Monday, June 29, 2009

The Fed is taking a stake in AIG's subsidiaries

The Fed has agreed to swap it's senior AIG debt for preferred equity in American International Assurance Company (AIA) and American Life Insurance Company (ALICO), extinguishing $25 billion of AIG debt. AIA is the Asian insurance firm and ALICO is the international life insurance and wealth management business. Both are profitable. Looks like the Fed got tired of waiting for AIG to sell assets and repay (at least some of) it's debt and took an ownership stake in a couple of it's stable businesses. Not clear if the Fed got a fair price, but at least the central bank will try to extract some value from this mess.

The various government support for AIG has shifted from secured loans to equity holdings, which will benefit AIG's unsecured debt holders. See chart from Moody's:



The key mistake the US government made with AIG is committing to make the preexisting creditors whole. Those who relied on AIG debt's "AAA rating" should have felt the pain as did so many others who trusted the "AAA". Unfortunately in September that wasn't a consideration. Many creditors of AIG were foreign institutions, but at the time Hank Paulson didn't feel like spreading the pain. Some even feel that Paulson pushed to make creditors whole in order to support his former employer Goldman, who was one of the creditors. If the government negotiated with the creditors even remotely as vigorously as they did with the auto debt holders, the taxpayer would be in great shape with respect to AIG.

The way it looks now, the Fed will probably get it's money back at some point in the future as the foreign subs of AIG may interest some strategic buyers - possibly in China or Singapore for AIA and someone like AXA for ALICO. That's assuming some stability in the capital markets. The Treasury's holdings are another story - AIG's US operation has a bit of a "brand" problem.



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