"AIG Can Be Salvaged By a Breakup".
AIG Can Be Salvaged By a Breakup
By RON SHELP
Two weeks ago the insurance giant AIG declared its fourth-quarter earnings for 2008 -- nearly $62 billion in losses, the largest quarterly corporate loss in American history. And even though it was mostly a noncash loss -- poor investments and more losses from its renegade financial-products unit and mark-to-market accounting -- it was still shocking and hard to explain.
Now we've learned that AIG, which has to date received more than $170 billion in federal funds, is paying some $165 million in bonuses to the very executives in its financial-products unit -- mainly derivatives traders -- who almost sank the entire company. Not surprisingly, this has infuriated everyone from government officials to ordinary citizens.
Yesterday, facing a political firestorm, President Barack Obama responded: "This is a corporation that finds itself in financial distress due to recklessness and greed," he said. "Under these circumstances, it's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay." He then said he instructed Treasury Secretary Tim Geithner to pursue "every single legal avenue" to cancel the bonuses.
Clearly, the president's outrage reflects the views of the American people. But unless Mr. Obama and his Treasury secretary go to extreme measures they will not succeed in canceling the AIG bonuses, many of which have already been paid out. And while these bonuses stick in my craw, there are reasons to proceed with them as part of the breakup and restructuring of a once great insurance company.
First, these bonus programs were all in place well before AIG received federal funds and before the current CEO, Edward Liddy, was in charge of the company. Second, they are part of legally binding employment contracts between these executives and AIG. Even if Mr. Liddy wanted some way out of awarding these bonuses, under current law he could not. If he tried, AIG would be sued by the executives.
But the real reason the bonuses are justifiable is because the executives in the financial unit are trying to undo and wind down very difficult agreements. It is in everybody's interest, AIG's and the government's, to get them cleaned up and to close down the unit.
This will allow AIG to stop losing money on derivatives and related products and get out of the financial units business that wrecked the company. For the government, it means it will have to cover no further derivatives or credit default swaps and will be on its way to getting out of the insurance business.
What went wrong? AIG was done in by credit default swaps and other derivatives tied to securities and corporate debt. When these financial instruments weakened, the company lost massive amounts of money. In the course of one night last September, AIG's cash needs went from $20 billion to $80 billion. To meet these financial needs, the whole company was practically wiped out.
Hank Greenberg, who was CEO of AIG for nearly 40 years, is the only one who really understands the company in all its complexity, much of which he created. What's clear, however, is that AIG will be broken up and its parts sold off to repay the government. The company has announced tentative plans to spin off its Asian life insurance company, AIA, as well as its international life insurer, ALICO.
Earlier this month, AIG announced it will form AIU Holdings Inc. to facilitate the restructuring. The firm will "assist AIG in preparing for the potential sale of a minority stake in the business, which ultimately may include a public offering of shares, depending on market conditions," according to a press release.
If all goes as planned, the moves could free the company of its huge debt burden and bad investments, and help retain key employees and customers. Admirers of AIG can only hope that AIU Holdings will one day be built into something like AIG was in its heyday -- before it was virtually destroyed by its bonus-seeking financial unit.
Mr. Shelp, a former AIG vice president, is author of "Fallen Giant: The Amazing Story of Hank Greenberg and the History of AIG" (Wiley, 2006).
By RON SHELP
Two weeks ago the insurance giant AIG declared its fourth-quarter earnings for 2008 -- nearly $62 billion in losses, the largest quarterly corporate loss in American history. And even though it was mostly a noncash loss -- poor investments and more losses from its renegade financial-products unit and mark-to-market accounting -- it was still shocking and hard to explain.
Now we've learned that AIG, which has to date received more than $170 billion in federal funds, is paying some $165 million in bonuses to the very executives in its financial-products unit -- mainly derivatives traders -- who almost sank the entire company. Not surprisingly, this has infuriated everyone from government officials to ordinary citizens.
Yesterday, facing a political firestorm, President Barack Obama responded: "This is a corporation that finds itself in financial distress due to recklessness and greed," he said. "Under these circumstances, it's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay." He then said he instructed Treasury Secretary Tim Geithner to pursue "every single legal avenue" to cancel the bonuses.
Clearly, the president's outrage reflects the views of the American people. But unless Mr. Obama and his Treasury secretary go to extreme measures they will not succeed in canceling the AIG bonuses, many of which have already been paid out. And while these bonuses stick in my craw, there are reasons to proceed with them as part of the breakup and restructuring of a once great insurance company.
First, these bonus programs were all in place well before AIG received federal funds and before the current CEO, Edward Liddy, was in charge of the company. Second, they are part of legally binding employment contracts between these executives and AIG. Even if Mr. Liddy wanted some way out of awarding these bonuses, under current law he could not. If he tried, AIG would be sued by the executives.
But the real reason the bonuses are justifiable is because the executives in the financial unit are trying to undo and wind down very difficult agreements. It is in everybody's interest, AIG's and the government's, to get them cleaned up and to close down the unit.
This will allow AIG to stop losing money on derivatives and related products and get out of the financial units business that wrecked the company. For the government, it means it will have to cover no further derivatives or credit default swaps and will be on its way to getting out of the insurance business.
What went wrong? AIG was done in by credit default swaps and other derivatives tied to securities and corporate debt. When these financial instruments weakened, the company lost massive amounts of money. In the course of one night last September, AIG's cash needs went from $20 billion to $80 billion. To meet these financial needs, the whole company was practically wiped out.
Hank Greenberg, who was CEO of AIG for nearly 40 years, is the only one who really understands the company in all its complexity, much of which he created. What's clear, however, is that AIG will be broken up and its parts sold off to repay the government. The company has announced tentative plans to spin off its Asian life insurance company, AIA, as well as its international life insurer, ALICO.
Earlier this month, AIG announced it will form AIU Holdings Inc. to facilitate the restructuring. The firm will "assist AIG in preparing for the potential sale of a minority stake in the business, which ultimately may include a public offering of shares, depending on market conditions," according to a press release.
If all goes as planned, the moves could free the company of its huge debt burden and bad investments, and help retain key employees and customers. Admirers of AIG can only hope that AIU Holdings will one day be built into something like AIG was in its heyday -- before it was virtually destroyed by its bonus-seeking financial unit.
Mr. Shelp, a former AIG vice president, is author of "Fallen Giant: The Amazing Story of Hank Greenberg and the History of AIG" (Wiley, 2006).
Labels: Keeping them honest
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