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AIG Restructuring Leaving Best Bits to AIG, Not US Taxpayer

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I had refrained from commenting much on the latest iteration of retrading AIG’s deal with Uncle Sam, save to observe that each of its predecessors had resulted in an arrangement more favorable to AIG, and I saw no reason to assume this time would be any different.

One of the features of this revamp was to give the US a bigger stake in certain operating units, presumably the more valuable ones. That assumption appears dead wrong. Per John Hempton:

There is only one piece of AIG that is still highly valuable – which is the core American P&C business (including some auto businesses). AIG has for instance merged AIG Direct into its fully owned 21st Century – a California Insurance Company. That business is still a very effective competitor – but their website no longer mentions those three letters (AIG) – I guess to protect the value of that business.

Life companies (ALICO etc) are not anything like as valuable as they were.

I posited in this post that the Feds were taking their interest in direct ownership of the valuable bits of AIG – so that they could let the mothership go.

I was wrong. The Treasury announcement contains this phrase:

The Revolving Credit Facility will be reduced in exchange for preferred interests in two special purpose vehicles created to hold all of the outstanding common stock of American Life Insurance Company (ALICO) and American International Assurance Company Ltd. (AIA), two life insurance holding company subsidiaries of AIG. AIG will retain control of ALICO and AIA, though the New York Fed will have certain governance rights to protect its interests. The valuation for the New York Fed’s preferred stock interests, which may be up to approximately $26 billion, will be a percentage of the fair market value of ALICO and AIA based on valuations acceptable to the New York Fed.

If the government wanted to protect taxpayers it would take control of the really valuable bits of AIG through this sort of structure.

They are not doing so.

Taxpayer protection bought to you by Geithner, Obama and Moral Hazard’s other friends.

Now AIG was always full of very very clever lawyers, but I wonder why I have heard nary a peep about C.V. Starr (technically C.V. Starr and Starr International Co. both headed by former AIG CEO Hank Greenberg),AIG affiliates that I long understood to be management enrichment vehicles (as if the AIG top echelon weren’t already well enough paid).

Even normally jaded writers are starting to take umbrage at the AIG mess. From Felix Salmon:

The scandal here is not the size of the losses from the global financial meltdown — those are losses which sooner or later, in one form or another, would have had to be borne by the government anyway. Rather, the scandal is that AIG could have earned billions of dollars by selling insurance against a meltdown, even as it was wholly incapable of paying out on those policies. I wouldn’t be surprised to learn that Hank Greenberg was still a billionaire, even as the policies his company wrote have cost the average American household some $1,600. It’s time for his wealth to be confiscated: it might be only a drop in the bucket compared to AIG’s total losses, but it would feel very right.

And Matt Yglesias agrees.

However, in a typical display of unmitigated brazenness, Hank Greenberg, who set the credit derivatives mess in motion, has the temerity to be trying to extract yet more money from AIG, which now means the US taxpayer. As the Wall Street Journal reports:

Separately, former AIG Chief Executive Maurice “Hank” Greenberg has sued the company in New York federal court, alleging securities fraud tied to misrepresentations of billion of dollars in losses on the company’s portfolio of credit default swaps. A company spokeswoman said the company believes the lawsuit is without merit.

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20 comments

  1. David

    I don’t know where this guy John Hempton gets this idea that the Asian companies are not as valuable. In fact the opposite is true. The Asian companies are the future of AIG. The US companies are plenty profitable but have limited growth potential. The bull case for AIG was always that insurance is growing quickly in China, even faster than GDP, and that AIA would seize much of that growth. The Fed probably got a good deal but you have to factor in the value of future growth. These insurance companies are very valuable. It is simply the holding company which is likely worthless. Their reputation, the AIG brand, is certainly damaged but that is something that can be fixed in time.

  2. doc holiday

    I love refreshing old news from Sunday, April 3, 2005: A.I.G.: Whiter Shade Of Enron

    State insurance filings also indicate that American Life holds large equity stakes in private A.I.G. subsidiaries. Among its biggest stakes are those in AIG Financial Assurance Japan, AIG Life Ireland Ltd., Amplico Life, First American-Polish Life Insurance and Reinsurance Company S.A., and Unibanco Seguros S.A.

