AIG, a symbol of financial crisis, repays bailout loan and finds new foothold

By Brady Dennis
Washington Post Staff Writer
Saturday, February 5, 2011; 10:56 PM

Early on Friday afternoon, Jan. 14, more than a dozen employees from the Federal Reserve Bank of New York headed out for a celebratory lunch in lower Manhattan. They chose the Ketch, a restaurant on the first floor of American International Group's iconic headquarters building, at 70 Pine St.

Although AIG had recently sold the art deco skyscraper and relocated nearby, it seemed a fitting place to mark the occasion. Hours earlier, AIG had repaid the final chunk of the New York Fed's $85 billion emergency loan used to rescue the company in September 2008. After two tumultuous years, the Fed was off the hook, the Treasury Department appeared poised to turn a hefty profit on its AIG stake, and the company that had become a symbol for the recklessness and excess behind the financial crisis was looking more like a blessedly boring insurance firm again.

In Washington that afternoon, Robert H. Benmosche - AIG's rambunctious, strong-willed chief executive, who had come out of retirement to try to revive the troubled insurance giant - was taking a victory lap of his own.

He had been ushered into the Oval Office for a brief, unpublicized meeting with President Obama, who thanked him for stepping into a mess and helping turn the tide. Afterward, Benmosche shared a private lunch with Treasury Secretary Timothy F. Geithner.

Then, the 66-year-old executive, a towering man with a shock of gray hair, headed to a downtown office suite for a round of television interviews about AIG's reversal. His boyish face displayed a mixture of weariness and contentment as he settled into a chair overlooking New York Avenue. A former MetLife chief executive, Benmosche had arrived in 2009 at a company mired in controversy and saddled with uncertainty.

A year and a half later, AIG no longer was anathema on Wall Street or in Washington, though the firm's future as an independent company was still no way assured. Critics continued to find fault with the rescue, some arguing that the terms were too generous to AIG, others that they were too onerous.

As Benmosche went before the cameras, Jim Millstein watched intently from his cramped office on the second floor the Treasury Department building. Millstein, a 55-year-old former banker at the investment group Lazard, had been a central engineer of the plan to place AIG on more solid footing and put taxpayers in position to reap a profit from a bailout that had once reached a commitment of more than $182 billion.

Silver-haired and salty-tongued, he had built a long resume of corporate restructurings, but the complexity and public scrutiny of those assignments paled in comparison to AIG.

Now Millstein stood with his hands on his hips, watching the positive headlines about AIG roll across a small television in the corner as Benmosche spoke.

"I can't believe we got all this done in this short a time," he said.

Detractors of the federal rescue have disparaged both the government's handling of the bailout and the Wall Street banks that directly benefited from it, and taxpayers have yet to recoup a sizable portion of their huge investment in the once-mighty insurance giant.

Still, the transformation of the company over the past 18 months has surpassed nearly all expectations. In early 2009, AIG looked like a lost cause. It had more than $130 billion in debt coming due, its stock price had fallen off a cliff, and the company had continued to hemorrhage money despite an ever-growing federal bailout. In addition, AIG had managed to infuriate the president, lawmakers and millions of Americans by continuing to dole out millions in executive pay.

The company's fortunes began to turn, thanks in part to improving market conditions but also to a willingness to alter the original strategy and pursue a new course.

The story of how AIG was pulled back from the brink is a tale of trial and error, of a determined but sometimes precarious effort to find an exit from the most momentous of all Wall Street bailouts. It was marked by long days and short tempers, internal conflicts and repeated arguments over strategy. Feuds simmered within the AIG boardroom and between the company and its government overseers.

"They were all really hard decisions, and we'd never done this before," said Sarah Dahlgren, 47, a 20-year New York Fed veteran who was tapped to lead its AIG team. "There was no playbook."

In early 2009, many in the government and at the company were in despair.

That March, AIG posted a $62 billion loss for the fourth quarter of 2008 and a nearly $100 billion loss for the year - the largest in U.S. corporate history - even as the rescue package of Fed loans and Treasury-provided cash from the bank bailout program continued to mount.

AIG, once a highly rated company operating in more than 130 countries, had embarked on a frenzied strategy to pay back the government, selling many of its global assets.

But that approach had foundered. The credit markets were in tatters, buyers were in short supply, and the company faced pressure to sell at rock-bottom prices.

In a cramped conference room known as the "submarine" inside the fortresslike New York Fed, more than a dozen employees who constituted the institution's AIG task force were working marathon days, crammed elbow to elbow around a long wooden conference table.

"Each month you think you're making progress, and then something else happens," said Dahlgren, who had taken to staying in the city during the week and visiting her family in Westchester on the weekends.

Millstein, who had worked on Obama's transition team, returned to Washington that spring as the Treasury Department's chief restructuring officer.

AIG "was totally toxic, and nobody really wanted to be identified with it," Millstein recalled. "And also, it looked like it was going to collapse." Millstein soon found himself spending all his time on AIG.

Benmosche was enjoying retirement at his 8,000-square-foot villa along the Adriatic Sea in Dubrovnik, Croatia, awaiting the harvest at his nearby zinfandel vineyard, when the call came in late spring 2009.

AIG's chief executive at the time, Edward M. Liddy, had given notice that he would be stepping down, and the search for his replacement had turned to Benmosche.

"I wasn't interested in talking," Benmosche said.

