Hank Greenberg proposes alternative to AIG Bailout
Tuesday, October 14, 2008 at 07:19AM In an open letter to current AIG Chairman Ed Liddy, past Chairman and CEO Hank Greenberg offers his alternative plan for the bail out of AIG.
You can read the entire letter by clicking on the link here.
As you can tell from a reading of the letter, as well as the accompanying story in The Wall Street Journal, this is a significant departure from the plan as it is currently structured. Primarily it gives the US a preferred stock position with an annual dividend and mark up on sale compared to the onerous loan and debt repayment structure with warrants that the current plan provides.
It gives you an idea of how the deposed chief of AIG, and the man who built it into the financial and insurance giant it became, would have handled the negotiations under the same circumstances. He obviously, as the companies largest single shareholder, is deeply disturbed over the structure of the current deal as it will lead to a massive loss of stock holder value.
Some thoughts about the Greenberg plan:
1. It exposes and addresses the exceptionally high interest rates charged on the loans and the rather perverse incentive to use the money due to the way the interest rates are treated between "used" and "unused" portions of the loan. Greenberg feels a preferred dividend at 5% to 6% is a more realistic cost of money and doesn't saddle the company with crippling monthly loan interest, which is currently running at $1 billion per month.
2. He points out that the AIG bail out was geared to protect AIG transactional counter parties on the loan agreements and insurance, as the loan bail out wipes out stockholder equity, risks the viability of the company going forward and puts thousands of jobs at risk. This is a veiled reference to the widely held belief that the bail out was structured to protect other banks and investment banks up the food chain with little regard for stockholders, employees and pension holders who held AIG stock.
3. He feels, as do I, that the current deal runs the risk of forcing the effective liquidation of the company as the interest rates are brutal, the time frame is short to locate buyers and the enterprise risk to the company of the deal terms harms the ability of management to keep their insurance operations running as they did for the years leading up to this debacle. While everyone is cheering for the company to come out of this essentially intact, the structure of the deal forces the management into choices which aren't ideal for maximizing shareholder and enterprise value.
4. I appreciate Greenberg giving us all a specific glimpse into what he feels would work, but I think there is no way AIG gets the deal reversed due to the voters anger over the entire bailout and market crash in general. The dye is cast and it's up to Ed Liddy and his management team to get the best possible outcome for the business under incredible duress and a crushing debt burden with the government.
Obviously, there are a lot of companies, first and foremost Lehman who was allowed to die and AIG which was given a devils deal to save it, who are looking at the new deals coming out of Congress and Treasury and realizing they were hammered and other companies will survive, only as a result of timing. It is a brutal fact of life right now and AIG is going to need all the managerial and executive skill they can muster to come out of this with a viable P&C component as it their stated goal. Who knows, maybe Greenberg and the AIG shareholders can prevail on Congress and Treasury to alter the deal, but I wouldn't spend much time on that hope.
Bottom line, the company is going through a wrenching change and while the policyholders are clearly protected, the future remains uncertain for the "Big AIG" and the shareholders under the existing deal worked with the Feds.
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Reader Comments (4)
What bothers me (and perhaps it's beside the point, but I don't think so) is that very very few Americans understand what happened with AIG and don't understand what happened with the CA event with American General. It's not even understood how many individual (and diversity of) companies fall under the umbrella of AIG, for that matter.
Beginning with the Congressional oversight committee, those slides from St. Regis were thrown up there and no one knew what they were about really (or if they did, it was possibly used as a distraction from the larger problems. Who knows?) In knowing that a lot of airline tickets, etc., had been purchased for independent agents who qualified based on performance in the past year (or 18 months) to shut this off seemed like bad business. So, it seemed a choice between bad PR or bad business (which would create further difficulty with carrying of business dealings even though American General Life is fiscally sound (but as you know, not enough to bail out "AIG" on it's own...not remotely.) The best American General can right now (for larger AIG and for the country) is to compete in the marketplace like any other life insurance company.
The public, obviously doesn't understand how life insurance companies work, (in terms of independent agents and incentive compensation events that are the norm and really part of those agents salaries in some way.)
When I saw the Congress oversight slam American General but not focus on the way larger issue which brought the entity of AIG to its knees, I was floored. Could they all be so uninformed? And then the media just went wild on the story; it's been bizarre. Anderson Cooper on CNN has somehow linked American General Life with J. Cassano from AIG-FP which is all wrong. The public just buys into it and gets furious. I don't understand why the company (American General) does not correct Cooper et al.
I have explained the situation just to regular folks I meet in my every day life and when it's explained to them, they DO get it and say, "well, why is it being reported erroneously?" Good question. And has been a good question from the start. Very frustrating as I do have family members who work with AFLife.
I'd appreciate any comments from you.
Thanks,
Shannon
Thank you for such a detailed and well thought out response and question. As to your issue on the confusion the lax or uniformed reporting has caused, I think the "regular media" has done the employees and customers of AIG a grave injustice. The example with Anderson Cooper was one I saw myself and was the biggest example of sloppy and misleading reporting and research you could ever hope to find. Even a sliver of reporting and research would have shown this was a sales incentive trip, standard in our industry and not some lavish retreat for company executives at tax payer expense and in no way related to what Cassano and the AIG-FP group was doing. My issue, as is well documented, was how badly AIG under estimated tax payer rage over the nationwide bail outs and AIG clumsily stumbled into the cross hairs with the perfect symbolic mistake of a nice retreat for agents that could be used to blast the company. Your right, once you explain to people how the business works and what this really was, their anger is pretty minimal, but the problem is that AIG and their PR firm failed to recognize the importance of symbols at a time like this, and every congressional hearing needs a whipping boy or a face they can put on the problem. Honestly, all the company can do at this point is keep a very low profile, stick to it's work of selling insurance, calm down the customers and employees and hope for a good resolution to this mess.
You might disagree, though. Would be interested in your thoughts.
Also of interest, anyone I've explained the situation to (and it's been a number of people) have said, oh, well, yeah, they should have gone on with the trip...but with a letter sent to the Congressional Oversight committee before this occurred. I suppose that could have backfired too as media sources would have picked up on it. The place I first saw the issue confusion, though, was on C-Span and I was completely floored and disgusted. It was inexcusable.
No, you don't put American General side by side with Cassano and more or less ignore AIG Financial Products unit (where all the trouble came from.) Seems unethical to me. For the oversight committee, for the media...Has been incredibly frustrating to observe, to say the very least.
Thanks again and let me know the answer to my question at the beginning of this note.
As to tipping off Congressional oversight I don't think anyone at AIG was remotely aware of the anger this trip would cause, largely because it was so routine in the activity of their normal business. Things happened so quickly in the last three weeks that the people in NY obviously didn't send out the word or get word that this trip was on at the subsidiary.
I think you chalk it up as the perfect storm in PR disasters and now AIG has to ride it out. Correct the media where appropriate but I wouldn't wave any flags in front of any politician's in the midst of an election year. AIG is the ultimate easy target right now.