    Because these are private companies, American Life does not have to value the stakes at market prices. But if the continuing investigation into A.I.G.'s accounting results in restatements at any of these entities, the equity stakes held in them by American Life could decline.

    For now, Delaware insurance regulators are monitoring the situation at American Life. Michael L. Vild, the state's deputy insurance commissioner, said: ''Its reserve and other regulatory oversight is done in the countries in which it does business. But we do monitor its financial solvency. If the erosion in the value of A.I.G. stock has an effect on the company's overall solvency, we'll take whatever steps are necessary.''

    The steps could include requiring an infusion of capital to the subsidiary or requiring it to change its underwriting standards.

    >> These shitbags should have been shut down 10 years ago, but No, the regulators are busy training to learn about reinsurance and derivatives and since no one ever had a clue, let's just keep playing the same game and give AIG more and more money for dope and vacation parties. AIG isn't a fraud in America, but who can say if they have trouble off shore, like in Bermuda: Investigation of A.I.G.’s Deals Moves Offshore

    In 1997, after an investigation, Delaware insurance regulators cleared A.I.G. of any wrongdoing with Coral Re, and ordered the entity to mark down $100 million in reinsurance credits. Coral Re's operations were wound down shortly after. The regulators also ordered A.I.G. to disclose to them any similar, future arrangements with offshore reinsurers.

    It is unclear what A.I.G. has disclosed to various state regulators about its offshore insurance operations. Michael L. Vild, the deputy insurance commissioner for Delaware, said that the agency would not comment on current or planned investigations.

    >> This is the real AIG, that I love, from 2002:

    AIG has worked diligently to protect and preserve relevant documents, and will provide them to the authorities as requested. Recently, AIG became aware of efforts to remove documents and information from its Bermuda building without AIG's permission. AIG immediately brought these incidents to the attention of the relevant authorities. AIG has been cooperating with the New York Attorney General and the Securities and Exchange Commission with regard to document security in New York, Bermuda, Ireland, and other locations. As previously disclosed, one individual in Bermuda was terminated for failure to cooperate with AIG's review, and several other AIG employees in Bermuda have resigned.

    We are working around the clock to complete our internal review as quickly and thoroughly as possible. AIG will continue to cooperate fully with all relevant authorities in their investigations. This includes terminating the employment of any AIG employee who does not cooperate with the internal review and external investigations.

    We are committed to improving transparency and corporate governance, and we want to have an open and constructive dialogue with our regulators. At the same time, it is unfortunate that current circumstances have obscured the reality that AIG's unique global franchise is sound, our financial position is solid, and cash flow remains strong. Most important, our managers and employees around the world have stayed focused on the business, demonstrating remarkable resilience, integrity, and commitment under challenging circumstances, thus meriting the continued confidence of our customers, agents, and producers.

    I am convinced that the process we have under way will make AIG a stronger and better company for the future. It will also enable AIG to protect its reputation and continue to play a leading role in global insurance as the industry moves to make necessary changes.

    >> DISGUSTING that DOJ, FBI and Congress are crooks that support this!!!

  3. Yves Smith

    David,

    Dunno what impact it had on the business, but many Chinese customers reportedly cancelled policies when AIG got its first bailout back in October. And the consensus among economists is that, parallel to the Great Depression, the big exporters, namely China, Japan, Korea, Taiwan, will take a much bigger growth hit and face a longer recovery than the chronic debtors/importers like the US. So the growth prospects for the Asian operations are likely not to be so hot over the next decade, and anything beyond that gets lost in a NPV calculation.

    Hempton is in Australia, he’d be more attuned to the Asian growth issue than most American analysts.

  4. doc holiday

    Why is America bailing out crooks engaged in fraud?
    IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
    Date Decided: February 10, 2009

    The Wagoner line of cases, however, does not address this issue in a direct or thoughtful way. Instead, it addresses the issue by rote, applying agency principles developed for other purposes. A more thoughtful tact, based on the use of heightened pleading standards (e.g., particularized fact pleading), standards of liability (e.g. gross negligence), proof (e.g. clear and convincing evidence), and measures designed to address liability (perhaps capping liability at some multiple of audit fees plus interest and clearly giving negligent audit firms full indemnification rights against any insider who acted with scienter) would be more directly responsive. As a second best, the Wagoner rule could just be explained as grounded in the notion that immunity for auditors is, in the view of New York policymakers, the best way to address an imperfect world. For now, what I wish to make clear is that I apply Wagoner and its progeny because I must, and not because that rule represents a cogent, well-thought out approach that Delaware should adopt. I dismiss without prejudice because the absence of a New York Court of Appeals ruling on point means that this question of law remains, to some extent unsettled, and thus to the extent that the New York Court of Appeals clarifies this matter, the Stockholder Plaintiffs should be able to bring their claims.