But he agreed to meet with the company's search committee during a trip to New York and realized "this was a real big issue," both for the insurance industry and the larger economy.

When Benmosche landed at AIG that August, he wasted little time in living up to his promise to be forceful and outspoken.

During a town hall meeting for employees in Houston, Benmosche criticized Congress for vilifying AIG employees over roughly $165 million in bonuses paid to employees at its Financial Products division, whose troubled derivatives portfolio had nearly caused the company's collapse.

Benmosche's combative remarks instantly lifted morale within the company.

He also spent months butting heads - first over his own pay, then his executives' - with Kenneth R. Feinberg, the Obama appointee responsible for setting compensation levels at a handful of bailed-out firms.

Feinberg had been moving to significantly curb pay for the highest-paid executives at AIG at a time when executives were already feeling discouraged.

The conflict culminated that November when Feinberg, Millstein and Herb Allison, the Treasury Department's assistant secretary for financial stability, gathered in AIG's 18th-floor boardroom.

" 'I've got to be able to keep people,' " Benmosche recalled telling Feinberg. "I said, 'If this keeps going, I don't know if I should stay here. . . . We'll have such a demoralized team.' "

"You guys just don't get it!" Feinberg fired back in his thick Boston accent. "I'm trying to help you."

He said he was trying to walk a fine line between allowing fair pay while not reigniting public uproar over bonuses at AIG. Simply rubber-stamping their requests for executive compensation, he said, would not save them from an angry Congress.

By year's end, the two sides agreed on a plan. Feinberg allowed higher pay in a few specific cases, and AIG consented to a pay structure that relied more heavily on long-term performance.

AIG still needed one thing above all else: cash. Only cash would help the firm eliminate its huge loan from the Fed and put it in a position to pay back the Treasury Department.

Early on, government officials and AIG executives recognized that the company's crown jewels - Asian-based American International Assurance, or AIA, and American Life Insurance Co., or Alico, which operates in more than 50 countries - could provide the solution if put up for sale.

Moreover, Millstein and Dahlgren had become convinced that unloading those giant subsidiaries made strategic sense, so AIG could be reorganized around a pair of remaining businesses: life insurer SunAmerica and property-casualty insurer Chartis.

By early 2010, AIG was in the final negotiations in a deal to sell Alico to MetLife for $15.5 billion. The company also was weeks away from a public offering of AIA on the Asian market.

What the board of directors did not know, however, was that Benmosche had been talking privately with Prudential chief executive Tidjane Thiam about a possible outright sale of AIA for roughly $35 billion.

Benmosche wanted to make a big sale, though some board members did not share his sense of urgency.

For weeks, he and Millstein - who on one occasion met secretly with Thiam in a suite at the Willard hotel during a Washington snowstorm - negotiated the details of a deal while keeping the AIG board in the dark.

Finally, the two men notified the board's chairman, Harvey Golub, who was furious that he and other members had not known about the deal.

The majority of the AIG board voted in favor of the move. But Prudential's board voted the deal down, dashing any hope of a quick sale.

The episode exposed a growing rift between Benmosche and Golub, and Benmosche threatened to leave if the chairman remained. Golub resigned before the board members were forced to choose.

The failed deal also underscored for officials at the Fed and Treasury that not everyone within AIG felt the same urgency to free the company from government support.

In the summer of 2010, Millstein, Dahlgren and their teams, working with AIG executives, hammered out details of a plan to come up with the badly needed cash.

"By July, there was a consensus on the broad strategy," Millstein said. "Then everything started to fall into place."

In November, AIG raised nearly $37 billion in cash between the sale of Alico and the successful public offering of AIA in Hong Kong .

In a deal that closed last month, the company used those proceeds to pay off the Fed loan. At the same time, the Treasury converted its preferred shares in the company into 1.66 billion shares of common stock, giving the government a 92 percent stake in AIG that the Treasury plans to sell over the next two years.

The stock offerings, which will be underwritten by four leading banks, could commence as early as March. If AIG's stock holds steady, the government stands to make nearly $20 billion on its investment over time.

Millstein said this windfall would be justified because taxpayers took "enormous risk" in bailing out AIG.

While some critics, such as former AIG chief executive Maurice "Hank" Greenberg, say the government stands to make too much off the rescue, Millstein countered that companies must understand there's a stiff price to be paid for "leaving yourself in a position where you need that help."

Millstein said the Treasury Department won't celebrate until it sells the last of its AIG shares, but he probably won't stick around for that. His wife and two teenage children have taken a liking to the nation's capital, and he's already exploring other potential turnaround projects in Washington, both in the public and private sectors.

Dahlgren recently became head of the New York Fed's bank supervision group, which oversees some of the country's biggest financial firms. The rest of the AIG team is tying up loose ends and moving on to other assignments.

Benmosche seems at ease these days, heaping praise on the same government officials that he often wrestled with over the past year and a half.

Meanwhile, Benmosche has been fighting a separate battle - a personal one, against cancer. He has not divulged details about his illness, saying only that it is incurable but treatable.

Last month, Benmosche revealed to the AIG board that he had received an encouraging prognosis that will allow him to remain in his role for at least the next 12 to 18 months - long enough, he hopes, to see the last Treasury shares sold.

"I've always believed in my life that when you start something, you finish it. And we're not finished yet," he said. "I want to be able to see it through."

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