Having heard about Treasury Secretary Hank Paulson's investments in the
nine leading banks, Maurice "Hank" Greenberg, American International
Group Inc.'s largest shareholder and former chairman and CEO, has a new
idea for an alernative to the Federal Reserve's $85 billion emergency
loan, which threatens to wash out shareholders and leave the company a
mere shell of its former self.
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In a Monday letter to AIG chairman and CEO Edward Liddy attached to
a Tuesday Securities and Exchange Commission filing, Greenberg said the Fed loan, which carries a
roughly 14% annual interest rate, including an 8.5% annual rate whether
AIG takes down the loan or not plus a 2% one-time commitment fee and
grants the government 79.9% ownership of AIG, "means that AIG cannot
pay off this loan from the proceeds of selling assets in this market,
nor can it pay the annual interest rate from earnings." He added, "by
requiring AIG to pay interest on money it does not borrow, the
agreement encourages the company to draw down the full amount of the
loan even if it does not need the capital. In order to service the
principal and interest on this loan, AIG will have no choice but to
engage in a fire sale of profitable assets."
Greenberg's plan: to
ditch the loan and instead issue the Fed nonvoting preferred stock in
AIG that pays a 5% to 6% annual dividend and to give AIG the right to
redeem the preferred shares over a period of 10 years at a 10% premium.
His plan is similar to that unveiled Tuesday by the U.S. Treasury that
has financial services companies selling billions of dollars of
preferred shares to the government "on attractive terms that protect
the taxpayer," as stated by the Treasury. Those initially tapped by the
Treasury to participate are Bank of America Corp. and its newly
acquired Merrill Lynch & Co., Bank of New York Mellon Corp.,
Citigroup Inc., Goldman, Sachs & Co., J.P. Morgan Chase & Co.,
Morgan Stanley, Wells Fargo & Co. and State Street Corp.
So if
all those guys can get a fair deal in exchange for a little bailout
money, why can't AIG? Maybe staring bankruptcy in the face eliminated
any bargaining chip AIG might have had.
Any window that AIG might have had to renegotiate terms seems to be
closing quickly. The struggling insurer, which has yet to announce any
asset sales to pay back the Fed, by the first week of October
reportedly already drew down $61 billion on the loan and by the
following week asked the Fed for roughly $38 billion more. And the Fed loan did not call for any shareholder approval as time
was of the essence in closing the deal. So I guess that means the Fed
could care less about what Greenberg and any other shareholder thinks. - Michael Rudnick
Michael Rudnick is a senior writer for The Deal.
