AIG Update: After the Rescue, Comes the Restructuring

Now everyone waits for Act 3. The next phase of the AIG saga, following its rapidly escalating financial crisis and Tuesday night’s 11th-hour rescue by the Federal Reserve, will be the development and execution of a restructuring plan to save both the world’s largest insurance company and the up to $85 billion in loans the Fed has pledged. Last night, the Federal Reserve Bank of New York received the OK to lend up to $85 billion to keep AIG out of bankruptcy. In return, the federal government will get 79.9 percent of AIG stock. Immediately before the decision, it was widely predicted that AIG would in fact file Chapter 11 today. “Order” was a theme in the Fed’s announcement on the bailout: “The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance. “The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.” The 24-month credit facility will include interest at the three-month LIBOR rate plus 850 basis points. The Fed emphasized that the arrangement protects taxpayers, noting that the loan is collateralized by AIG’s assets and those of its subsidiaries and that the loan is to be repaid from the sale of AIG assets. In addition to the nearly 80 percent equity stake in the company, the federal government will have veto power over the payment of AIG dividends. AIG’s management will reportedly be replaced, with Edward Liddy being brought in to head the company, replacing Robert Willumstad, who although he has been AIG’s chairman since 2006, has been CEO only since June. Liddy, 62, is a former chairman, president & CEO of Allstate Corp. Earlier this year, he joined private equity firm Clayton, Dubilier & Rice, New York, as a partner. In addition, Liddy sits on the boards of 3M, Goldman Sachs and Kroger. At a fund raiser Tuesday night, Dean Skelos, majority leader of the New York State Senate, called for the return to AIG of Maurice “Hank” Greenberg, who served as the company’s chairman from 1968 to 2005. Greenberg left AIG as a result of an accounting fraud investigation by then New York Attorney General Eliot Spitzer. Although some civil charges are still unresolved, all criminal charges were eventually dropped and Greenberg remained a major stockholder in AIG. Meanwhile, the New York Times took a long look at the compensation received by top execs at companies that have taken recent high profile nose dives. They noted that Willumstad’s minimum cash bonus for this year was reportedly $4 million, with a target bonus of $8 million. In addition, he owns three homes, on Park Avenue in Manhattan, on Long Island and in Vermont.