AIG's Mean Business

Posted by: Matthew Goldstein on March 19

American International Group (AIG) is supposed to be gradually winding down its now infamous structured finance division., which was responsible for the near collapse of the once giant insurer and the world economy as well. But sometimes it’s hard to tell if that’s really the plan at AIG.

First, there was the controversy over those lavish retention bonuses the company approved for dozens of employees at AIG Financial Products, which sold hundreds of billions of dollars in insurance-like products on now ailing securities. Now there’s an allegation that the troubled Connecticut-based operation is blocking at least one longtime customer from moving its business elsewhere. The allegation, made in a recently filed federal lawsuit, suggests that AIG may not be so eager to wind down all of its far-flung derivatives deals.

A large Los Angeles-based asset management firm claims AIG Financial Products is playing hardball and preventing it from terminating a series of derivatives contracts. TCW Asset Management claims the AIG division is “interfering’’ with the asset manager’s efforts to find another trading partner—even threatening to file “suit against the new counterparty for tortious interference with AIG-FP’s purported contractual rights.’’

The legal dispute centers around seven collateralized debt obligations—complex securities that include slices of other asset-backed bonds. Beginning in 2003, the asset manager entered into a series of derivatives deals with AIG to minimize the impact of interest rate fluctuations and inconsistent interest payments on the underlying investments that make-up the seven CDOs. The lawsuit filed in New York federal court alleges the derivatives deals are valued at more than $100 million.

Things started getting testy between TCW and AIG in September when the ratings agencies downgraded the insurer’s debt rating—right around the time the Federal Reserve came in with the first round of bailout money. The lawsuit claims a so-called trigger in the derivatives contracts required AIG Financial Products to find a substitute trading party to takeover the transactions if the giant insurer’s credit rating was downgraded. AIG failed to do that and the asset manager moved to terminate the relationship.

As CDOs go, the deals managed by TCW—most of which bear the name Davis Square Funding—are in relatively good shape and haven’t yet fallen into default. So it’s perfectly understandable why the asset manager would like to get as far away from AIG as possible. After all, AIG is an effective ward of the federal government after taking on one taxpayer bailout after another.

But it’s less clear what’s motivating AIG Financial Products, which is obligated to make periodic payments to the asset manager under the transactions. The division’s 400 or so employees are supposed to be extricating the division from its remaining derivatives deals, presently valued at $1.7 trillion. It would seem that any opportunity for AIG to rid itself of a derivatives contract would be welcome news—even if its a contract that’s not fallen in value.

A lawyer for AIG Financial Products declined to comment before getting permission from his client. We’re still waiting to hear back from him.

But here’s a theory: may be AIG is trying to keep a goodly number of its outstanding derivatives transactions in place, so it can sell them en masse to another financial firm. Such a move may help AIG pay back some of the $170 billion in bailout money it’s getting from the federal government.

But that strategy of keeping sound derivatives contracts in place, means AIG Financial Products may be around a lot longer than many of us imagined. And, of course, the longer AIG Financial Products is around, the longer those bankers who got us in this mess will keep drawing paychecks


Reader Comments

jw

March 20, 2009 12:17 PM

The government will get nothing back.
That money is gone.
We have been played.

TellasisPatel

March 20, 2009 12:21 PM

I do not see anything wrong if AIG can pay back some of the $170 billion in bailout money it is getting from the Federal Government with the help of any banker - period. We want AIG to do well and do us good at the same time - that is the purpose of our helping AIG. We are helping them to help ourselves!

mike

March 20, 2009 12:21 PM

if i was aig i wouldnt have paid those insurance claims because they were a pack of loans that was based on a big lie. if i tried to file a claim with my insuracne compay to replace my car then they found out that is was a peace of junk out in a field they would not pay me at all as a matter of fact they would prosacute me

Charles Sebaski

March 20, 2009 12:36 PM

I am often confused by those who both want their $80B government bailout money back from AIG and simultaneously want the firm to abandon people and quality assets in irrational manner. I would like to discuss two issues addressed above, retention bonuses and the AIG Financial Products (FP) wind down.

First, I would like to address the retention bonuses at AIG. Those 400 people in the FP Group were given retention bonuses for the purpose of winding down a $1.7T notional exposure derivative book. Without those bonuses, it is very reasonable to understand why those people would leave the firm. Why else would someone expedite a process to eliminate their own employment, but that is exactly what the 400 employees at FP have been asked to do. In addition if those employees were to leave in mass, AIG would be unable to manage that $1.7T exposure and cause the $80B in FED bailout to be lost.

Second, with regard to asset sales and wind down. While I do not know the particulars of the TCW transaction, I find it curious that anyone who desires for their $80B returned would want AIG to dispose the quality assets of FP first. All this will produce is a shell corporation with undesirable and unsalable assets leftover, which in turn makes the repayment to US tax payer questionable at best.

