It began over 100 years ago when an American businessman decided to start an insurance agency in Shanghai. Cornelius Vander Starr was one of the first westerners to ever venture into the Chinese insurance market. He sold insurance for quite some time until the rise of the Communist Party and Mao Zedong forced him to relocate his headquarters back to New York City in 1939 and AIG went public in 1969. AIG is actually a holding company for a large network of insurance subsidiaries with a wide variety of products and services including property, casualty, life insurance, financial services, retirement savings products, asset management, and aircraft leasing. The holdings of the company are widespread throughout Asia including Japan, Indonesia, Pakistan, The United Kingdom, and China. They started to take a foothold in higher-margin corporate insurance and moved from using agents to brokers to increase profits and take their business to a higher level.
AIG has had many years of success, but they have also had years full of scandal and poor management. AIG can only blame so much on the 2008 financial crisis for the misfortunes that resulted for them as a company. It started in September of 2008 when the credit rating of AIG was downgraded which resulted in a liquidity crisis. They were required to come up with additional collateral for their trading partners as consequence of the downgrade. Meanwhile, Joseph Cassano in the London division of AIG had entered into $441 billion of credit default swaps of which $57 billion were subprime mortgage-backed securities.
In 2008 the stock price of AIG had fallen to a mere $7.00, a far cry from the 52-week high of $70.13. AIG began to get desperate and turned to many sources to raise money. They were authorized to borrow $20 million from their subsidiaries and considered selling off their aircraft division to raise money. The U.S. Federal Reserve came to the rescue and extended a $67 billion loan in exchange for an 8.5% interest rate, a temporary 79.9% stake in the company, and the right to suspend dividends to common and preferred shareholders while they worked to pay down their debt. This seemed like a pretty good deal to AIG and its shareholders at the time considering the other option staring them in the face was bankruptcy.
The board of directors accepted the deal and started to get their company back on track. When it was all said and done, AIG paid back the $67 billion with $5 billion in interest. AIG recovered well compared to some of the others that received bailout money like Fannie Mae, Freddie Mac, and General Motors (NYSE:GM), which totals over $156.7 billion dollars of taxpayer money that has yet to be returned. Those 3 organizations out of the 926 bailout recipients account for almost 63% of the money that needs to be returned. It will take longer for the money to be returned for some of the bailouts, but the future profits will have to be phenomenal to beat the building interest.
When AIG was on the brink of collapse, the U.S. government came to their aid to avoid insolvency. At the time, no one else was willing to loan the amount of money the U.S. government was willing to put up on any kind of reasonable terms. With the help of the government and taxpayer dollars, AIG was saved. Even with the bailout, shareholders have not even begun to see a resurgence of pre-2008 numbers where the stock price hovered around the $1,500 mark in the middle of 2007. By March 6th of 2009, the stock closed at a price of just $7, about one half percent of where it was just 2 years before. This is a point of contention with the shareholders of AIG. It is actually such a large point of contention, that the shareholders have filed a class-action lawsuit in the amount of $25 billion dollars against the U.S. Government for some of their actions during the bailout. The case that they are presenting is that shortly after the controlling stake was taken, the U.S. Government did a reverse 1:20 stock split without the consent of the shareholders. This is a common practice among companies that are in dire financial straits in order to boost the price of the stock but the case points out that the shareholders had no vote in the matter. The argument is simply that the U.S. Government had no right to authorize the reverse stock split and that they violated the 5th amendment in an illegal taking.
The counterargument would of course be that at the time AIG was in dire financial condition due to poor investment decisions, management, and partially due to the state of the economy. It was AIG who accepted the terms of the bailout which included the government taking a significant stake in the company therefore allowing them to make a variety of decisions as the primary stakeholder. The reverse stock split was a move by the government to consolidate shares and boost the share price back up to reasonable place which it did raise it quite a bit. It has not reached anywhere near what it used to be, but that hope of getting back to $1,000 per share may be a pipe dream or a hope for long down the road. The shareholders and previous CEO Maurice Greenberg filed their lawsuit and sat before the current board of directors of AIG to ask them if they would join them in the suit on January 8th of 2013. AIG decided that they would have no part of moving forward with lawsuit brought forward by the shareholders and former CEO.
Even as outrageous as the class-action lawsuit seems on the surface, there are some valid arguments in between the far stretches that have some salt to them. Even though it may seem as though AIG is biting the hand that fed them, much of the bailout money that was delegated for them was distributed to their various counterparties immediately before they received a dime. Benefactors included Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC), Deutsche Bank of Germany (NYSE:DB), Societe Generale of France, and Citigroup (NYSE:C) which received a total of $100 billion of the total $182 billion allocated for the bailout. Furthermore, the government used the money and their controlling stake to pay back the banks on their derivatives they had entered into in full. After careful investigation, the Congressional Oversight Committee criticized the U.S. Government for "undermining the credibility of America's system of financial regulation." By taking the bankruptcy option off the table, they set the precedent for the future. Banks and insurance companies will continue to engage in risky investments and corruption if they know there will always be an easy way out. The lesson here is that accountability and consequences are necessary to make progress.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: This article was written by an analyst at Catalyst Investments.