Liddy To Step Down From AIG Positions

"Working with the board, Mr. Liddy has determined that, coincident with the reconfiguration of the board, the company should also initiate the necessary actions to install a more permanent leadership team and structure," AIG announced.

"Much work remains to be done at AIG, but much has already been accomplished," Mr. Liddy said. "With the financial assistance of the Federal Reserve Bank of New York and the U.S. Department of the Treasury, we have made substantial progress in stabilizing AIG, reducing the systemic risk that led the government to rescue the company, protecting our policyholders and our businesses, and developing a plan to repay American taxpayers."

He added that "as we have noted repeatedly, our pace of success will depend on global economic conditions and financial markets. It is likely to take several years. AIG should have a leadership team committed to a similar time horizon and prepared to carry the plan to completion."

"In mid-September 2008, Ed Liddy answered the call of his country and the needs of AIG without reservation amid one of the darkest periods of the current financial crisis," said Stephen A. Bollenbach, AIG's lead director.

"Coming out of retirement, he has led AIG effectively and courageously–and without compensation," Mr. Bollenbach added. "Today, AIG has a durable capital structure, manageable liquidity, and is executing on a credible plan to repay the American taxpayer. We are deeply grateful for Ed's accomplishments and his leadership, and we wish him well in his return to retirement. He deserves it."

Meanwhile, anyone hoping for a quick government exit from the AIG bailout is bound to be disappointed, as Washington's involvement is likely to be lengthy, U.S. Treasury Secretary Timothy Geithner warned last week.

Mr. Geithner also ruled out forcing AIG's counterparty credit holders to take a loss on their trades with AIG through its troubled Financial Products subsidiary. He said it would be "incredibly difficult for us to negotiate effectively to reduce the value of those claims."

Mr. Geithner's comments were made at a Senate Banking Committee hearing update on the progress of the Troubled Asset Relief Program, coming in response to tough questions from Sen. Richard Shelby, R-Ala., the panel's ranking minority member.

Sen. Shelby called AIG a "black hole," adding that the government "keeps pumping billions of dollars into it," yet it "still seems to be hemorrhaging money." He added that some people are telling him that AIG's viable assets "were worth more six months ago than they are now."

"Mr. Geithner, you have got the bear in the house. What are you going to do about it?" he asked the Treasury secretary.

Mr. Geithner said that all involved "have no option now to selectively diminish the value of those claims without taking risk that you would have default and its consequences for AIG," adding that "the financial system still cannot withstand the failure of AIG."

He said the current task of all involved–the government, AIG's board and management–is to disentangle its viable insurance units from the risky parts of the business that got the company in trouble.

Mr. Geithner said the task of winding down risky trades in the AIGFP unit is about half-done. He said the former $2.7 trillion notional value of those credit default swaps has been cut in half to about $1.5 trillion.

Similar comments were made last week in congressional testimony by AIG Chief Executive Officer Edward Liddy. At that time, Mr. Liddy said AIG hopes to complete the majority of the task by year-end.

"There's no doubt that this company–not just to the Fed and the Treasury, but to its board and management–proved much more complicated, much more risky than people thought, and has proved much harder to disentangle and separate," according to Mr. Geithner.

AIG's board and management, he added, "were the ones that brought the company to the abyss."

"You can't feel more strongly than me about the need to get the government out of this company, get the company to the point where it poses less risk to the system, and put those underlying insurance businesses on a path where they can be viable going forward," said Mr. Geithner.

In responding to Mr. Geithner's testimony, Sen. Chris Dodd, D-Conn., chair of the committee, said "there should be a better answer to this."

RATING DOWNGRADE

In related news, Fitch Ratings announced it has dropped the financial strength ratings of AIG's property-casualty subsidiaries a notch based on the stress of its continuing financial problems. The downgrade for the p-c subsidiaries took them to "A-plus" (strong) from "double-A-minus" (very strong).

