September 27, 2008
The AIG Deal
Posted by Jeff Lipshaw
This is what it feels like when you are on the inside of a deal. Can it really be that the AIG bail-out is old news, since trumped by the bigger bail-out bill, the WaMu seizure and sale, the McCain debate cancellation, the screaming session at the White House, the actual debate, and rumblings about Wachovia?
As Steve Davidoff pointed out eons ago, there was a problem with the original structure of the deal between the Fed and AIG in that it appeared to involve giving warrants to stock not yet authorized by a shareholder vote. AIG then pulled back with a press release and 8-K suggesting that it and the Fed had gone back to the drawing board. Also kudos to Steve. He predicted the final form: "I am curious to see how the parties get around this — perhaps by issuing out preferred with equivalent voting and dividend rights?"
The deal as struck now involves the Fed getting 100,000 shares of non-redeemable and perpetual convertible preferred stock. Until the shareholders vote to authorize enough shares of AIG to permit conversion of the preferred stock into 79.9% of the common equity, the Fed holds preferred equity with a liquidation value of $500,000 (that's right, five hundred thousand dollars), but with rights to vote and receive dividends that are as if the Fed owned 79.9% of the common equity. I haven't gone back to look at the AIG certificate of incorporation, but I'm assuming it had "blank check preferred" powers, meaning that the shareholders had granted to the board the right to issue preferred shares on whatever terms the board deemed appropriate without an amendment of the certificate of incorporation.
So.... I take back what I said about the Fed not actually owning AIG. It does. And it will, because there is no provision for the redemption of the preferred shares if the loan is paid back. Moreover, the only risk to the Fed is that AIG goes into bankruptcy before the shareholder vote, because at that point it only has a $500,000 liquidation preference. On the other hand, it still has security interests in all the valuable AIG subsidiaries in the event of a default on the primary loan. What I haven't found yet is what consequence, if any, would follow from the shareholders not approving the amendment to the certificate authorizing the additional stock.
By the way, for all you populists out there, or others interested in class warfare demagoguery, I was curious just who the bailed-out fatcats were. In short, who are the shareholders we are rescuing with our money? There's a lovely little website out there called www.j3sg.com that gives the institutional shareholder make-up of public companies, as well as the companies that institutions own. It turns out that the fatcats being rescued (at least as of June 30) are anybody who has an interest in these and other elitist institutions: Fidelity, Vanguard, TIAA-CREF, New York State Common Retirement Fund, CALPERS, the New York State Teachers Retirement System, the Teachers Retirement System of Texas, the Public Employees Retirement System of Ohio. I could go on and on. None of them were bitching when AIG was climbing up the mountain!
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Don't lose sight of the fact that there are also plenty of not so fat cat normal people who now have their money frozen by AIG and cannot do anything about it. Perhap you legal people should be focussing on how to help them?
Posted by: J Lord | Sep 29, 2008 6:49:36 AM
Interesting that the AIG deal involves warrants for shares with voting rights. The TARP bill proposed over the weekend specifies warrants for NON-voting shares (sec. 113(d)(1)(A) of the bill). Any idea why the discrepancy?
Posted by: A.J. Sutter | Sep 29, 2008 8:19:34 AM
A.J. - The AIG deal is preferred not warrants, but, to your point, they have "as if" voting rights. On the TARP, I wonder if a Republican in all the haggling said something like, okay, we'll agree to a dilution of the equity, and even to a cap on compensation, but there's no way the government should be voting shares that determine the management of the company.
Posted by: Jeff Lipshaw | Sep 29, 2008 6:48:24 PM
AJ: What Republican would stand up and question whether the government should have dominion over management? The species Homsapiens republicanis should be re-classified under the invertabrates.
Posted by: J W Greenawalt MD | Oct 2, 2008 9:10:20 PM