S&P Lowers Opinion Of AIG After Verdict

NU Online News Service, July 8, 3:26 p.m. EDT

Standard & Poor's lowered its opinion of American International Group after a jury found the company had no claim to more than $4 billion in damages it sought from a company headed by Maurice "Hank" Greenberg.

"We still view AIG's underlying fundamentals as weak and under pressure, and believe AIG's loss in its lawsuit vs. former [AIG] CEO Hank Greenberg is another negative for the shares," said Catherine Seifert, insurance analyst with S&P's equity research, as the rating agency changed its opinion from "hold" to "sell."

She went on to say that the recent 1-for-20 stock split by AIG "may ease the mechanics of shorting AIG shares," but the opinion "reflects our view of AIG's weak fundamentals and high degree of execution risk."

Yesterday, a jury sitting in U.S. District Court in Manhattan decided that Starr International Company, which Mr. Greenberg retained control of after he left AIG, did not a breach a trust with AIG over payment of a deferred compensation profit participation plan and did not owe AIG $4.3 billion in damages.

AIG claimed that the deferred compensation retirement plan, which was started in 1975 and was administered by SICO using the proceeds of AIG stock it held, was created for the purpose of rewarding select AIG executives for their work and was intended to do so for a long period of time.

In seven days of testimony, Mr. Greenberg, AIG's former chief executive and current chief executive of SICO, testified that the ultimate fate of the plan was at the discretion of SICO shareholders.

Shortly after Mr. Greenberg was forced out of AIG in 2005 in the midst of an accounting scandal, SICO terminated the deferred compensation retirement program.

That incentive plan rewarded employees on retirement by using a portion of the dividend profits SICO gained as a major shareholder of AIG stock. Mr. Greenberg testified that the program was used to control AIG and keep employees in the company for the long term by not granting the rewards until their retirement from AIG. If they left AIG, they lost the reward.

Andrew J. Barile, an industry consultant based in Rancho Santa Fe, Calif., said the loss of the plan means the loss of AIG's competitive edge to keep qualified executives from moving elsewhere, some now going to SICO.

"[Mr. Greenberg] was a genius in using the concept to build and retain AIG executives," Mr. Barile said in an e-mail. "Now the pendulum switches to building Starr using his same expertise."

He added, "AIG executives need to be freed up to build value, not spending their time on costly litigation."

In an interview with National Underwriter, Mr. Barile said finding a way for AIG to replace the incentive plan would "take more work than they [AIG] ever dreamed of."

The brilliance of the plan, he said, was that being a private company, SICO never had to report how much the executive incentive payments amounted to. The competitive advantage, he said, was that other companies found it difficult to lure away executives from AIG because they would never know how much to pay them in incentives to leave.

He noted, too, with the federal government owning a large share of AIG now, it is doubtful such a program would be allowed to happen.

In an interview shortly after the verdict with Maria Bartiromo of CNBC, Mr. Greenberg called the seven days he was on the witness stand "grueling," but said he was glad he did it because it was the turning point in the case.

He welcomed the jury verdict but noted that the final decision is up to District Court Judge Jed S. Rakoff.

In one of his rulings, Judge Rakoff said the jury's decision on breach of trust would serve an advisory role. The judge's ruling is due sometime in August.

In the interview, Mr. Greenberg revealed that at the time he left AIG in 2005, SICO's value in AIG stock was worth $20 billion. Today, the stock's value is down to $200 million.