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New York Times, March 15, 2009 column


The New York Times




March 15, 2009

Fair Game

At A.I.G., Good Luck Following the Money

WE return this week to the subject of the American International Group, the giant insurer that has received $170 billion in taxpayer guarantees, because the clamor over its rescue continues to grow. Of concern to those on both Capitol Hill and Main Street is the secrecy surrounding the $50 billion funneled to A.I.G.’s counterparties since it nearly collapsed last fall.

Now that we live in bailout nation, why does the A.I.G. rescue rub so many the wrong way? Here is a hypothesis: Even as investors, employees, communities and taxpayers have been battered by the crippled financial system, A.I.G.’s counterparties were saved from losses on deals they struck with the insurer.

Add the fact that the government has resisted revealing these companies’ identities or how much federal money they received, and it’s easy to see why resentment boils. As a result of the A.I.G. rescue, taxpayers own almost 80 percent of the company. (Friday evening, as this column was going to press, rumors were swirling that A.I.G. might be releasing a list of all of its counterparties.)

Representative Carolyn B. Maloney, Democrat of New York, said she had twice asked for a full accounting from Ben S. Bernanke, the chairman of the Federal Reserve, which arranged the A.I.G. rescue. She has not received it.

“They have told others it is proprietary information,” Ms. Maloney said in an interview. “But we are the proprietors now. Taxpayers own the store, and we should be able to see the books.”

A.I.G., at one time the world’s largest insurer, sold contracts to these sophisticated counterparties that theoretically protected them from losing money if the debt they had purchased defaulted. Known as credit default swaps, the contracts offer the same kind of protection a homeowner receives from an insurance policy against fires and other unforeseen calamities.

The arrangements behind the deals produced fees for A.I.G. while the firms buying the contracts got peace of mind. No one thought A.I.G. might have to pay hundreds of billions of dollars in claims. Until, that is, A.I.G. came under financial pressure last year.

When the government stepped in to rescue A.I.G., its main and very reasonable concern was that a collapse of the insurer would drag down with it other big financial companies that were its customers. So the government shoveled taxpayers’ money into A.I.G., beginning with an $85 billion loan last September.

Then the rescuer went mum.

Officials at the Fed, who continue to oversee the A.I.G. rescue, have taken the position that the terms of the insurers’ contracts are confidential and that it would be wrong for the government to break those promises by naming recipients of taxpayer money. Another concern may have been that disclosures of A.I.G.’s counterparties might make investors and depositors uneasy about the well-being of the firms getting the money.

According to people briefed on the situation who were granted anonymity because they were not authorized to talk about it, the counterparties that taxpayers have bailed out include Goldman Sachs, Merrill Lynch and two French banks, Calyon and Société Générale. Along with other unidentified entities, the counterparties have received 30 percent of the $170 billion allocated to A.I.G. (Goldman has said that it had insulated itself from any financial damage that might have resulted from an A.I.G. collapse.)

Even A.I.G.’s own independent directors haven’t been told which of the counterparties were paid, according to a person with direct knowledge of the matter who requested anonymity because of confidentiality agreements.

SUCH secrecy raised hackles because the insurance claims were paid off in full, even though widespread defaults on the underlying debt have not occurred. Why, many people wonder, did the Fed make A.I.G.’s counterparties whole on losses that have not happened yet? Why didn’t it force these financial companies to close out the contracts at a discount, making them take what is known on Wall Street as a “haircut”?

Robert Arvanitis, chief executive of Risk Finance Advisors in Westport, Conn., and an expert in insurance, speculated that the United States was afraid that A.I.G.’s foreign bank counterparties would suffer large hits to their capital cushions, the amount they must set aside in case of losses.

“If somebody takes away the A.I.G. guarantee, all of a sudden the banks’ capital ratios look bad,” he said. “It might have stretched some of these banks.”

Still, Mr. Arvanitis said, it is not clear that the government had to pay out 100 percent of the contracts’ value to all the counterparties. Healthier institutions could have been persuaded to take a haircut, he said. “That is what tough negotiators do,” he added.

The government installed Edward M. Liddy as chief executive of A.I.G. when the company was bailed out. A former chief executive of Allstate, Mr. Liddy was also a director at Goldman Sachs before he joined A.I.G.

And in January, the Fed appointed three trustees to oversee the insurer. Their job is to maximize the company’s ability to repay amounts owed to the government and to ensure that A.I.G. is managed “in a manner that will not disrupt financial market conditions,” according to the Fed.

The trustees are Jill M. Considine, former chairman of the Depository Trust Company and a former director of the Federal Reserve Bank of New York; Chester B. Feldberg, a former New York Fed official who was chairman of Barclays Americas from 2000 to 2008; and Douglas L. Foshee, chief executive of the El Paso Corporation and chairman of the Houston branch of the Federal Reserve Bank of Dallas.

The trustees have already rankled a big A.I.G. shareholder. The American Federation of State, County and Municipal Employees pension plan, which owns 18,000 shares of A.I.G. common stock, had put forward a shareholder proposal on executive pay that it hoped would be put to a vote at the company’s annual meeting in May.

The proposal asked the company to adopt a policy requiring senior executives at A.I.G. to retain a significant percentage of the shares they received as compensation until two years after they left the company. Such a policy would help reward performance based on long-term value creation for shareholders, the pension plan said.

But Richard Ferlauto, the director of corporate governance and pension investment at Afscme, said A.I.G. trustees have indicated they oppose the proposal. But Kevin F. Barnard, a lawyer at Arnold & Porter who represents the trustees, said they were still considering the proposal. “To my knowledge, they are batting ideas back and forth but have not made fixed decisions,” he said.

Mr. Ferlauto said the compensation debate at A.I.G. would be yet another indication of how A.I.G. sees its relationship with those who continue to bail it out of trouble: taxpayers.

“If they do vote against a reasonable compensation reform,” he said, “then it would be an appalling breach of faith with the American taxpayer.”



A version of this article appeared in print on March 15, 2009, on page BU1 of the New York edition.



Copyright 2009 The New York Times Company




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