The New York Federal Reserve Bank has published the latest accounting of how much American International Group’s borrowed: a cool $82.9 billion so far. That’s out of a total available of $122.8 billion, consisting of the original $85 billion line of credit plus a second $37.8 billion deal to help out AIG’s Life Insurance companies’ troubled securities lending businesses.
If you want to take a look for yourself, the line on this statement “other credit extensions” is the tally and as you’ll see it’s up another $11.95 billion in the past week.
A spokesman for the NY Fed said they won’t comment on the rate at which AIG is pulling down its borrowings, but one person who’s very upset about it is former CEO Maurice R. Greenberg.
Greenberg sent his latest seething letter to the company, and current CEO Edward Liddy, on October 13. His main complaint: the federal loan. “As it is currently structured,” Greenberg writes, the loan “will result in the liquidation of AIG, the loss of thousands of jobs, and the irretrievable loss of billions of dollars in shareholder value.” That’s because the government’s charging roughly 14% interest on whatever is drawn down and 8.5% on anything that’s not yet but could be. More recent Fed interventions have come on much kinder terms. “Bottom-line, this means that AIG cannot pay off this loan from the proceeds of selling assets in this market, nor can it pay the annual interest rate from earnings,” Greenberg argues.
In the current market, deals are few and far between, and AIG is trying to sell tens of billions of dollars worth of assets asap, and for cash only. An analysis by Keefe, Bruyette & Wood’s analyst Cliff Gallant and his team put the market value of the businesses AIG has put up for sale at $57.8 billion, tens of billions of dollars below what AIG has already borrowed.
Greenberg has a solution: change the loan to non-voting preferred stock with a 5-6% dividend and a 10-year right of redemption for AIG at a 10% premium.
The terms of the government’s loan seem less focused on keeping AIG in business as an insurer, more intent on settling down the credit markets, a point Greenberg makes in his note, and an opinion many on Wall Street share.
“Who is the winner in this scenario?” he writes. “It is hard to find one, except perhaps for certain of AIG’s transactional counterparties, who faced exposure in the tens of billions of dollars if AIG had filed for bankruptcy protection…The role of government should not be to force a company out of business, but rather to help it to stay in business, especially a company that has been the pride of its industry.”
So far, like his earlier proposals, this one seems to have fallen on deaf ears. Nicholas J. Ashooh, a spokesman for AIG, says the company is continuing to pursue the asset sales laid out by Liddy October 3, which he describes as “very active” though no deal is ready to be announced. Liddy described a core AIG made up of its US property and casualty business, its foreign general insurance division, and an interest in its Asian Life Insurers. Today Ashooh sounded like some of that might be on the block too. “We’re planning, we didn’t say definitely, we’re planning to save those,” he said. “There’s flexibility in all of that especially in the Asian Life Businesses. That doesn’t mean we’re not looking at other options, but we’ve very much focused on implementing that plan.”
Shortly before the $12 billion data came out, AIG and New York Attorney General Andrew Cuomo announced that AIG has agreed to a series of cost cutbacks and executive pay constraints.
* providing Cuomo with an accounting of all compensation paid to its senior executives including former CEO Martin Sullivan and the former head of the Financial Products Unit, Joseph Cassano.
* establishing a Special Governance Committee within AIG which will institute new expense management controls.
* not make any payments pursuant to the multi-million dollar employment agreement of Steven Bensinger, the company’s now-former Chief Financial Officer.
* cancel all junkets or perks, including more than 160 conferences and events, some exceeding more than $750,00 per event, for a total savings of more than $8 million.
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