In Long Fight, AIG Braces for Losing Round
Ahead of Dire Report, the Firm's Leadership Moves to Restructure Its Rescue

By Brady Dennis
Washington Post Staff Writer
Thursday, February 26, 2009

Edward M. Liddy seemed weary as he wandered the 18th floor of American International Group's headquarters in lower Manhattan earlier this month.

The 63-year-old chairman and chief executive was fighting a cold. Fatigue had settled in around his small blue eyes. And he was shouldering burdens that cough drops and Kleenex could not solve.

"This place can be suffocating," said the man chosen by the government to lead AIG after a massive federal bailout last fall. "There's just an issue a second, and generally they're not good issues. Each rock has a scorpion under it. Or it has a bigger rock under it."

As AIG prepares to report another round of staggering losses next week -- some analysts estimate $60 billion for the fourth quarter of 2008 -- it could quickly find itself in the same predicament as last fall. The company's leaders are desperately hoping to stave off further downgrades to AIG's credit rating, which could force the company to pony up billions of dollars more in collateral to its trading partners and sink the firm into an even deeper hole.

The company has been immersed in talks with federal officials -- in daily conference calls and meetings at AIG and the New York Fed -- about once again restructuring the company's rescue package, which has grown to more than $150 billion.

Among the options is converting current preferred stock investment in the company into common stock, which would free AIG from paying costly dividends, according to a source familiar with the conversations. Another option would have the federal government forgive part of its outstanding loan to AIG in return for stakes in its operating divisions.

Federal officials also could choose to pump more cash into AIG, allowing the company to hold, rather than sell, its assets. Liddy has vowed to sell two-thirds of AIG's assets to pay back government loans, but that effort has suffered from falling values and hesitant buyers with their own credit problems.

A soft-spoken, genial veteran of the insurance world, Liddy arrived in September with a promise to employees that "the mess we're in is solvable." During his tenure, AIG's situation has gone from precarious to downright dire. The insurance titan's stock price has fallen steadily, to a paltry 46 cents. Congress and the public have clamored about fiscal irresponsibility, and investors and observers alike have questioned whether a company that was too big to fail might fail after all.

The trappings around Liddy's office hint of AIG's brighter days: Fine Asian art alongside stately wood tables and picture windows overlooking the financial district. Despite the outward elegance, AIG is tattered and bruised, and a sense of uncertainty pervades its towering headquarters at 70 Pine St.

Liddy shrugs off the grim predictions. "To run one of these big companies, you have to be an optimist," he said.

A fellow AIG executive put it this way: "Ed Liddy has the worst job in America."

* * *

The phone rang at Liddy's suburban Chicago home on Tuesday, Sept. 16. Treasury Secretary Henry M. Paulson Jr. was on the line.

AIG was teetering on the brink of bankruptcy, largely because of a troubled portfolio of exotic financial derivatives written by a subsidiary. After a frenetic weekend of discussions, the federal government had stepped in with an emergency bailout, taking a 79.9 percent stake in AIG and essentially nationalizing one of the world's largest companies.

"We need you," Liddy recalls Paulson saying. "It'll be more complicated than anything you've ever done in your life."

The two had known each other since the 1980s, when Liddy was an executive at Sears, Roebuck & Co., and Paulson was a rising star at Goldman Sachs. Liddy later joined the board at Goldman. After consulting his wife -- "It was not her idea of what I would be doing in retirement" -- he accepted the offer, packed a bag and flew to New York. He showed up for work at AIG the next morning.

He seemed a logical pick. Liddy, who has an MBA from George Washington University, had spent his early career at G.D. Searle, a Chicago pharmaceutical company, where he worked for Donald Rumsfeld.

Later that decade, Liddy arrived at Sears, where he played an integral role in restructuring the company and helping it divest itself of assets. He also oversaw the spinoff of Allstate, and soon joined the company as its chief operating officer. In 1998, he became the first outsider to head the insurer and led it until his retirement in April 2008.

"He has an extraordinary work ethic. He's as honest an executive as I've ever worked for," said Robert Pike, who worked with Liddy for a dozen years at Allstate. "It has to be a tremendous burden on him to do what he has been asked to do."

* * *

At AIG, Liddy has faced a mountain of obstacles. For starters, the government's short-term loan had a steep interest rate -- about 14 percent -- which would force the company to sell its assets at fire-sale prices and imperil any chance of repaying what it owed.

"I read the term sheet and repeatedly gagged at the relative harshness of it," Liddy said. "It was a rough deal."

He was astounded by the byzantine structure of the company -- subsidiaries spread across 130 countries -- stitched together by longtime chairman Maurice "Hank" Greenberg, ousted in 2005. "Hank built a great company, but he built a company only he could manage," Liddy said. "There's very few who really know how everything fits together."

He also inherited more than 100,000 apprehensive employees. "People here are just shellshocked," he said.

Liddy oversaw a restructuring of the federal bailout in November. The new deal eased the terms of the government's loan, included a $40 billion cash infusion and the federal purchase of more than $50 billion in troubled assets to help AIG clean up its balance sheet.

Around that time, Liddy ended the company's voluntary deferred compensation plans and announced there would be no 2008 annual bonuses and no salary increases through 2009 for AIG's senior executives. He said he would accept a $1 salary in 2008 and 2009, with the likelihood of receiving compensation in years to come.

He hired Seattle executive Paula Reynolds to manage the sale of global insurance operations that constitute 65 percent of AIG's assets and employ 70,000 people. He told anyone who would listen that the company would repay the government loan fully and quickly.

"I've been clear what our goal is," Liddy said. "In America, when you owe somebody money, you pay them back."

* * *

Liddy has been the target of a bevy of criticism, from questions about his qualifications -- "What does he know about a global operation?" said Greenberg -- to public outrage over more than $1 billion in retention payments the company set aside for thousands of employees -- "I've lost trust," said Rep. Elijah E. Cummings (D-Md.).

His most urgent concern is a looming lack of cash. In recent months, AIG has announced nine asset sales, but the total is a fraction of what it owes taxpayers.

"This is a terrible market into which to be selling valuable assets," AIG spokesman David Monfried said. "Nobody's got cash; nobody's got confidence in the market. Access to credit is very limited."

Whatever revisions are made to the federal bailout plan or to the company's current strategy, they must come soon.

"We don't have an indefinite time period here," Liddy said. "The passage of time, customer concerns, the competition, the 'Oh, AIG might fail, watch out' -- it doesn't help."

AIG's fate likely depends only partially on Liddy.

"He's extremely well-qualified," said Eric Dinallo, New York insurance superintendent. But "he's up against a very, very tough challenge. You don't question his qualifications. You just question whether anyone can do it. He may have been given an impossible task."

Liddy said he clings to hope. "You have to believe things are going to get better," he said. "You have to just keep plowing through."

Some weekends, he catches an American Airlines flight to Chicago to see his wife, three children and five grandchildren. Most days, after long hours on the 18th floor, the optimist slips into the bustle of Manhattan and walks to his small apartment in the heart of the city.

It's good to get fresh air, he says, and, if only briefly, to escape the troubles at 70 Pine.

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