AIG: What “Taxpayers” “Own” and “Invest”
posted by Lawrence Cunningham
Two shorthand references often used these days are how “US taxpayers own 80% of AIG” and “the government has invested more than $170 billion” in bailing AIG out. There is something in both common expressions. But the entire corporate finance and corporate governance structure put in place, and endlessly changing, is so unorthodox, that these expressions do not reflect their usually meanings.
Using them can be misleading in two different directions: (1) in terms of the 80% ownership notion, “taxpayers” have vastly diminished rights compared to the usual rights of corporate shareholders and (2) in terms of the $170 billion figure, the taxpayers have vastly less invested than that.
As to the ownership notion, a Trust whose sole beneficiary is the Treasury Department owns a series of AIG preferred stock (called Series C) that is convertible into AIG common stock that would represent 77.9% of AIG’s outstanding common shares, if converted. For now, the Trust also gets to vote on proposals to AIG’s common shareholders, including director elections, as if the preferred were converted, and receive dividends paid on common stock, as if it were converted.
But surely the “taxpayers” do not own that stock and certainly have no right to elect AIG’s directors. The Trust does. That Trust, in turn, is managed by three Trustees. These people are appointed by Treasury, not by taxpayers. The Trustees do not stand for election. Further, the Treasury Secretary is not elected by taxpayers, or removable by them, but is appointed by the President, and removable by him. The President, of course, serves a four-year term, whereas corporate director elections occur annually.
Furthermore, to the extent that the Trust functionally controls nearly 80% of the voting shareholder power of AIG, it is a controlling shareholder. That means that the Trust owes fiduciary duties to AIG and its other stockholders, including the common stockholders. Those include 10% holder Maurice Greenberg, former CEO who is implicated in the conduct that has caused the company’s catastrophic crisis.
The interests of the Trust and of Mr. Greenberg may come into conflict from time to time. Yet, under Delaware corporate law, the Trust must look out for Mr. Greenberg’s interests; under traditional trust law, the Trustees must look out for the interests of the Trust. The resulting conflict may be unmanageable in a variety of circumstances. Accordingly, it may be misleading to draw inferences of taxpayer ownership from this structure in any meaningful, appealing or comfortable sense.
On the other hand, as to the dollars of taxpayer funds, the total amount of cash transferred to AIG in exchange for the preferred stock appears to be approximately $65 billion (although it is difficult for me to verify that figure exactly). Most of the rest of the routinely cited $170 billion figure comes not from the taxpayer but from the New York Federal Reserve Bank.
According to AIG’s year-end financial statements, it has debts due to the NY Fed of about $60 billion. And AIG is repaying the loans, in part by selling assets and in part by negotiated transactions in which it is giving the New York Fed preferred stock in its profitable subsidiaries. In addition, the NY Fed has bought various assets from AIG and supported other transactions in a total amount of about $25 billion. AIG also has the right to borrow up to an additional $25 billion from the NY Fed. So the $170 billion (plus) figure considerably overstates the amount of “bailout” funding that “taxpayers” have transferred.
Overall, the complexity of this deal making and its totally unorthodox nature may be difficult to translate into simple sound bite terms. But it could be possible to improve upon the simple sound bites of taxpayers owning 80% of AIG with a $170 billion investment. Perhaps: AIG, the New York Fed and Treasury are partners in an unorthodox rescue mission that has little or nothing to do with taxpayers as such and everything to do with stabilizing a terrifying economic situation.
March 20, 2009 at 4:30 pm
Posted in: Current Events
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Responses (5)
Bill Sjostrom - March 20, 2009 at 8:46 pm
Any idea where the $170 billion figure comes from? The media initially seemed to be going with $180 billion, then $173 billion and now $170 billion. In my working paper on the AIG bailout, I came up with $179.8 billion or $200.7 billion if you include borrowings under the Fed’s commercial paper program. Recent GAO testimony puts the figure at $182.5 billion.
A.J. Sutter - March 20, 2009 at 10:10 pm
When you say “an unorthodox rescue mission that has … everything to do with stabilizing a terrifying economic situation,” are you speaking of the ostensible intent or of the likely effect of this “rescue mission”? If the latter, what would suggest that this mission will succeed?
Lawrence Cunningham - March 21, 2009 at 9:27 am
Bill: Thanks. The Treasury’s investment is relatively easier to measure, a couple of tranches of preferred stock payments that don’t change much; the NY Fed’s is harder because it is a combination of different types of long term debt, short term credit support, purchase of distressed assets at bargain prices, all of which is being repaid in various ways, including with cash from asset sales and transfers of other kinds of assets. Notably, the resulting capital strucutre is pretty clear: Fed is Debt; Treasury is Senior Equity; Greenberg et al are common equity.
Lawrence Cunningham - March 21, 2009 at 9:32 am
A.J.,
Hard to say, natch, but Ed Liddy appears to be doing an impressive job:
reducing AIG’s most dangerous book of business from $2.7 trillion to $1.6 trillion;
preserving the high-performing businesses;
paying down the Fed debt; and
most impressive and important of all, being unflappable and holding up as a responsible person before hysterical, irresponsible grandstanding among Members of Congress at a House Committee hearing Wednesday.
Lawrence Cunningham - March 21, 2009 at 4:11 pm
Update/Clarification: Making these points more acute, the Trustees of the Trust holding the preferred stock are appointed not by Treasury but the New York Fed, in consultation with Treasury. The Trust Agreement is here: http://www.newyorkfed.org/newsevents/AIGCFTAgreement.pdf
Those who run the New York Fed are even more remote from accounability to taxpayers.
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