    > See Also: Rule Of Imputation:
2nd Circuit Clarifies Adverse Interest Exception

    The sole actor rule will impute the agent’s knowledge to the principal even when there is self-dealing where the principal and agent are one and the same, such as when the agent is the sole shareholder of the corporation. The 2nd Circuit rejected Ernst & Young’s argument because the CBI managers involved in the wrongdoing were not the sole shareholders of the corporation, nor were all of the shareholders involved in the fraud.

    Also note: In Tombstone, Holliday quickly became embroiled in the local politics and violence that led up to the famous Gunfight at the O.K. Corral in October 1881.
    The gunfight happened in front of the picture studio, the day after a late-night argument between Holliday and Ike Clanton.

  5. Richard Smith

    Yves, David, how did the Asian AIG life companies invest their premium income? Did they do the same as Manulife (equity markets)? Or the same as some UK insurers (Aviva and L&G have got into enough RMBS to give them a prospect of solvency issues a little way down the road)?

    At the bottom of the last bear market in '03 many UK insurers were right on the brink of insolvency. They had to switch from equity investments to FI (and the equity market promptly boomed of course).

    The Asian AIGs really might not be terribly valuable just now if they have got caught in the same way.

    Somewhat analogous to the troubles that equity-oriented pension funds find themselves in.

    No doubt there will be some clues from other life insurers' results.

  6. eh

    More interesting than this public information is what is not being made public, e.g. why AIG is being handled this way. The real reasons. Because all of this rather reeks, doesn’t it?

  7. Brian

    C. V. Starr and Starr International are not subsidiaries of AIG. They are private companies that Greenberg took with him when he left. You are correct in that they were executive retention tools, as they were the largest shareholder of AIG, before the government intervention. They do not have any common interests or relationships. In fact, in some property-casualty lines of business, AIG and Starr compete. When Greenberg took Starr with him when he left AIG in 2005, he took the entire Marine insurance team with him. AIG restocked by hiring a new 38 person team, then went after the business. For two years in a row, premiums for customers were cut by 50%. Those in the industry unaffectionately refer to it as “Starr Wars”.

    The” crown jewel”, the property-casualty insurance subsidiaries in the US, are a little tarnished these days. Year-over-year, the fourth quarter saw a 22% premium decrease, and a 21% premium decrease quarter over quarter. The combined ratio, which is a measure of underwriting profitability, was 116. That means that AIG property-casualty insurance subsidiaries were spending $1.16 for every dollar of premium that they took in. You can do that when your investment income is high, not today. Competitors such as Travelers and Ace have combined ratios of 90.

    But hey, who cares? AIG has the US government backstopping them. They have access to unlimited, cheap capital, unlike their competitors. And they can write business unprofitably, knowing that down the line, the losses will be shouldered by the government.

    I listened to the AIG conference call yesterday. Liddy addressed why the government was failing to AIG. Insurance for 30 million policyholders, retirement plans, teachers, nonprofit organizations, blah, blah, blah. Then he got to the heart of it — $2 trillion in financial guarantees, $1 trillion of it to 12 financial institutions.

    That’s why AIG has been bailed out — there are 12 financial institutions, never named by AIG or the government, to whom they sold the majority of their credit default swaps. The talk on Wall Street is that the customers are Goldman Sachs and European banks. In Europe, bank capital requirements were more flexible than in the US, based on the Basel II model. Having higher-rated assets allowed you to keep less capital and reserves, allowing you to leverage up further. Banks throughout the Continent held assets, many very dodgy, and used AIG credit default swaps to slap a AAA rating on them.

    I don’t think the American taxpayer would be too happy if they found out all this money being poured into AIG was going to save the asses of Goldman Sachs and a bunch of European banks. If you think the AIG rescue is unpopular now, what do you think it would be then?

