AIG return to its ‘old ways,’ and the sale of those units [unimpaired by the bad assets in the holding company] create some reasonable value for the taxpayer.

  13. Anonymous

    “If that’s what nationalization is, then it’s a pretty good argument for not nationalizing. The bad management of Fannie And Freddie indicates that the government is no better at finding competent managers that the private investors were. A taxpayer backstop for incompetent management merely prevents a dead cat bounce by taking longer to reach bottom.”

    We need to impose receivership or bankruptcy on the banks, so creditors/counterparties debt holdings in banks can be flipped into equity.

  14. Russ

    I’m to the point where I think nationalization is a soft landing for the scam artists, the general public won’t feel any less pain whether nationalization occurs or standard belly-up bankruptcy occurs. Am I really going to be able to tell the difference between getting a hammer to my head 70 times instead of 80 times?

  15. Anonymous

    Finally a move that makes sense. With three separate corrupt AIG top management teams running around, we can expect the wasteful and extravagant partying on the French Riviera at the expense of US taxpaying chumps to increase at least three fold…

    Vinny

  16. artichoke

    I’m told that all the problems come from AIG Financial Products headquartered in Wilton CT.

    I’m also told that the problems relate to CDS written by some part of AIG that have come into the money, and the counterparty on many of them is Goldman Sachs.

    The important thing is to stop the bleeding. Hence I think that nationalization is exactly the wrong approach, because that would mean formally that the government is backstopping the black hole(s) that apparently exist.

  17. Anonymous

    “The third unit to be carved out, American Life Insurance Company, is a global life insurance company with operations in more than 50 countries and a large presence in Japan.”

    Considering the graying of the country, is it really all that good to have a large presence for life insurance in Japan?

    “”AIG shareholders have lost 99% of their investment if they bought prior to 2008. Is it really a priority to ensure that the last 1% is wiped out?”

    It is an absolute priority that bondholders and counterparties are haircut, so those parties do not inflect losses on taxpayers.”

    I think people are misunderstanding a bit here. It’s not the shareholders getting screwed that should happen. They’re not a company’s power and have not been for a long time as shareholder power has been completely shot down over the past couple decades. The only time I can think of shareholders ever holding an ounce of power was Michael Eisner getting removed at Disney.

    It’s the people that run these companies that we should worry about.

  18. doc holiday

    This is potentially off topic, perhaps not, but I just started reading a book: No Time To Think: The Menace of Media Speed and the 24-hour News Cycle

    This is an interesting commentary aimed out our blog world and news media — and for better or worse, I think it does suggest that we all need to double check facts and challenge what reality is. I think Yves does a great job in giving opinions on cutting edge news here and most of the comments that build on her efforts are top notch! Nonetheless, we can all do better and we must do so, if we are going to take over the world …. moohawhahahahahah

    1. Jeff Greenfield, yelling at you, calling this blog-like process, a “maelstrom of semi-informed, uniformed windbaggery.”

    2. “Rosenberg and Feldman examine the self-correcting blogosphere belief in some detail with extensive quotes from believers and non-believers alike. Based on their examination of what’s out there, the two authors conclude that other bloggers are more likely to be an echo chamber than offer corrections. But this conclusion is also offered on the basis of anecdotes concerning major stories. But it does feel true.”

    * This is not intended as an effort to promote sales or piss anyone off.

  19. Anonymous

    So why are we not all beating the drum to expose and deal with the derivative market? It is, has been and will continue to be the elephant in the room until it either kills us or we kill it.

    It doesn’t take a bunch of economist bloggers sitting in a conference to figure this out. Why don’t you invite some cultural anthropologists to this econ bloggers gathering and figure out with them how to turn this society around…..that or engage in more navel gazing.

  20. Anonymous

    It is my understanding that the government is not trying to protect AIG, or AIG shareholders. As noted above, they have already lost 99% of their investment, what’s another 1%? Instead, they are trying to save AIG’s counterparties, and the holders of AIG debt. While headquartered in Wilton, Connecticut, the operational center for AIG Financial Products was in London. Their biggest customers were European banks. In many cases, regulatory capital was tied into AIG insured credit default swaps. The failure of AIG would have brought down every large bank in London, Paris and throughout the continent. Their failure, in return, would have brought down everybody else.

    As for the insurance operations, yes, they are not directly impacted by this mess. However, key people have been leaving –the head of Lexington, their largest property-casualty insurance operation; the top four executives of AIG Environmental, and the top underwriters who could write their ticket at any other insurer. The brain drain is real. Relationships between brokers, who place the business, and underwriters, are key to success of the insurance carrier. Losing their top people is a huge deal.

    Until very recently, most of their top clients were sticking with AIG. That appears to be changing. There’s an article today in BusinessWeek that quotes a top insurance broker as saying that finally, clients have had enough. They’re now getting calls from clients saying move me, midterm, don’t wait for the renewal.

    I’m no expert on restructuring, and I’m not clear on what the government and AIG would attempt to accomplish with breaking up the company. My guess is that they would break it into four distinct parts; US business property-casualty, foreign property-casualty, life insurance, and personal lines (homeowners and auto). Removing them from the corporate rump with its legacy credit default swap problems and re-capitalizing them would produce healthy insurance operations available to be sold. Problem is, who wants to buy at anything approaching the price that would be asked?

