The survival of a great American business may now depend on whether private investors will be allowed to succeed where government seems to be failing. We're referring to insurance giant AIG, which under the terms of a federal bailout is threatening to become a loser for taxpayers. Maybe it's time for the feds to consider Plan B.
With its September 16 rescue of the world's largest insurer, the New York Federal Reserve has managed to put taxpayers on the hook for more than $120 billion, but on terms so onerous that AIG may have to be sold in pieces at firesale prices. Most of the taxpayer exposure comes from an $85 billion revolving credit facility, in return for the government taking almost 80% of AIG's equity. Further Reading
* Free AIG 10/02/2008 – The Fed takeover looks like an increasingly bad deal. * The Fed and AIG 09/18/08 – Nationalizations and the financial panic.
The Feds are charging AIG more than 10% interest on the entire $85 billion, even if the company doesn't borrow that much. The interest rate on money actually borrowed is more than 14%. One AIG shareholder likens it to a financial counselor advising someone struggling to pay the 6% interest on his mortgage to solve the problem by running up debt on his credit card. That's why the New York Federal Reserve recently had to bail out the bailout, lending another $37.8 billion at more attractive terms.
But the first transaction is still crushing the company, forcing a virtual liquidation. According to a source familiar with the company, AIG is suffering declines in renewals among corporate customers as it loses business to competitors. An AIG spokesman says, "Renewals worldwide are strong, but there are variations depending on the region and line of business." No one disputes, however, that interim CEO Ed Liddy's job is not so much to run the business as to prepare various AIG subsidiaries for quick and dirty sale, though there's no guarantee that the prices he gets will protect taxpayers from losses.
We have little sympathy for a company that sought government assistance, except that in this case shareholders were never permitted to vote on the deal. The shareholder with the largest stake, former CEO Hank Greenberg, says the firm would have been better off in Chapter 11. AIG directors instead had every incentive to choose a transaction with the government -- even on horrible terms -- over bankruptcy. That's because a bankruptcy filing would have stripped directors of legal protection.
Boris Feldman, an attorney at Wilson, Sonsini, tells clients who serve on boards to avoid bankruptcy at almost any cost, because in such scenarios "you have everyone coming at you." Directors, suddenly responsible for their own legal bills, can face suits from trustees, shareholders and bondholders. The only other clear winners in the September 16 deal, besides AIG directors, are the undisclosed counterparties in derivative transactions that the government protected from loss.
There may be a better way. Mr. Greenberg has sketched out a proposal similar to the terms Treasury is now offering large banks -- nonvoting preferred stock for the government, with the company paying 5% to 6% and an option to buy out the government later with a premium for taxpayers. Though it's becoming known simply as the "Greenberg plan," the proposal appears to enjoy broad support among large AIG shareholders and, we suspect, employees as well. Other shareholders may have competing ideas that would leave the company healthy enough to ensure that taxpayers get their money back.
Fed & AIG Considering Re-Structuring Deal Including Points as Proposed by Maurice Greenberg
The Fed and AIG may be re-structuring their recent deal and considering terms proposed in a recent October 2008 letter sent by former AIG chief Maurice Greenberg to present Chairman/CEO Edward Liddy.
Instead of having AIG liquidate its vital holdings to pay off an ever growing bridge loan, that comes with a 14% per annum interest tag, along with a 79.9% Fed stake, Greenberg, instead proposed the following in his letter filed October 13, 2008 with the SEC:
"The terms of the Credit Facility and preferred stock issuance could be amended into a “win/win” as follows: · The government would acquire non-voting preferred stock in AIG that pays a 5 or 6 percent annual dividend. This would be a respectable spread over the cost of money to the Federal Reserve.
· AIG would have the right to redeem the preferred over a period of 10 years at a 10 percent premium.
· Such a plan would have an immediate impact on the market and would save AIG from being liquidated. The United States would retain a great company, jobs would not be lost, share value would increase, and sales of assets could be undertaken in a more orderly fashion than what is currently contemplated.
· If need be, AIG would raise third-party funds, and could ultimately have a Rights offering at a time when markets are more stable and the sale of assets, as indicated, could take place in an orderly manner."