Treasury selling remainder of AIG stock

Finally, after several banks declined to provide a private sector solution, the NY Fed stepped up to the plate September. 16, 2008 with an initial $85 billion in cash in exchange for 79.9 percent of AIG’s stock.

The NY Fed, in tandem with the Federal Reserve Board and the Treasury department of the Bush and later the Obama administration, ultimately invested more than $100 billion in additional funds, as well as the creation of facilities, and the federal government’s credit as implied backing of AIG.

The Fed is in the process of closing out two facilities jointly funded by the Fed and AIG cash as well as subprime securities owned both by AIG Financial Products and its life insurance subsidiaries. It also sold its common share ownership to the Treasury Department, which has been selling off its ownership since last year.

The company’s plight was best articulated in a November federal court decision throwing out a case brought by Starr International, a predecessor company of AIG and Maurice “Hank” Greenberg, a primary shareholder of Starr and former longtime chairman and CEO of AIG.

In the decision, the court said that, “in September 2008, “AIG was in extremis, and its independent board of directors, to save the company, voluntarily accepted the hard terms offered by the one and only rescuer that stood between it and imminent bankruptcy—the NY Fed.”

“Specifically, based on Starr’s own allegations, (1) AIG, as of mid-September 2008, was in dire straits, whether as a result of its own business decisions, the unraveling state of the financial system, the lack of available liquidity, or a perfect storm of these and other factors, and was actively considering bankruptcy; (2) AIG had not found any effective rescuer in its hour of need other than Federal Reserve Board of NY, and had run out of time to keep looking; and (3) AIG’s Board, unwilling to accept bankruptcy and the ‘public opprobrium’ and ‘risk of legal liability’,” that would come with it, acceded—regretfully, and perhaps angrily, but, as a matter of law, voluntarily—to the hard terms on which the NY Fed was willing to extend the $85 billion credit facility,” the decision said.

“Far from describing actual control of AIG by an outside party, these allegations describe a moment of corporate desperation, in which AIG’s board grabbed the sole lifeline extended to the company,” the decision concluded.

The sale, if completed, would end several controversial and tense chapters in the life of Timothy Geithner, who is expected to leave his role as Treasury secretary early next year.

Geithner was president of the NY Fed when the Federal Reserve Board was told by Henry Paulson, then secretary of the Treasury in the Bush administration, to rescue AIG.

Besides finding that AIG wasdealing with the huge liability from the CDS, later investigations by the Government Accountability Office and the Pennsylvania Insurance Department found that the AIG insurance subsidiaries, both life and property/casualty, had cross-guaranteed the liabilities of AIG Financial Products.

As the problems of AIG became clear in 2009, House Republicans seeking political cover from the fact they had accepted campaign donations from AIG during its heyday told him, “I have no confidence in you,” and, “You should resign.”

Amongst the issues that surfaced was the fact that AIG officials who had led the company astray, including those in London who had devised the CDS investment strategy as well as had speculated in billions of dollars of highly speculative securities such as collateralized debt obligations secured by mortgages of dubious quality, were owed more than $100 million in bonuses.

Geithner bore the brunt of the criticism although the Fed was barred by a provision of the Gramm-Leach-Bliley Act from supervising or even looking at the books of insurance holding companies.

The political solution that resulted was a reduction in the amount of bonuses paid as well as a system overseen by attorney Ken Feinberg that limited the bonuses companies receiving federal aid could pay their employees.

Indeed, Robert Benmosche, president and CEO of AIG, said one of the reasons he wants the federal government to divest itself of a financial interest in AIG is to be rid of the limits on executive compensation imposed on those who received bailouts in the 2008-2010 period.

“We are very pleased to repay 100 percent of all that America invested in AIG plus a total combined positive return – or profit – of $22.7 billion,” said Benmosche. “On behalf of the 62,000 employees of AIG, it is my honor and privilege to thank America for giving us the opportunity to keep our promise to make America whole on its investment in AIG plus a substantial profit.  Thank you America. Let’s bring on tomorrow.”