Saturday, September 20, 2008

A Loan is NOT a Bailout -- AIG

The financial uproar that led to the bankruptcy filing of Lehman Brothers, the sale of Bear Stearns, the sale of Merrill Lynch and major threats to the existence of AIG has led the US government to offer emergency LOANs to end the turmoil.

Bear Stearns received a 10-year loan collateralized by a pool of assets once considered valuable enough to push Bear's stock price to $170. Meanwhile, JP Morgan struck a deal to buy Bear for $2 a share. But JPM soon realized that buying Bear for $2 a share was an act of getting so much for so little that it bumped its final price to $10 a share. The Bear building alone was worth the extra $8 a share.

Merrill wasted no time looking for loans from Washington. Merrill, led by John Thain, quickly concluded a deal with Bank of America for $50 Billion.

At the start of 2008, Bear employed about 14,000. When JP Morgan acquired the company, it kept about half the workers. Lehman employed about 25,000 at the start of the year. As a result of the bankruptcy, all of them were out of work. However, Barkley's Bank bought a portion of Lehman after the Chapter 11 announcement. It appears that purchase may have saved about 9,000 jobs.

How many jobs will Merrill lose? Undoubtedly thousands. But Merrill will live on.

Then there is AIG, which is a diverse financial services business unlike the investment banks. The US government extended a Two-Year Loan to AIG. With this capital, AIG will have the breathing room to conduct a sale of its many parts. It appears that the government has taken the role of Corporate Raider that was popular on Wall Street in the 1980s.

Those were days of Greenmail. When Corporate Raiders would acquire Large Companies in Leveraged Buyouts and sell them, one division at a time, for more than the price of the Acquisition. R.J. Reynolds was one of the best known. That episode inspired the book "Barbarians at the Gate."

This time the US government is financing the orderly sale of AIG based on a rock-bottom sale price. Should AIG have trouble repaying an $85 billion loan by selling businesses that had been valued at several times that figure not long ago? No.

What might lie ahead? The investment banking business has always been risky. About 25 years ago Sears wanted to diversify. Retail, like all businesses, had its ups and downs. To offset the cycles in retail, it bought an investment bank -- Dean Witter, a national firm with a conservative Wall Street reputation. The union was always difficult. During the years Sears owned Dean Witter, Sears introduced the Discover credit card, which was a huge success. Eventually Sears, like many companies, decided to return to the business it knew best and sold Dean Witter and the Discover Card business as a package. It also sold off its Allstate Insurance division. Both units were spun-off from Sears and thereafter the stocks of Dean Witter Discover and Allstate traded on the NY Stock Exchange.

Morgan Stanley eventually acquired Dean Witter Discover. Now Morgan Stanley is negotiating its own fate. That might include a sale of 50% of the company to China or a total sale to Wachovia Bank.

Again, what might lie ahead? The reappearance of Merrill Lynch, for one. Bear Stearns for another. When times improve for investment banks, Bank of America might spin off Merrill the same way Sears spun off Dean Witter. The other investment banking names may reappear under the same scenario. After nursing them back to health, the corporate parents may decide to capture an easy profit by selling their stakes.

A.I.G. Is Still Profitable, With a Wide Array of Enterprises

American International Group and its assortment of businesses run the gamut from aircraft leasing to life insurance for Indians to retirement plans for elementary schoolteachers. Parts of the company have been battered by the credit crisis.

But many of its operations may put up for sale — as the Federal Reserve signaled they would be when it announced its rescue of the company Tuesday night — and they could prove attractive to prospective investors and competitors. The main insurance unit has remained profitable, as has the aircraft leasing arm.

The great assortment of assets reflects the determination of the man who built A.I.G., Maurice R. Greenberg, to create an global empire operating in complementary businesses. Not even the company’s annual reports to shareholders or its regulatory filings offer a chart of its complex corporate structure.

Though its name is American, the company is rooted in Asia. According to company lore, its founder, Cornelius Vander Starr, a World War I veteran, traveled to Asia with only 300 Japanese yen (less than $3 by today’s exchange rates) in his pocket and started the firm in Shanghai in 1919.

