• 01 Mar 2013 at 5:04 PM

AIG Is Even More Not Owned By The Government

AIG is in the news today for two very small numbers in connection with much larger numbers. First: AIG is no longer bailed out! I know, you thought that happened like six months ago, and then again three months ago, but today AIG got rid of the last little bits of government ownership, really this time:

American International Group, Inc. (NYSE: AIG) announced today that it completed the repurchase of warrants issued to the United States Department of the Treasury (U.S. Treasury) in 2008 and 2009. … AIG and the U.S. Treasury agreed upon a repurchase price of approximately $25 million for the warrants. The U.S. Treasury does not have any residual interest in AIG after AIG’s repurchase of these warrants.

“With AIG repurchasing all outstanding warrants issued to the U.S. Treasury, we are turning the final page on America’s assistance to AIG,” said Robert H. Benmosche, AIG President and Chief Executive Officer. “We appreciate the opportunities this support allowed and are proud to have returned to America every cent plus a profit of $22.7 billion.”

Back in December, I speculated baselessly about why AIG didn’t just buy back these warrants in connection with Treasury’s final sale of stock back in December, since they were just rounding error on the $7.6bn offering. I figured waiting would let the government get a better deal, and it seems to have: I ballparked a value of $18,000,000.393 for those warrants in December, so Treasury made an extra $7mm by waiting three months.1 One possible explanation is that AIG and Treasury enjoyed the dynamic of announcing “AIG HAS PAID OFF ITS BAILOUT” every three months, so they milked it for all it was worth. I’m sure someone from Treasury left a pen or something at AIG’s offices, and its return will be announced with great fanfare in a few months.

But this is a distraction from more amazing, less pleasant AIG news:

The Federal Reserve Bank of New York this week made public its crisis-era settlement with Bank of America in order to bolster its case against American International Group Inc over mortgage-securities claims.

On Thursday, the New York Fed submitted to a Los Angeles federal court the settlement in which its Maiden Lane II unit said it intended to receive all litigation claims associated with securities it acquired when it bailed out insurer AIG in late 2008.

The settlement showed that Bank of America agreed to pay the New York Fed unit $43 million related to some of the residential mortgage securities.

The ongoing dispute, however, involves far larger amounts. It concerns whether AIG transferred $18 billion of litigation claims to Maiden Lane II, which the New York Fed created in December 2008 to buy the securities from the giant U.S. insurer.

Guys, I’m just going to say this: Gretchen Morgenson had an absolutely excellent story about this a few weeks ago. We talked about the issue in January, before the settlement was disclosed. Basically:

  • The Fed, in the form of a Maiden Lane vehicle, bought some Countrywide mortgage bonds from AIG,
  • at shall we say a discount (of something like $18 billion),
  • and then signed a settlement with Countrywide, purporting to release Countrywide from any claims relating to those securities ever again, in exchange for $43 million
  • AIG disagrees and thinks it should still be able to sue over the $18bn it lost between buying those bonds and selling them to the Fed.

The settlement includes a representation from Maiden Lane that:

AIG disagrees; it thinks that it should still be able to sue over losses it experienced before selling to the Fed. My sympathies lie mostly with AIG here. The Asset Purchase Agreement is ambiguous; it says that Maiden Lane is buying “all right, title and interest” in the securities, true, but so does the deed to your house, and that doesn’t mean that the former owner can’t sue someone if he finds out he got cancer from living next door to a toxic waste dump.2 If I buy stock for $45, and then find out its value is inflated by fraud and sell it to you for $20, you totally totally own the stock; you own all right, title and interest in it; if the management does something to screw shareholders you can totally sue – but the $25 stock drop that was caused by the fraud really seems like my problem, and I should get to sue for it.3

But the sheer dollar value of the settlement is what most weakens BofA’s claim. AIG is suing over $18bn of rep and warranty violations; in other contexts, Countrywide rep and warranty violations have been worth … like, over 100 cents on the dollar. Here they were apparently worth 0.24 cents on the dollar. That seems to be below market; far enough below market that it’s hard to believe AIG really intended to transfer them to the government to settle that cheaply.

We haven’t heard much from Hank Greenberg lately; I guess his lawyers have been busy with Herbalife and Argentina. His theory in suing the government over its AIG bailout is that the bailout treated AIG shareholders unfairly in order to pursue a public policy of providing backdoor bailouts to more politically favored banks. I’ve always thought that that theory was legally weak, but factually an intriguing mix of crazy and right. This Countrywide settlement, I think, shifts that mix a bit more towards right.

AIG Repurchases Warrants from U.S. Treasury [EDGAR]
In AIG suit, NY Fed reveals details of crisis-era BofA settlement [Reuters]
Settlement Agreement and General Release [C.D. Cal.]
Don’t Blink, or You’ll Miss Another Bailout [NYT]

1. The stock is up like $5 in the interim, so I’m not sure they did better than my estimate on a vol-price basis, but I am too lazy to check. Feel free.

2. Not that you live next door to a toxic waste dump. Also: that was my first and last product-liability analogy for mortgage securities. Sorry about it. No worse than “It’s like selling a car you know will explode!” really.

3. This is admittedly made more complicated in RMBS, since (1) the suits here are kind of a term of the securities (rep & warranty putbacks) rather than an extrinsic fraud, and (2) this was a bespoke purchase and maybe AIG really did intend to transfer its right to sue.

5 comments (hidden to protect delicate sensibilities)
Show all comments ↓

Comments (5)

  1. Posted by Fewdollarsmore | March 1, 2013 at 5:34 PM

    By selling all assignable benefits including litigation claims AIG sounds more like a cancer patient who has made Maiden Lane the beneficiary of its physical disability insurance.

  2. Posted by LightRectangled | March 1, 2013 at 5:57 PM

    Put another way it sounds like a Harbinger saddled with LightSquared who has made Maiden Lane the beneficiary of any interest on loans taken out of it by its general partner.

  3. Posted by Guest | March 2, 2013 at 4:35 AM

    Congrats, Matt. First Bloomberg now The Economist.

  4. Posted by Hieu Tran | March 29, 2013 at 12:03 PM

    So is this really the final repayment? I've been hearing about this for months now. It's like having four birthdays in a year.

  5. Posted by Buy Xeloda | June 19, 2013 at 1:53 AM

    It's really very interesting post. All the comments are very helpful and very good. Thanks for sharing.