    I think we would have public hangings brought back.

  8. Bendal

    So how much of these billions of taxpayer dollars given to AiG has gone to paying insurance to people who never held the notes that needed insuring? Also, how many of these non-holding insurance policies are they continuing to sell?

    ABCNews last night mentioned the reason for bailing out AiG again was that “they are too big to fail” and would take too many other businesses down with them. If that’s what is passing for a thought process in DC now then we’re all doomed.

  9. Anonymous

    “Separately, former AIG Chief Executive Maurice “Hank” Greenberg has sued the company in New York federal court, alleging securities fraud tied to misrepresentations of billion of dollars in losses on the company’s portfolio of credit default swaps.”

    Sweet. There is some justice, after all.

  10. dianeb

    What’s interesting as well is that The Starr Foundation, founded by the estate of CV Starr, is also suing AIG for the same reasons. The Foundation’s assets were mainly in AIG stock left by CV Starr with the understanding that the Foundation would hold onto it for as long as financially feasible. I think in 2007 through 2008 (starting possibly in 2006), the Foundation sold several billion dollars in stock. However, the Foundation lost about a billion or more, and while it has pledged to fund all commitments, the Foundation will not be accepting new proposals beginning in 2009.

    The filing from May 2008 is amusing, to say the least, demanding that AIG compensate the Foundation for some $400 million in losses (closer to about $1 billion to $1.5 billion at the end of 2008, by my estimate).

    In terms of the philanthropy scene here in NYC, Hank Greenberg (along with Sandy Weill) and Starr were among the kings of the big givers. Their current status is not quite so stellar.

    And Hank had no idea what was going on at AIG?

  11. Thomas

    Regarding the value of AIG’s Asian life insurance operations:

    The 2008 results are there for all to see. AIG had an operating loss of nearly 6 bn US$ in “life insurance outside of North America”, which for all practical purposes is Asia (the rest is negligible). The reason for the loss is massive impairments of all sorts totalling 12 bn US$.

    So their investment portfolio was far from conservative, and it’s likely to have taken further hits in Q1 2009, the way the markets have been going.

    As to the value of the business franchise: In China, AIG is rather marginal. True, it is the largest foreign life insurer. But all 30 or so foreign life insurers together make up less than 10 % of the market, and the foreign companies have been losing market share of late. It’s far from clear that AIG’s long-term perspectives in the Chinese life market are rosy. The Chinese customers seem to prefer their home-grown competitiors.

    And then there’s Taiwan, where AIG owned Nan Shan is settled with huge amounts of in-force business with a terrible negative spread (they guaranteed 6-8 % on their book, and can earn very little interest on their asset portfolio).

    The other biggies are Japan, Hong Kong and Singapore. None of those are terribly impressive growth markets. But they are big, and presumably they are profitable (or would be, if it weren’t for the current market turmoil and their apparently rather aggressive investment portfolio).

  12. Anonymous

    This is EXACTLY the type of injustice and deceit the markets are sniffing out.

    Equities will continue to absorb losses as long as the outright fraud is allowed to continue.

  13. williambanzai7

    BOHEMIAN BAILOUT A.I.G.
    (Bohemian Rhapsody, Queen)
    WilliamBanzai7

    Sing along link: http://www.youtube.com/watch?v=aPnw8Z8Z00E

    Is this the real world-
    Is this warped bailout fantasy-
    Caught in a market dive-
    Lets all escape from financial reality-
    Open your eyes
    Look up to the TARP bailout skies and see-
    We’re just a poorly managed sham, we need financial sympathy-
    Because its easy come,easy go,
    Trade a little high,little low,
    Anyway the market winds blow, doesnt really matter to AIG,
    To AIG

    Obama, just watched the AIG bailout scam,
    Put a derivative gun against Uncle Sam’s head,
    Pulled the trigger, now the deficits red,
    Obama, your Presidential term had just begun,
    But now the TARP money’s gone and Geithner’s thrown it all away-
    Obama ooo,
    Did’nt mean to make you cry-
    If the DOW is not back this time tomorrow-
    Carry on, carry on, as if moral hazard dosnt really matter-

    Too late, our time may have come,
    Spending taxpayer nickels and dimes-
    Wallets aching all the time,
    Goodbye everybody-this bailout scams got to go-
    Gotta leave this joke behind and face the truth-
    Obama ooo- (any way the market wind blows)
    The economy may have to dive,
    Sometimes its like Adam Smith was never born at all-

