By Brady Dennis
Washington Post Staff Writer
Tuesday, March 3, 2009
Despite the latest federal bailout, American International Group still faces months of peril and uncertainty, a prospect that the company acknowledged yesterday as it reported staggering losses of $61.7 billion for the fourth quarter and nearly $100 billion for all of 2008.
AIG, in announcing the largest losses of any U.S. company in history, outlined a series of potential pitfalls, any of which could derail its efforts to pay back the billions of dollars it owes taxpayers and force it to ask the government for even more money.
Among the key concerns: Further deterioration in the value of AIG's assets, which could make selling them either impossible or foolish and could cause further harm to the company's balance sheet. The continuing departure of key employees, agents and customers, prompting even weaker earnings and doing more harm to AIG's bruised reputation. An additional downgrade of AIG's credit rating, which would trigger more demands for collateral from the company's trading partners and sink the insurer deeper in debt.
"If one or more of these possible outcomes is realized," the company noted in its annual report yesterday, "AIG may need additional U.S. government support."
The most recent rescue package, unveiled by the government yesterday, involves a combination of cash investments, debt relief and guarantees from the Treasury Department and Federal Reserve. The government announced it would provide up to $30 billion more in public funds to stave off further downgrades of the company's credit rating. By again overhauling the bailout, officials provided the ailing insurer with a luxury it had very nearly exhausted: Time.
The revised package frees AIG from having to sell its assets in badly depressed global markets and reduces costly dividend payments to the government, giving the company a measure of flexibility to weather the worst economic calamity in generations.
But many observers say it remains almost inevitable that the company will require even more help.
"It's just going to get harder," Rob Haines, senior analyst at CreditSights, said of AIG's reworked bailout. If the economy continues to tank, the company will keep posting massive losses and need more support. "In the near term, the government might have to bail them out again. It's just a fact of life," he said.
He added, "If there was no systemic risk, they'd be happy to let this company go. It'd be gone." But, he said, "AIG just happened to have this systematic kind of exposure. They just can't let it go."
Federal officials this week acknowledged that sinking tens of billions of taxpayer dollars into AIG is hugely expensive, but they insisted that allowing the company to fail would ultimately prove far more costly.
"The steps announced today provide tangible evidence of the U.S. government's commitment to the orderly restructuring of AIG over time in the face of continuing market dislocations and economic deterioration," the Fed said in a news release yesterday. "The additional resources will help stabilize the company, and in doing so help to stabilize the financial system."
That show of commitment was in large part what prompted the major credit-rating agencies to support the bailout revision and hold off downgrading AIG, despite the mammoth losses.
"It gave the company a great deal more flexibility," said Rodney Clark, a credit analyst at Standard & Poor's. "It takes care of the problems that are there now, but it doesn't eliminate the possibility of other problems if the markets continue to be down. Does it eliminate all the risk? No, it doesn't. But it does show that the Fed and Treasury are working to find as creative a solution as possible."
Under the revamped bailout, AIG would satisfy part of the $40 billion obligation it has to the Fed by giving the government equity stakes in two of the company's crown jewels, Asian-based American International Assurance and American Life Insurance, which operates in more than 50 countries. Each subsidiary will be placed in a separate trust, with the government given preferred shares and paid about a 5 percent dividend. AIG will continue to operate the companies and eventually can sell them or take them public.
In addition, the deal allows AIG to free itself from some of the dividends it previously had to pay the government on its preferred shares. The government also agreed to purchase a sizable slice of AIG's domestic life insurance business for $8.5 billion. It could choose to sell that business or keep any income it provides. Company officials also plan to combine AIG's domestic and foreign property-casualty units into a single operation, with new leaders and a new name, and potentially sell 20 percent in a public offering.
Donn Vickrey, chief analyst at the financial research firm of Gradient Analytics, said federal officials and AIG appear to be earnest in their efforts to craft a structure that offers AIG a chance to pay back at least some of the debt it owes to taxpayers. But he said the company will undoubtedly struggle to make money as it loses insurance customers and employees. "Their operations aren't generating enough case to pay for their obligations, and they can't sell [their assets] for enough to pay what they owe," he said.
In addition, as AIG is forced to sell off assets over time, it will inevitably wind up as a shell of its former self, Vickrey said. "AIG as we know it will be history," he said. "It will cease to exist."
Few critics have been as outspoken about the government's approach as former AIG chairman Maurice "Hank" Greenberg, who was forced out in 2005 after nearly four decades at the helm.
"With this last move, it's destroyed. It's irretrievably broken," Greenberg said yesterday of the latest plan. "The only way to save AIG was to rebuild it, not to destroy it. Now they're just breaking it up into pieces. The whole together was stronger than the pieces. They'll never be another AIG as we knew it."
Worse, Greenberg said in an interview, there remains little if any chance that taxpayers will ever see a return on their massive investment in the company.
"I don't see how that's going to occur," he said. "They're going to be losing people and business. It's going to be worth less by the quarter."
Early yesterday, on a conference call with investors, AIG Chairman and chief executive Edward M. Liddy struck a different tone. Sure, the "marketplace is a pretty crummy place to be right now," he said, and "when the world catches pneumonia, we get it, too."
He painted the picture of a smaller, downsized AIG as a good alternative to the "complicated, unwieldy and opaque" behemoth that operates in more than 130 countries.
He also vowed, despite the myriad challenges ahead, that AIG could restructure itself while "protecting our policyholders and providing a return to the U.S. taxpayer."
"It's easy to look at the AIG story and conclude that we just don't seem to be able to make any progress," Liddy said, but "we are still alive."
As for the future:
"Who knows what happens in the future?" he said.
Staff researcher Madonna Lebling contributed to this report.