AIG Agrees to Break Itself Up
by Efin Advisor | March 1, 2009
The Financial Times reports that AIG will announce a radical plan to break itself up after 90 years as a global insurance conglomerate by ceding control of its two largest divisions to the US government in exchange for a $30 billion-plus lifeline.
“We are breaking up AIG but we are trying to do it in a way that preserves value for the taxpayer, the employees and the businesses,” said a person close to the plan, which was revealed by the Financial Times last week.
People close to the situation said the authorities, which already own 80 per cent of AIG, would get a controlling stake of 70-75 per cent in American International Assurance (AIA) – AIG’s large Asian operations – and American Life Insurance Company (Alico), a global life insurance business. The structure is aimed at giving the government a better chance to recoup taxpayers’ money when the two businesses are sold or listed.
AIG will also securitize $10 to $15 billion of cash flow from its US life insurance operations and sell the bonds to the government, insiders said. In return, the government will cancel most or all of the $37 billion it is owed from AIG as part of a $60 billion credit line it extended in November. The authorities will also lower the interest rate on the rest of the loan, saving AIG $1billion a year. And the government will provide a $30 billion standby equity line – a promise to buy preferred shares in AIG – that it can tap if needed.
Is this the last of it or will more bad news come out soon when more money or support of some sort is needed?
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So, here’s the thing- I fail to see how breaking up this company will save it any money in the long run. If it is several companies, it will have more operating costs, and overhead. It will need many more executives, more buildings, office supplies etc. This sounds like creating a massive euphemism in an attempt to pull the wool over the eyes of the taxpayer. It’s like if I re-brand “K-mart” as “Big K-mart” and expect people to pay more money for the same crap. This creates no actual change to operations, and diminishes the ability of the government to treat AIG as a massive, and necessary institution.
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This is a fantastic move, and I am overjoyed to see it occur. One of the main reasons that AIG has been in such a rut is that it is not able to adapt quickly to the changing economy. A smaller, more focused and agile company would be able to do that better. Hopefully this move will allow for AIG to continue providing its vital services to people, and will be able to exist in the current recession.
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Can anybody explain to me what this means? Is the government going to buy more shares of AIG in return for dropping its current debts? This has the unmistakable stench of the taxpayers getting shafted, again. Why would we want to buy more of this failing company when they have shown that they can’t even turn a profit from $700 B and now have to break up into many smaller entities. It may have worked for Paul McCartney, but it didn’t work out too well for the Soviet Union.
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What good will this do? It seems to me that it’d be better to have AIG around, as it already has a corporate structure and a name-brand. It’ll be pretty tough to sell a new company to people during these economic times. Yes, people know that AIG has failed recently, but they’ll still trust it more than Joe’s Insurance or whatever they’re going to form. It’ll also be a lot harder for a bunch of fledgling insurance companies to survive in this economic climate than one company that already as the potential for lots of capital. Bad move.
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