Past Haunts AIG as Bailout Solution Announced

November 12, 2008

Is American International Group, Inc.’s (AIG) hosting of a conference for independent financial planners a sign that the company is rising from the ashes with the help of a newly announced bailout from the U.S. Treasury and Federal Reserve or just the latest in a string of high-profile and expensive mistakes?

Two months ago, the U.S. government and American taxpayers saved AIG from collapse by loaning the company a record $85 billion. AIG executives used the money to go on the now infamous hunting trip. Not long after that, the company paid more than $400,000 to send top-performing insurance agents on a week-long retreat. So it is understandable that people - the media, taxpayers, politicians, regulators - view AIG’s hosting of a $343,000 conference in Phoenix, Arizona with some skepticism.

The skepticism is deserved. Especially since the bailout increased to more than $150 billion on Monday. The solution, outlined in a public statement from AIG distributed to the media on Monday includes:

The purchase of $40 billion in newly issued AIG perpetual preferred shares and warrants to purchase the equivalent of 2 percent of outstanding AIG common stock by the U.S. Treasury Department. The perpetual preferred stock carries a 10 percent coupon with cumulative dividends. Proceeds from the sale of the preferred and common stock will be used to pay down the credit issued by the Federal Reserve Bank of New York (FRBNY).
The existing FRBNY credit will be revised to reflect a total commitment of $60 billion, an interest rate of LIBOR (London Interbank Offered Rate) plus 3 percent annually, a 0.75 percent fee on undrawn commitments and a 5-year loan term.
AIG will transfer mortgage-backed securities to a newly created financing entity capitalized with $1billion in subordinated funding from AIG and up to $22.5 bilion in senior funding from FRGNY.
The purchase of approximately $70 billion in Multi-Sector CDO exposure by a second financing entity created by AIG and FRBNY.

“Today’s actions send a strong signal to our policy holders, business partners and counterparties that AIG is on the road to recovery,” Edward M. Liddy, AIG Chairman and CEO said in a statement. “Our comprehensive plan addresses the liquidity issues that threatened AIG, and gives us the financial flexibility to complete our structuring process successfully for the benefit of all our constituencies.”

Comparatively, the $23,000 that the Arizona Republic reports as the total cost AIG said it incurred for the Phoenix conference barely registers. Even if AIG picked up the full cost of the conference, it’s only slightly more than 0.2 percent of 1 percent of the total bailout cost so far. In addition, the company reports that financial planners like those attending the conference generated almost $200 million in revenues this year, as of September 30.

After being exposed by local then national media, Larry Roth told the Arizona Republic “Our success in enlisting product sponsors to pay for the vast majority of costs, while charging financial planners a registration fee and for their travel, has resulted in minimal cost to AIG.”

Liddy concurs, saying “We conducted a top-to-bottom review of all expenses of the Phoenix meeting in advance and found that it was consistent with my October 10th directive [to reduce expenses, conserve cash and cancel all nonessential conferences and meetings, unnecessary travel and excessive overhead]. This conference was approved because it provides the kind of communication we must conduct with the people who sell our products if we are to be successful and repay the U.S. taxpayer.”

Minimal cost is not free. The public is understandably skeptical of AIG’s explanations given their past behavior. There are some indications, however that this explanation has some truth to it.

Phoenix is the headquarters of AIG Financial Advisors (AIGFA) minimizing travel costs for AIG employees. Nearly 2,000 independent, fee-based financial advisers are affiliated with AIGFA, a registered broker-dealer and member of financial Industry Regulatory Authority (FINRA). On of the responsibilities of a registered-broker dealer under National Association of Securities Dealers (NASD) Rule 1120, Continuing Education Requirements, is providing registered covered persons with formal product- and regulatory-related training.

The goal of the bailout was to allow AIG to survive. Some conferences and formal training are part of doing business for a financial company. If AIG is to continue operations, let alone begin rebuilding itself or repaying taxapyers, they are going to have to spend some money to do it. but they have only themselves to blame if the public uses past experience to judge the company’s present and future actions for some time to come.

Update from Morgan:

AIG sent this email to us in response:

Good Evening,

I hope this note finds you well. I know you and your readers have been following AIG and I wanted to send you this note in case the news we issued today hasn’t already found its way to your readership.

Today, Edward M. Liddy, Chairman and Chief Executive Officer of American International Group, issued the following statement.

“Recent news reports have grossly mischaracterized an American International Group seminar for 150 independent financial planners held in Phoenix last week.

The financial planners are not AIG employees. In addition, the cost to AIG for this event was minimal. More than 90 percent of the costs were paid either by sponsors or by the independent financial planners themselves.

It is essential for AIG to conduct seminars of this kind to keep independent financial planners abreast of investment products and services including those offered by AIG. The financial planners are responsible for generating almost $200 million in revenue this year for AIG as of September 30th.

On October 10, I issued a directive to all AIG employees and subsidiaries to reduce expenses and conserve cash, including cancelling all nonessential conferences or meetings, unnecessary travel and excessive overhead. Since then, we have canceled more than 160 events. We conducted a top-to-bottom review of all expenses of the Phoenix meeting in advance and found that it was consistent with my October 10^thdirective.

This conference was approved because it provides the kind of communication we must conduct with the people who sell our products if we are to be successful and repay the U.S. taxpayer.”