Also revised were the issuer default rating to "triple-B" (good) from "A" (strong). Fitch said it was affirming AIG's short-term IDR and commercial paper ratings at "F1."

Fitch said it perceives a decline in the subsidiaries' "competitive positioning derived from the organization's financial difficulties, along with the effect this stress is likely to have on AIG's near-to-midterm operating results."

The rating firm commented that it believes AIG has taken "reasonable steps to protect its competitive positioning and franchise value in light of these difficulties."

It mentioned the formation of AIU Holdings Inc. to serve as part of a rebranding campaign, and said it views the necessity of such measures as "symptomatic of the deterioration of the franchise and inconsistent with the 'double-A' category ratings."

The downgrades, Fitch said, also reflect AIG's p-c subsidiaries' recent operating trends, the results of which Fitch generally views as "lagging those of their peers."

Fitch said it believes U.S. government support of AIG currently remains strong. However, the agency added that once systemic risks abate, the U.S. government would likely not provide additional funding, if needed, simply to support ratings at the former levels.

Further, with recent downward rating migration in the insurance sector, Fitch said it believes the AIG insurance organization that emerges from the restructuring could be viable and competitive at lower rating levels than the organization held historically.

The Evolving Rating Outlook on AIG's holding company as well as all insurance subsidiaries other than foreign life reflects a view that AIG and subsidiaries could emerge from the organization's restructuring with a credit profile supportive of higher ratings if the restructuring goes as planned, said Fitch.

But it noted "significant execution and market risks persist which could lead to downward rating migration if the restructuring is unsuccessful."

PAYBACK TIME

In other developments, AIG investors will get $843 million as part of the company's 2006 settlement of a huge accounting fraud, a federal court in New York ruled last week. U.S. District Court in Manhattan approved the settlement distribution for a group of investors estimated to number 257,000.

The settlement resulted from allegations the company issued misleading financial statements to investors from 2000 to 2005 based in part on sham reinsurance transactions with General Re, the Securities and Exchange Commission announced.

Four executives from Gen Re and one from AIG were convicted in February of 2008 for their involvement in the phony reinsurance activity.

The 2006 AIG agreement settled federal and state actions for a total of $1.6 billion, and included the resolution of claims related to improper accounting, bid-rigging and practices involving workers' comp funds.

In addition to the SEC, the investigations included then New York State Attorney General Eliot Spitzer, the New York Insurance Department, the Department of Justice and the U.S. Postal Inspection Service.

Prior to the settlement in May 2005, AIG acknowledged accounting errors and restated earnings downward by $3.9 billion over a five-year period and cut its net worth by $2.7 billion. Six months later the firm announced it would revise its statements again after finding a $500 million understatement of previously disclosed retained earnings.

Besides the restatement, the investigations led to the replacement of Maurice Greenberg as chair and CEO of AIG, as well as the replacement of Howard Smith, AIG's chief financial officer. It also sparked continuing lawsuits between Mr. Greenberg and his former company.

The SEC said the settlement took place under the Fair Funds provisions of the Sarbanes-Oxley Act, which granted the SEC increased authority to help harmed investors by allowing both ill-gotten gains as well as civil money penalties to be distributed to them directly.

The AIG Fair Fund's court-appointed distribution agent estimates that checks will be mailed to more than 257,000 affected AIG investors within the next few months.

Regulators charged that AIG entered into two sham reinsurance transactions with Gen Re that had no economic substance but were designed to allow AIG to improperly add a total of $500 million in phony loss reserves to its balance sheet in the fourth quarter of 2000 and the first quarter of 2001.

In its restatement, AIG admitted not only that its accounting for certain transactions had been improper but also that the purpose behind some of those transactions was to improve financial results that AIG believed to be important to the market.

Under the agreement, AIG paid a total of $800 million–$700 million in disgorgement of "ill-gotten gains" and $100 million in penalties. The payment to investors was authorized last June.