Collapse of AIG: The Inside Story

Today Edward Liddy, AIG’s new CEO, announced what the troubled insurance company is putting up for sale, and it’s a lot. Other than the company’s US property and casualty businesses, and its international general insurance business (companies with a combined annual revenue of about $40 billion) most everything is on the block. He is hoping to retain a majority interest in the company’s top notch international life insurance business as well.

He wants to do big deals and do them quickly, in a bid to pay off the expensive bridge loan the company got from the New York Federal Reserve two weeks ago. AIG has already pulled down $61 billion of the $85 billion offered, at an interest rate currently around 12.5%. The company is also paying 8% interest on the balance it has not drawn down.

In his first conference call with investors, Liddy fielded a good numbmer of questions about why the company didn’t put the Fed deal to a vote of shareholders. Many analysts concluded their exchanges with the CEO with a wistful “Good luck.” Clearly it’s a tough market to be selling anything especially with lending so restrained.

But Liddy’s tone was unrelentingly businesslike and matter of fact. He promised in conclusion to be in better touch with them than perhaps the company had been in the past. “A strong viable and nimble AIG will emerge from this crisis,” Liddy promised. He encouraged investors to think of the Fed deal as an essential lifeline and one that would have suffered for waiting days or weeks for a shareholder vote.

One of the thorniest issues for AIG is the one that brought is to its knees in the first place: the rapid rise in collateral it has had to post to cover credit default swaps. Most of the $61 billion drawn down, Liddy said, has done to its securities lending arm, AIG Financial Products, “in round numbers $53 or $54 billion,” he said. “I liken it to filling up a bathtub, you fill up initially and then it starts to slow down.” Though he did clearly say AIG expects to borrow more from the Fed, he didn’t say how much. When asked if he might have to go back for more than $85 billion, Liddy said he never likes to say never, but that they hoped to borrow as little as possible. He noted that an analysis by Blackrock of these deals showed that even under the worst case thought possible, the “intrinsic value is significantly above where we have those market. The question is can we retain some of the upside?” And that’s a question Liddy can’t answer.

For Liddy and his managers the biggest challenge right now is keeping the various companies operating at a high level and that means keeping people. As of today some know they will be leaving the mother ship no matter what. “Certainty is better than uncertainty,” said Liddy. “So by declaring today what businesses are a part of us going forward and which are not, at least it lets people know where they sit.” Just to be sure they stay seated, he’s put in place “a full array of retention agreements and enhanced severance agreements. “For many reasons, for our people and our policy holders, selling the businesses to brand name companies, with strong ratings, strong balance sheets, and well capitalized, that is a key.”

These businesses could be game changing for the buyers who get them he notes, and he says he’s heard from dozens of interested parties already.