The outrage over AIG using taxpayer dollars to pay big executive bonuses has upstaged a potentially more important question for the troubled government-owned company.
AIG CEO Edward Liddy told a congressional panel he would ask employees to return some of the bonus money, which initially was defended as essential to the “unwinding” of trillions of dollars in bad bets and the sale of large chunks of the sprawling insurance conglomerate. But it remains to be seen how much of the company can be sold off at any price — and whether some of the biggest pieces can stay afloat long enough to complete the restructuring.
As Liddy faced a grilling from the House panel on Capitol Hill, President Obama continued to field questions about the use of hundreds of millions in taxpayer bailout money for AIG bonuses, including many payouts of more than $1 million.
"Just as outrageous is the fact we find ourselves having to clean up after AIG's mess," Obama told reporters as he prepared for a trip to California.
Cleaning up that mess is turning out to be harder than the government envisioned when it moved to bail out the failing company after a marathon weekend of negotiations last October. So far, the Fed and Treasury have pumped some $170 billion into AIG to keep it afloat while Liddy and other managers try to sell off assets and use the proceeds to pay back the government.
The justification for the bailout was that AIG was simply “too big to fail.” The company owns more than 30 separate operating units and has customers in more than 130 countries; it insures more than 100,000 entities that employ more than 100 million Americans, along with more than 30 million U.S. policyholders. The fear was that a failure to make good on hundreds of billions of dollars worth of loans, insurance and other financial commitments to dozens of the world’s biggest institutions would further destabilize the already-shaky global financial system.
But AIG is also just “too big to manage,” according to Liddy, who joined AIG as CEO in September.
“The company's overall structure is too complex, too unwieldy and too opaque for its component businesses to be well-managed as one entity,” Liddy wrote in The Washington Post Wednesday.
The strategy the company is pursuing is to sell off as many pieces as possible to pay back the money advanced from the Treasury and the Fed and keep the healthy businesses afloat to generate profits for taxpayers.
There’s plenty to sell. AIG is a sprawling holding company with its fingers in dozens of businesses, from various lines of insurance — including life and property-casualty — to asset management, real estate lending, aircraft leasing, and investment products and services for both big institutional investors and consumers.
When it announced plans to sell off pieces of the company in October, the company said it would put everything up for sale except its U.S. property and casualty business, its foreign general insurance and stakes in some foreign life insurance operations. But putting a price tag on those assets has proved to be tougher than anyone imagined.
A big part of the problem is trying to estimate future profits during the worst global downturn since the Great Depression. In October, Merrill Lynch estimated total proceeds from the sale of all of AIG’s operating units could be anywhere between $98 billion and $140 billion.
The company has tried to keep some large divisions intact and sell them to single buyers. But that has narrowed the field of buyers. The U.S. life insurance and retirement services unit, for example, valued in October at between $17 billion and $26 billion, was bigger than all but three U.S. life insurers, according to Merrill Lynch. With credit hard to come by, raising the funds to finance such a large purchase also limits the potential market.
Other businesses are a tough sell because of the economic downturn. The company’s American General Financial Services, for example, is heavily involved in mortgage insurance and real estate lending.
With few buyers available, the government is faced with the prospect of continuing to pump money in the ailing company to keep it afloat.
That strategy is also risky. Earlier this month, the company posted a record $61.7 billion quarterly loss, prompting the government to come up with another $30 billion of fresh capital to keep it afloat. That bailout helped head off a downgrade of AIG’s credit rating that would have made it even harder for the company keep borrowing the money it needs to fund its operations.
The latest quarterly loss was AIG's fifth in a row and the biggest ever suffered by a U.S. company, equivalent to $465,000 a minute. For all of 2008, AIG lost roughly $100 billion, wiping out all of its profits back to the early 1990s.
The bailout of AIG is also proving to be a bigger drain on taxpayer funds because much of the money is flowing right through to "counterparties" — companies on the other end of AIG's bad bets, including big financial firms here and abroad.
AIG has paid out more than $90 billion of the governmnet bailout funds to firms including Goldman Sachs, Germany's Deutsche Bank, France's Societe Generale and others to cover their losses from credit default swaps, a type of bond insurance. If the government tries to halt these payments, it could end up creating bigger problems for already ailing banks that may not be able to sustain the losses.
"To the extent that you have positive capital and can write that down that’s fine," said Robert Johnson, former chief economist of the Senate Banking Committee. "To the extent that you’re probably a zombie bank already, that probably deepens the anxiety about your credit quality as other people drive up your funding costs."
The continued money drain and sluggish sale of assets — combined with the latest outrage over millions of tax dollars used to pay big bonuses — will likely increase calls for a bigger government role in managing the company. On Wednesday, Obama said one option was to set up a government agency that would manage the asset sales similar to the Resolution Trust Corp. that sold off real estate assets held by failed savings and loans in the early 1990s.
But unwinding a company like AIG is vastly more difficult than selling off real estate. The cleanup of the savings and loan industry also played out at a time when the economy and broader financial system were in relatively good shape.
That may be why Congress has been slow to set up a similar agency to manage the unwinding of AIG and other troubled financial companies. Johnson says there's another reason Congress has taken a "hands off" approach to AIG.
"We have a very awkward ritual going on on Capitol Hill," he said. "These people have been involved in money finance politics for years and years. And some of the people who are crowing the loudest are among the biggest benfieciaries of AIG and other campaign finance contributions. Now the population is enraged: They see they’ve been disserved by legislators making the rules at the behest of their contributors from the financial sector."