    I see a little silhouetto of a bailout man,
    Alan Greenspan, Alan Greenspan come and do the bailout tango-
    Thunderbolt and lightning-very very frightening me-
    Asset Bubble
    Asset Bubble
    Market maestro-magnifico-
    Im just a greedy Wall Street con man and nobody loves me-
    Hes just a Wall Street con man with an Ivy League pedigree-
    Spare him his life from Chapter 11 insolvency-
    Bailout easy come easy go-,will you give me bailout dough-
    Bismillah! no,we will not give him bailout dough-let him go-
    Bismillah! no, we will give him more bailout dough- don’t let him go
    Bismillah! we will not give you bailout dough-let you go
    Will not let you go-let him go
    Will let you go won’t let him go
    No,no,no,no,no,no,no-
    Obama mia, Obama mia AIG let them go-
    Beelzebub has a devil put money aside for A, for I, for GGGGGGGGG-

    So you think you can scam us and spit in our taxpayer eyes-
    So you think you can shtup us and leave us to die-
    Oh baby-cant do this to us baby-
    Just gotta get out-just gotta get right outta here-

    In the end
    Nothing really matters,
    Only AIG and rampant greed,
    Nothing really matters-,nothing really matters but greed,

    Thats the way the Wall Street wind blows….

  14. Don

    How ’bout this?
    “Citi Backs Ex-Execs New Fund
    Two former executives from Citi reportedly have launched a new $200 million hedge fund firm with money from their old employer.

    Jeff Jacob and John Humphrey launched Archive Investment last month with money from Citi and Blackstone, according to Dow Jones. The new firm will invest in corporate credit and distressed assets.

    Jacob and Humphrey were the heads of Citi’s global special situations group. They left to form their own firm in the fall, as part of an overall reorganization of Citi’s alternatives business. The plan was to have the new firm trade on behalf of Citi, as well as seek outside investors.

    Archview did not return phone calls from HedgeFund.net seeking comment. A spokeswoman for Citi declined to comment on the report. Blackstone did not immediately return a phone call from HFN seeking comment.

    In 2008, Citi did not have a good year with its in-house hedge funds. In June, the company shut down Old Lane, the hedge fund run by Vikram Pandit, now the bank’s chief executive office. Old Lane’s failure came only a little over a year after Citi bought it for $800 million. In August, the bank closed Tribeca, its $400 million convertible arbitrage hedge fund firm.

    In January, Citi also liquidated a $4.2 billion special situations fund.”

  15. Jim T

    Oh! What's this; Another case of the "TAIL WAGGING THE DOG!" Only on Wall Street does the "BEGGER SET THE TERMS OF THE DONATION!"

    The Fed & Treasury also today announced that they eliminated the restriction on Executive Compensation for the BEGGER COMPANIES wanting to access the $1 Trillion Dollar TALF program!

    These "Corporate Assholes" are playing chicken with our government and winning! They say "We won't play unless it's on our terms" and our government rolls over and lets the bastards off the hook!

    Fuck Them! That's not how the game is supposed to be played and if they don't want to play by our rules then let them go "BANKRUPT".

    GET SOME BALLS, THEIR BOARDS WON'T LET THAT HAPPEN! CALL THEM ON THEIR BLUFFS AND SEE WHAT HAPPENS!

    DOING IT THEIR WAY SO FAR HAS GOTTEN US NO WHERE EXCEPT DEEPER IN DEBT!

  16. eh

    And Hank had no idea what was going on at AIG?

    No, he didn’t. That’s his story and he’s sticking to it.

  17. Dave

    So much for “change we can believe in”. The Obama presidency is rapidly disintegrating into yet another disingenious fraud on the dreams of the American people.

    People are angry, and if Barack isn’t careful, he might end up with a revolution on his hands. And the lingering irony is that it won’t have a damn thing to do with race politics .. rather, with his actions in the face of the greatest corporate fraud in human history.

    And if and when this does come to pass, America will truly have transcended the race issue. What bitter irony. I want to see Americans, black, white and hispanic, marching in union against this threat to our common livelihood and future.

    Now *that* will be change to believe in.

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