AIG Chairman Harvey Golub as Thomas Jefferson Jefferson: Corbis; Golub: Chip East/Bloomberg/Landov
Browse the BusinessWeek Archive
American International Group's (AIG) $35.5 billion deal to sell the AIA Group, its main Asian insurance operation, to Prudential Plc (PUK) of the U.K. collapsed on May 31 when the insurer's board refused to cut the price. The sale was seen as critical to the firm's ability to begin repaying the U.S. government's $182.3 billion bailout, and its failure was a setback for CEO Robert Benmosche, who had agreed to a lower price, only to be overruled by his board.
Bruce Berkowitz, however, was delighted.
AIG may have become synonymous with recklessness and the global economy's near-death experience in 2008, but for Berkowitz it's pure gold, and the company's luster only grew brighter with the failure to sell AIA—no matter how many headaches it causes the government. For months, says Berkowitz, who manages the $16.5 billion Fairholme Fund, he spent six hours a day studying the battered insurer and bought more than 30 million shares. He now ranks as the largest private holder of the company's stock. Only the U.S. Treasury, which has a nearly 80 percent stake, owns more. The government just wants its money back; Berkowitz says he expects to double his.
"I've got the greatest analysts in the world working for me," says the Miami-based investor, who in January was named stock manager of the decade by Morningstar (MORN). "There's the GAO, the New York Fed, the Treasury, Congress, all the advisers they've hired. And guess what, they're working for me for free. I mean, I don't think people appreciate what the government has put into this. If I'm wrong I don't deserve to be in business."
Berkowitz knows he is making a contrarian bet. He usually concentrates his investments in a small number of stocks in industries he knows, from insurance and banking to energy and telecommunications, and admits to being obsessive about his research. He doesn't like AIG merely because it is a ward of the state. He likes it, he says, because it has been transformed by good managers—and especially by a new, more independent board of directors, with several of its members appointed by the government. "AIG's going to prove to be one of the great restructurings in corporate history and the board is a big part of that," says Berkowitz. "They're doing a great job. They're taking their time."
A little more than a year and a half after the collapse of Lehman Brothers, amid nonstop debate, criticism, and anxiety, many of the government's most controversial financial rescue programs appear to be paying off. While the markets have been volatile, the economy is growing again, creating jobs. Stocks and some housing prices are up, returning many companies to profitability. Bank of America (BAC), Goldman Sachs (GS), Wells Fargo, (WFC) and even General Motors have been repaying some of the hundreds of billions of dollars in bailout funds, and the Treasury announced last week that it realized $1.3 billion in profit on the first sale of Citigroup (C) shares it had acquired.
Of all the wounded firms, AIG has always stood apart. It is the only company to receive money from a special Treasury facility called the "Systemically Significant Failing Institutions" program, and that is just one of its many life-support systems. Even as the firm gets the bleeding under control, skeptics abound. AIG's new board has privately expressed its own concerns about the firm's viability, people with knowledge of the discussions have said. Elizabeth Warren, chairman of a congressional panel overseeing the bailouts, said last month that some AIG units might have to file for bankruptcy to speed recovery.
Post a comment about this story in Reader Discussion…
Track and share business topics across the Web.
RSS Feed: Most Read Stories
RSS Feed: Most E-mailed Stories
RSS Feed: Most Discussed Stories
About Advertising EDGE Programs Reprints Terms of Use Disclaimer Privacy Notice Ethics Code Contact Us Site Map Press Room
©2010 Bloomberg L.P. All Rights Reserved.
Read Full Article »