Management at AIG has already unwound the FP book of business from $2.7T to $1.7T and if $165M is required to relieve the US tax payer of $1.7T in exposure that seems to be a fair trade. If everyone would take a second to really think about what is being asked of this FP group, and stop biasing that process with what the previous management did we may be able to get out of this situation before making the situation incredibly worse.

jeff grove

March 20, 2009 12:49 PM

AIG needs to continue to take action that will create both short and long term revenue for its financial division. IN turn, this revenue needs to go largely in part towards paying back the government TARP loan. I think Liddy has this in mind as the primary goal. Paying back as much of the TARP as possible in the shortest period of time will keep AIG on the road to solvency. The rest of company's businesses arre in good shape.I have perosnally moved some monies into their stock at these low low prices. I beleive they will turn it around.

j meyer

March 20, 2009 12:55 PM

Angelo Mozilo (Countrywide and Indybank), Hank Greenburg (AIG) and Sandy Weil (Citigroup) should be considered terrorists and shipped to Guantanamo. Alan Greenspan should be put in stocks and have people throw tomatoes at him

Squeezebox

March 20, 2009 12:55 PM

Teh real trouble with bankers is that they are allergic to transparency, esp. in Switzerland. AIG should exlain themselves.

RSA

March 20, 2009 02:39 PM

To Charles Sebaski, you're full of cr*p. Paying hefty retention bonuses to people who royally screwed things up is the dumbest idea ever. There are lot of people calling these rotten brains as indispensible "talent" as if they're going to be our saviors. Wrong! If all those overly creative knuckleheads who created these financial derivatives were to be fired immediately, most would have serious trouble finding comparable jobs (that pay comparable salaries) anywhere on the face of the earth. Just ask your own employer if they'd be willing to hire such "talented" crooks. The money given to AIG is lost forever. I agree w/ j meyer that people like
Angelo Mozilo, Hank Greenburg, Sandy Weil, John Thain, Bernie Madoff and Allen Stanford should be considered terrorists and at least imprisoned forever if not tortured.

Michael Phan

March 20, 2009 03:34 PM

I did not recall mainstreet or wallstreet bad mouth about the practices of AIG, investment firms, banks, and other financial institutions when shareholders' profited from AIG's stock in 2005-2007. They began to blame those financial institutions when they have lost money. It is time to be real. They understood the risk and they should take it likes an investors. As far as the AIG bailout, i believe it was an effort to save billions and trillion of lost if AIG bankrupt. On the other hand, banker, financial institutions, insurance agencies, and other businesses will suffered if AIG is liquidated through Bankruptcy proceeding.

I believe, AIG will survived the financial crisis and it will be profitable in 2010, 2011, 2012. AIG stock will hit the $10.00 mark in 2010.

For short-time traders, he or she should be careful in trying to beat the system by betting low and sale short, AIG stock is not a gamble stock, it is a undervalue stock, eventually it will turn around.

Mar

March 20, 2009 03:44 PM

Have you forgotten that AIG employees are taxpayers too. They are entitled to protection under the law. I don't think that the FP_AIG group deserved bonuses but the they had contracts and are protected under the law. What is America without binding contracts.
The fault lies in the tangled web woven by the FED and certain members of congress who owed people politically. A senator in Ct where thelive and work and donate to his campaign found. A treasury sec. who broke the law and didn't pay all of his taxes, etc.

These people are covering for their friends at the big banks.

But as I said it wasn't the best idea to give them bonuses but they did nothing illegal..

and remember they paid their taxes!!!

Strategery

March 20, 2009 04:21 PM

A well known, trusted, quality brand name like AIG should have no trouble finding buyers and customers.

Alquaeda Insurance Group

March 20, 2009 05:59 PM

All financial terrorists!

Ted

March 20, 2009 06:59 PM

Paying retention bonuses is just more b.s. from AIG.

These employees were involved in a business that essentially failed. If these employees were so smart, why didn't they take steps earlier to prvent the firm from failing?

With unemployment so high, I really doubt any of them would be difficult to replace. And, if they did leave, who else would really hire them? AIG has worked so hard to taint its own name, that I can't imagine anyone would really hire ex-AIG employees.

Retention bonuses are bunk, and the american public is being taken for a ride. Its time to let AIG fail.

Pcfy2

March 21, 2009 12:43 AM

RSA, Charles Sebaski is correct.
The people reciving bonus as part of their pay are professional derivatives
traders. They did not write or create
any credit default swaps. They did not
write or create any CDO'S.

Those that did are gone!

This team of PDT'S are trying to eliminate 1.7 trillion dollars of CDO's.
We need these people to continue to
do their job.

Next time people get a job in the
finanical industry and then maybe you
can pertisipate in a bonus program.

This country needs to grow up and learn
about the finanical industry and how it
works.

Sure mistakes have been made but now is
the time to fix them and not throw bricks at glass houses.

khiem

March 21, 2009 01:29 AM

AIG playing the soft ball with our money, that teaching the government a lesson, be no more bail out any one again, let they die adn die, those asshose be no jobs, don't thnk about bonus.

Thank you for your interest. This blog is no longer active.

 

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BusinessWeek's Adrienne Carter, Jessica Silver-Greenberg, and David Henry deconstruct the mysteries of high finance, Wall Street, and hedge funds for pros and ordinary investors. E-mail them directly if you've got tips about big deals, a hedge fund, or even securities industry gossip.

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