AIG Borrows Another $12 Billion

Posted by: Nanette Byrnes on October 16, 2008

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.

Including:
* 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.

Reader Comments

NullVoid

October 17, 2008 8:43 AM

"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.”

Is Greenberg effing stupid? What does he think would have happened to the company had the Government NOT stepped in?

He needs to go back to congratulating himself for not being in prison and leave AIG operations to the people who've been in the trenches these past couple of years.

Kim

October 17, 2008 8:47 AM

I have problem with AIG homeowner's insurance. I filed a hail-damage claim last year (2007), but it hasn't been resolved. AIG's examination last year was postphoned because it was close to Winter even though I filed the claim on August 2007. They were supposed to come out to my house this year. They canceled two appointments in September (15th and 19th of September) this year (2008), and they have not explained or contacted me again since then. The AIG agent (Homesite) is LMEcheverri.

wtbirds92

October 17, 2008 3:30 PM

It doesn't take a rocket scientist to understand that this company is going to go out of business because they won't be able to keep their customers. Who would want to conduct business with an insurance company who can't manage their own books? At first they needed 20 billion, then it was 40 billion, then it became 80 billion and now it is 110 billion. These guys should all be in jail for running a business like this and then asking the government to bail them out.

RJ

October 18, 2008 10:44 AM

AIG..I am rsponding to this quote "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.”

First, in a capalistic society the government has no business trying to keep poorly managed companies afloat. If it was the governemt's responsibility we would all be driving horse andbuggies. SEcond,AIG has been a poorly mismanaged and corrupt company for years and deserves to go bankrupt. Let the market place decide AIG's future and not Nancy Pelosi with her billion dollar handouts to a company that she owns 2 ,000,000 shares in..

ardball

October 23, 2008 5:51 PM

The Archie Bunker`s that started this country did not state we had an capalistic society. Pelosi is small to Chaney and big Hal-burten. If big boys don~t get money, they are not big boys.

In The Know

October 25, 2008 11:54 PM

Trust me, eventual plans for the liquidation of AIG are already in place. The government package was designed ONLY to buy AIG time to wind down their business. I feel sorry for the AIG policy holders who will have to deal with state insurance regulators and the tens of thousands of AIG employees who will be out on the street. There is plenty of blame to go around but Greenberg deserves the most since he set AIG down its path to inevitable destruction.

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