    Meanwhile, it appears that the taxpayers will be stuck with the losses. All to save the counterparties and debt holders, most of whom are European banks (and Goldman Sachs, I’m told).

    Wouldn’t it be nice if one of these congressmen would ask the treasury secretary or the chairman of the Federal Reserve exactly who the counterparties are in these credit default swaps? Give us a list, with dollar amounts attached.

    Good luck getting it!

  21. Anonymous

    Something to consider: We’ve been solving systemic financial problems for over 100 years with layers of treaties and frameworks, regulations and incentives, along with all the intrinsic human drives of fear and greed, until it’s reached the point that anything else we do just makes the problems more complex and harder to handle with every passing moment. What if we’ve reached a tipping point, reached a point of total systemic complexity that not only can no single or group of humans begin to understand it anymore, but that it has reached a point where internal feedback and engineered harmonics are set in motion to tear it entirely to pieces. Greed and cupidity might have little or nothing to do with it going forward; it’s unhinging and is in the process of shaking itself into ruin, and all we can do is watch.

    Seriously, collapsing into utter final ruin. Reverting _several_ hundred years to simpler, even primitive, notions of financial health and guidance. Back to the essential basics.

    And if that really is the case… then what the heck are we doing propping up this unGodly monster? Or hoping for its recovery? It was built to destroy itself. We should be dancing in the streets!

  22. Anonymous

    “Meanwhile, it appears that the taxpayers will be stuck with the losses. All to save the counterparties and debt holders, most of whom are European banks (and Goldman Sachs, I’m told).

    Wouldn’t it be nice if one of these congressmen would ask the treasury secretary or the chairman of the Federal Reserve exactly who the counterparties are in these credit default swaps? Give us a list, with dollar amounts attached.

    Good luck getting it!”

    Congress should issue subpoenas to Geithner/Bernanke asking for the names of the AIG counterparties and the amounts they’re owed. And if Bernanke/Geithner refuse to comply, Congress should put them in jail for contempt of Congress, which is a crime.

    There is no reason to bail out AIG’s bondholders and swap counterparties. There is not systematic risk because money market accounts and deposits have been insured. The EU banks and GS want to drink an endless stream of taxpayer blood because they are vampires.

  23. Anonymous

    David — Keep your eye on the ball. The shareholders have not been bailed out. That sucker is worth zero on the equity side and nothing, nothing, is going to change that. All the government’s money is going directly to (i) bailing out bondholders, counterparties and other creditors and (ii) making sure the executives get the outsized compensation they need to maintain their outsized lifestyles to which they feel entitled because of their obvious talents (except for the little problem that their company can’t bring in enough revenue to service expense, they have OBVIOUS talents).

  24. Thomas

    I wonder if anybody seriously expected AIA to fetch 20 bn US$.

    AXA, currently ranked as the world’s largest life insurer, has a market value of slightly more than this amount. Prudential(UK) is worth barely half as much.

    So how could anybody expect that a bidder would somehow miraculously come up with 20 bn US$ to buy what is essentially the leading life insurer in Singapore, Hong Kong and Thailand, plus some rather marginal market presence in China?

    I mean: Singapore, Hong Kong and Thailand have a combined GDP similar to the Netherlands, and none of them are considered fabulous growth markets. What’s so irresistibly wonderful about buying the leading life insurer in these three countries?

    It simply isn’t a realistic number. Certainly not right now. Quite possibly never.

  25. Jim T

    I just read on Bloomberg these Arseholes want to restructure their bailout "AGAIN" and this time have the Government BACKSTOP their future CDS exposure! Let's see, they only lost $60 Billion in the 4th quarter of 2008!

    WHY IN THE F-CK WOULD THE TAX PAYERS WANT TO DO THAT?

    Let the bastards go bankrupt! Who in the hell are we protecting and why should we "The Tax Payers" have to pay for it? I'm sick and tired of this shit!

    I lost my business and I'm about to lose my house! I didn't get bailed out, I didn't get any TARP money! Why in the F-ck does Obama & company think I want to bail anyone else out?

    Most of these people AIG insured are big time investors (They knew what they were doing) "taking a risk" well they F-cking lost so they need to take the hit! NOT THE US TAX PAYER!

  26. Michael Donner

    1. with a 79%+ ownership we should have replaced the BofD and be negotiating with ourselves…like normal business does

    2. with all the money put in so far haven’t we paid more then its worth already?

    3. how can 79% of the whole thing become 40% of various parts with added money to boot?

    4. the latest is that we will be backstopping all the CDSs for nothing in return basically

    what am i missing here??

    M and M

  27. HoosierDaddy

    It’s time to cut our losses at the “epic disaster level” and let AIG go bk. We cannot keep Wall Street in caviar and have a functioning economy going forward. I think we are eventually going to have to turn off cash transfusions for the Dinosaurs. I just hope there’s still something left in Uncle Sam’s veins when the administration finally admits defeat.

  28. dd

    AIG Rescue May Include Credit-Default Swap Backstop
    excerpt:
    AIG provided protection on more than $300 billion of assets through credit derivatives as of Sept. 30. Credit-default swaps pay the buyer face value on their debt holdings in exchange for the underlying securities if the borrower fails to meet its obligations. It wasn’t immediately clear how many of the swaps would be backed by the U.S., and talks are continuing, the person said.
    AIG has posted four straight quarterly losses on swaps tied to U.S. home loans.
    http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=aBoViRlcrDGc

Comments are closed.