With a partner, he sold marine and fire insurance and expanded rapidly throughout the Philippines, Indonesia and China by hiring locals as agents and managers, a business strategy A.I.G. uses today. Nearly half of A.I.G.’s 116,000 direct employees — about 62,000 people — are in Asia.

In 1960, Mr. Greenberg joined the company, following his mentor, an executive at Continental Casualty Company in Chicago. Mr. Greenberg focused on making giant commercial deals, increasing its share of the life insurance business and writing what were, decades ago, unusual types of coverage, like insurance against kidnapping and protection from suits against a company’s officers and directors.

A.I.G.’s general insurance business, which accounted for nearly half its $110 billion in revenue last year, has held up well. A.I.G. claims that its companies are the largest underwriters of commercial and industrial insurance in the United States. Its policies cover everything from environmental liability for companies to auto insurance.

A.I.G.’s asset management group — it includes a private banking subsidiary for the wealthy, a broker dealer and another unit that manages mutual funds — has had losses, but it is not a unit that pushed the company to the brink. That group reported its first loss in years in the last quarter of 2007; in the second quarter of this year, it reported an operating loss of $314 million, which is modest these days.

Then there is the aircraft leasing business, which owns more than 900 planes and is part of the company’s financial services group. The company stated in its annual filing with regulators that the leasing unit would buy 73 new aircraft this year. That unit is profitable, according to the most recent report for the quarter ended June 30.

A.I.G.’s problems rest in the company’s London-based financial products unit, part of its financial services group, which is exposed to securities tied to the value of home loans — the same kind of securities that forced Lehman Brothers into Chapter 11 bankruptcy proceedings on Monday. The financial products group sold credit-default swaps, complex financial contracts allowing buyers to insure securities backed by mortgages. Many of the buyers were European banks. As home values have fallen, the value of the underlying mortgages has declined, and A.I.G. has had to reduce the value of the securities on its books.

The company has other forms of real estate exposure. One subsidiary, American General Finance, makes home loans and has suffered along with the housing market. Another subsidiary, the United Guaranty Corporation, provides mortgage guarantee insurance. Still other units buy mortgage-backed securities directly.

“We’ve always been opportunistic,” Mr. Greenberg said, responding to a question about whether the company would buy other insurers struggling in the wake of the Sept. 11 terrorist attacks. “When we see opportunities, we will never change. At A.I.G., it’s part of our culture.”

Geographically, A.I.G. is sprawling. One of its life insurance companies operates in 50 countries and other units offers other products, like health insurance and retirement services, in countries like Japan and the United States. It claims to be the largest life insurance company in the Philippines. Its private bank is based in Zurich.

A.I.G. ’s Asian asset management business has $115 billion in assets, and the company peddles mutual funds in the Philippines, Hong Kong and Singapore and investment trusts in Taiwan.

The company is a sizable investor in Asian development projects, from toll roads in the Philippines to Seoul’s international finance center. It is also a major investor in the Taiwan government. As of February, A.I.G. held $14.2 billion in Taiwan government bonds, 13.1 percent of Taiwan’s total issued government bonds.

Though he left the company a few years ago after an accounting scandal, Mr. Greenberg’s fortune remains locked up with A.I.G., in which he has a stake of about 11 percent through various holdings, according to Bloomberg News.

Early in 2005, questions arose about financial transactions that had the effect of making the company’s earnings look better. Mr. Greenberg resigned as chief executive after regulators sent a wave of subpoenas to the company; eventually A.I.G. restated earnings covering a five-year period.

His successor tried to restore confidence in the company but his efforts did not meet with investor approval and he was replaced this summer, after the company announced that it lost $7.8 billion in the first quarter of the year, the biggest loss in its history. In August it announced that it had lost another $5.3 billion in the second quarter.


Anonymous Anonymous said...

Secured loan or unsecured loan? And if secured, what's the collateral?

10:12 AM  
Blogger no_slappz said...

The loan is secured by the assets of AIG.

Credit-card debt is unsecured debt. The credit card company has nothing but your PROMISE of repayment backing your bill.

AIG has a lot of assets, and despite the hysteria, the assets are worth far more than ZERO, and I think the assets will sell for enough to repay the loan.

11:06 AM  

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