“I really didn’t know what I was walking into,” Jim Millstein says about taking one the biggest jobs of his life: unraveling the taxpayers’ bailout — er, investment — in the American International Group.
Jim Millstein, the chief restructuring officer for the Treasury, has been managing the bailout of A.I.G.
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A longtime restructuring banker from Lazard who worked on some of the biggest bankruptcies in history, including WorldCom and Argentina, Mr. Millstein holds an unusual title at the Treasury Department: chief restructuring officer. And for the last year and a half, he has been trying to get his arms around the mother of all bailouts.
About six months into his job, after fearing that he might have stepped into an impossible task, he made a startling assertion to his team: “We’ll probably get all our money back.”
It was almost blasphemous to say aloud. The $180 billion bailout of A.I.G. has been widely accepted by both the political left and right as a fiasco that will cost us all dearly. Inside the Treasury, the “whisper number” of the total cost had been closer to $100 billion, surely not zero.
So Mr. Millstein confided in only a handful of people, worried that it was still early days and that if it leaked, he said, “Half of the people in Washington would say we were crazy — ‘it’s all smoke and mirrors’ — and the other half would say, ‘Oh well, we can bank it then.’ ”
Last week, his boss, Treasury Secretary Timothy F. Geithner, endorsed that claim in announcing an ambitious exit plan, including converting much of the company’s preferred shares into common equity and paying down loans from the Fed.
As Mr. Millstein had expected, the plan was greeted less by skepticism than by utter disbelief. The public reaction to the Treasury’s announcement was predictably swift and incredulous.
“This is little more than a shell game,” declared Barry Ritholtz, director for equity research for Fusion IQ.
Indeed, how can a company with a supposed stock market value of only $26.2 billion ever pay back more than five times that to taxpayers?
Yet stop for a minute and consider something that is almost heretical to say in the current political climate: Mr. Millstein and Treasury may be right.
Here’s his math — and please bear with me, it’s actually not that complicated.
First, the $180 billion headline figure is not the right number to consider. Today, taxpayers have extended loans through the Federal Reserve and Treasury to the tune of about $130 billion, which is still a boatload of money. However, about $30 billion — and he is rounding numbers here to make this easier — of that total include assets that are owned in large part by the Federal Reserve through its Maiden Lane funds. Those assets, which were once considered troubled at the height of the panic in September 2008, have since increased in value and are now, as Mr. Millstein contends, “money good.”
So now we’re down to a hole of about $100 billion (or $97 billion if you want to get a bit more exact).
In the next several months, A.I.G.’s sale of its Alico unit to MetLife will be completed, generating about $6.8 billion in cash and $8.7 billion in securities. In addition, A.I.G. is planning an initial public offering of its A.I.A. unit, which should generate somewhere between $12 billion and $15 billion in cash. The cash components of those sales, he said, could generate a total of $22 billion. So at this point, we’re still off by $75 billion.
Then the Fed will receive another $4.2 billion from A.I.G.’s sale of its Japan-based life insurance units, AIG StarLifeInsurance and AIG Edison Life Insurance, to Prudential Financial. Now the tally is down to $71 billion.
At this point, A.I.G is going to pay down the Fed’s remaining $20 billion stake in two special-purpose vehicles, which hold the rest of Alico and A.I.A, he explained. In doing so, and this is where things get a little tricky, A.I.G. will be using money from the Treasury Department’s credit facility. In some ways, the government is moving money from one hand to another.
If all of that works — and if you’re still with me — A.I.G. will be left owing us, the taxpayers, about $49 billion.
Now, you’re probably asking, how can A.I.G., or what’s left of it, which is currently worth $26 billion, become a $49 billion company?
As part of the restructuring, Treasury is going to exchange its preferred shares for common shares, expanding the total number of shares of the company and diluting the current investor base. Treasury will own 1.6 billion shares, or 92 percent of the company. At A.I.G.’s share price on Monday, the government’s stake would be worth about $62 billion, a $13 billion profit. That’s if, of course, shareholders do not send shares tumbling because of the dilution.
Mr. Millstein is betting that investors will be bullish on the stock once they understand the government’s plan to exit its investment over time.
So far, big institutional investors like Fidelity and Capital Research have shunned A.I.G. even though they own most of the other insurers.
“None of those guys are in this and they will have to be,” he said, in part because A.I.G.’s public market capitalization will be so much bigger that it will have to be a bigger part of stock portfolios that track, or index, the insurance industry.
Finally, Mr. Millstein, son of Ira Millstein, the corporate governance guru at Weil, Gotshal & Manges, is gambling that the pure economics of A.I.G. will drive the valuation. Most insurance companies trade at eight to 12 times annual profit. If A.I.G.’s chief executive, Ben Benmosche, is to be believed, the company will make $6 billion to $8 billion in profit.
Of course, not everyone is happy about the deal-making. Some have complained that A.I.G. is pulling a fast one on the government because it will be exchanging preferred shares that pay a dividend and are secured by assets for common shares which would ultimately be worthless. But Mr. Millstein said it was impossible for the government to exit without taking some of “the equity risk.”
Other critics have argued that the government is rushing its exit of A.I.G., selling off its most valuable businesses just to raise a buck. Maurice R. Greenberg, the company’s former chief executive and still a major shareholder, has repeatedly made that complaint. But Mr. Millstein says that the government needs to exit the stock to maintain “the value of the franchise.” As he explained it, the government was not being viewed as “patient capital” in the market the way you might expect; instead, some investors and customers have been worried about investing and doing business with the company because of the uncertainty around the government’s position, he said. Now, he said, the government has made its plans clear.
“We didn’t come here to make a profit — but we should because we took so much risk,” he said.
Fingers crossed.
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