In an open letter to current AIG Chairman Ed Liddy, past Chairman and CEO Hank Greenberg offers his alternative plan for the bail out of AIG.
As you can tell from a reading of the letter, as well as the accompanying story in The Wall Street Journal, this is a significant departure from the plan as it is currently structured. Primarily it gives the US a preferred stock position with an annual dividend and mark up on sale compared to the onerous loan and debt repayment structure with warrants that the current plan provides.
It gives you an idea of how the deposed chief of AIG, and the man who built it into the financial and insurance giant it became, would have handled the negotiations under the same circumstances. He obviously, as the companies largest single shareholder, is deeply disturbed over the structure of the current deal as it will lead to a massive loss of stock holder value.
Some thoughts about the Greenberg plan:
1. It exposes and addresses the exceptionally high interest rates charged on the loans and the rather perverse incentive to use the money due to the way the interest rates are treated between "used" and "unused" portions of the loan. Greenberg feels a preferred dividend at 5% to 6% is a more realistic cost of money and doesn't saddle the company with crippling monthly loan interest, which is currently running at $1 billion per month.
2. He points out that the AIG bail out was geared to protect AIG transactional counter parties on the loan agreements and insurance, as the loan bail out wipes out stockholder equity, risks the viability of the company going forward and puts thousands of jobs at risk. This is a veiled reference to the widely held belief that the bail out was structured to protect other banks and investment banks up the food chain with little regard for stockholders, employees and pension holders who held AIG stock.
3. He feels, as do I, that the current deal runs the risk of forcing the effective liquidation of the company as the interest rates are brutal, the time frame is short to locate buyers and the enterprise risk to the company of the deal terms harms the ability of management to keep their insurance operations running as they did for the years leading up to this debacle. While everyone is cheering for the company to come out of this essentially intact, the structure of the deal forces the management into choices which aren't ideal for maximizing shareholder and enterprise value.
4. I appreciate Greenberg giving us all a specific glimpse into what he feels would work, but I think there is no way AIG gets the deal reversed due to the voters anger over the entire bailout and market crash in general. The dye is cast and it's up to Ed Liddy and his management team to get the best possible outcome for the business under incredible duress and a crushing debt burden with the government.
Obviously, there are a lot of companies, first and foremost Lehman who was allowed to die and AIG which was given a devils deal to save it, who are looking at the new deals coming out of Congress and Treasury and realizing they were hammered and other companies will survive, only as a result of timing. It is a brutal fact of life right now and AIG is going to need all the managerial and executive skill they can muster to come out of this with a viable P&C component as it their stated goal. Who knows, maybe Greenberg and the AIG shareholders can prevail on Congress and Treasury to alter the deal, but I wouldn't spend much time on that hope.
Bottom line, the company is going through a wrenching change and while the policyholders are clearly protected, the future remains uncertain for the "Big AIG" and the shareholders under the existing deal worked with the Feds.