Just because someone is angry and clearly motivated by self-interest doesn’t mean he’s wrong.
Former American International Group chief Maurice Greenberg has railed against the Fed’s bailout of the insurer since the deal was struck in early September. The two-year $85 billion plan (since changed to a five-year $60 billion plan) gave AIG access to some much-needed capital from the government in return for an 80% stake in the company. That essentially wiped out the shareholders—the largest of whom is Hank Greenberg.
Greenberg has seen a better way, and it comes in the form of the recent Citigroup bailout. As he argues in a Dec. 2 opinion piece in The Wall Street Journal, “the Citi deal makes sense in many respects”. The government puts in $20 billion and acts as a guarantor of 90% of losses stemming from $306 billion in toxic assets. In return, it gets $27 billion of preferred shares, leading to a potential equity stake of up to 8%. Writes Greenberg: “The Citi board should be congratulated for insisting on a deal that both preserves jobs and benefits taxpayers.”
Whether the Citi deal turns out to be a stroke of genius is, of course, yet to be determined. But Greenberg is right that the terms of AIG’s rescue increasingly look unfair. The pact was struck in the anxious and angry hours after Lehman Brothers’ collapse. Politicians wanted the fat cats of Wall Street to suffer; investors were frightened as the subprime house of cards fell on their heads.
If AIG needed taxpayer support, it would have to cease to exist in its current form. It immediately faced a 14% interest rate—more in line with what one gets from loan sharks these days, than from a bank. The company would have likely been forced to quickly shed core assets.
While some of the terms have eased, the reality is that AIG still faces daunting obstacles in any path to success. The shares are down about 97% this year, now costing less than the average subway fare. Clients are nervous, with some telling us they’re inclined to take their business elsewhere. Staffers are justifiably nervous and demoralized.
Any move to revisit the terms of federal assistance to AIG is sure to please Hank Greenberg. After all, a deal along the lines of what Citi got would likely leave him a much richer man. But it could also leave AIG in a stronger position to woo customers and capital—and remain a global force in insurance.
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