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To What Degree Were AIG?s Operating Insurance Subsidiaries Sound? (1)

Posted on 28 April 2009 by David Merkel

Hey, friends.? My piece on AIG is done, and I will be posting over the next few days, and resume a more normal posting schedule.? Here it is:

Summary

Aside from the mortgage insurers, the P&C subsidiaries were basically sound, though with some issues such as capital stacking, affiliated assets, etc., as mentioned below.? The non-mortgage P&C subsidiaries didn’t have a great 2008, but they would have survived as standalone entities.

The life and mortgage subsidiaries are another matter.? Without the help of the US Government, many of them would have failed.? Even now, given the levels of affiliated assets, capital stacking, deferred tax assets, etc., they are not in great shape now should there be another surprise.? Profitability is likely to be lower in the future than in the banner years of the middle of the 2000s decade.

Introduction

When the economic history books get written about the crisis at the end of the 2000s decade, the difficult analyses will involve Fannie, Freddie, Lehman, AIG, and the large banks that failed.? The degree of leverage employed, both explicit and implicit, will be quite a tale, as will the abandonment of underwriting standards.

This piece is meant to deal with the company that I view as the most complex, and the most levered – AIG. There have been many attempts to explain the problems at AIG, with most of the attention paid to AIG Financial Products.? This analysis is meant to be complementary to those analyses, because I will focus on AIG’s regulated US Life and P&C subsidiaries.? I have gone through the Statutory books for these subsidiaries, and there is an interesting tale to be told.? (A better story than how I got the Statutory data, even.)

Flashing back

Several incidents shaped my perception of AIG over the years.? Working there in the domestic life companies from 1989-92, I heard the AIG mantras:

15% return on average equity is the golden rule of AIG. Subsidiaries and divisions that cannot meet that will be eliminated.
We exit business lines that cannot meet our return goals.
Keeping the AAA rating is of utmost importance.
Our accounting should be conservative.
Keep expenses low.
Few people make it past five years at AIG, but if you can survive that long, you will be a lifer, and you will be rewarded.
We didn’t take over The Equitable because we couldn’t get to the 15% target. That said, the takeover team scared them away, and into the arms of AXA (another accounting nightmare I suspect).

I took the rules seriously.? I ended up closing two lines of business that could not meet return goals, and found two centimillion-dollar reserve errors.? There were several products that never made it to market because they could not meet the 15% return goal.

But there was the rest of the story:

“Dealing with auditors is bloodsport.”
“I drop my deficiency reserves in the Atlantic Ocean.” (via reinsurance)
“I like the pension and annuity businesses because they give some bulk to our balance sheet.” (Reputedly M.R. Greenberg said this to a colleague of mine. We scratched our heads over that one, because it was so anti-AIG philosophy.)
Heavy reliance on surplus relief reinsurance in order to front statutory earnings into the present, and reduce capital needs.
My boss found two centimillion-dollar reserve errors also.
“Dealing with reinsurers is bloodsport. Never give them an even break.”
Clever use of transfer pricing to get money out of blocked currencies.
Arrogant guys at AIG Financial Products that would hardly acknowledge you as part of the same team at conferences.
And, a $1 billion GAAP reserve understatement at Alico Japan in 1992.

There was AIG in theory, and in practice.? I was a young actuary at the time, and relatively idealistic, but it was easy to get cynical in a highly politicized office environment, where almost everything was a fight.? Thus my view of AIG was always colored by the hidden leverage, the large losses that never seemed to derail the company as a whole, and the bare-knuckled approach to business.

I could not live with my conscience while I worked there, so I sought greener pastures from year one there – it took two long years to get the right position.? Two very hard years.

Fourteen years later, I had dinner with a well-regarded sell side analyst while visiting P&C companies with him in Ohio.? The management teams we talked with thought we were twins separated at birth.? Our views were very similar, except on AIG.? He asked me why I didn’t like AIG – it was so cheap.? I told him the story that I have told you, and one more thing: when I worked for AIG, there was virtually no debt.? By 2006, the degree of financial leverage was four times higher than when I worked there.? The 15% ROE was intact, but the return on assets had dropped like a stone, and leverage from debt made up the difference.

I told him AIG was not the great company that it once was.? It was far more leveraged, and the ratings agencies were behind on their evaluations.

To the Statutory Statements

The statutory statements record the life of an insurance operating subsidiary.? The regulators require insurance companies to publicly disclose far more data than the banks do to their regulators.

Insurance holding companies own their subsidiaries, and survive by receiving dividends from the subsidiaries, or borrowing against them.? Operating subsidiaries receive cash from holding companies when opportunities are good, and dividend back when there aren’t as many opportunities.

The ability to dividend back is controlled by statutory accounting principles, risk-based capital rules, and also by the state regulators.? This places insurance holding companies in a tough spot; they need dividends from some operating subsidiaries to survive, particularly during times when credit is not available on favorable terms, if at all.

The key question I went off to answer is to what degree were AIG’s operating subsidiaries sound? We all know that AIG Financial Products was a basket case, but perhaps the rest of the operating companies were in good shape.? The answer to this question is mixed, and I will attempt to explain where there are weaknesses and strengths.? Sneak Preview: the weaknesses outweigh the strengths.

Given my prior experience with AIG, I expected to find question marks in the area of reinsurance.? I did find some, but it wasn’t the biggest area of problems.? I’ll try to take the problems in order of importance.

Leave AIG to its own Devices, and let it Fail if Need be

Posted on 24 March 2009 by David Merkel

When I was a young actuary, I worked for the now defunct Pacific Standard Life.? In 1984, PSL discovered Universal Life Insurance, and sold so much of it that it went insolvent, and was bought out of bankruptcy by Southmark.? I came to the company in 1986, but by 1988 I had my concerns.? Aside from the aggressive investment policy (junk bonds), Southmark had interlaced the capital of their subsidiaries, with one subsidiary owning the preferred stock of another, and vice-versa.? They even did a deal with ICH, exchanging preferred stock.? So long as neither defaulted, both looked more solvent, like two drunks holding each other upright.

My point for the evening is that there are clever ways to make an insurance company look more solvent than it should appear to be.? I mentioned the preferred stock manuever.? There are also deals regarding reinsurance.? A common traansaction is to sell of future profits in exchange for capital today.

Why do I write about this?? AIG again.? While I worked for the domestic life companies 1989-1992, I served as the actuary for the annuity line of business.? That involved the reinsurance treaties on annuities, which were designed to reduce the capital needs of the business, and thus increase leverage.? As I have sometimes said, “reinsurance is the ultimate derivative.”? If derivatives are opaque, reinsurance doubly so.? Tearing apart a reinsurance treaty is tough, and it takes significant skills that most auditors and regulators don’t have.

During my tenure at AIG, the reinsurance treaties were designed to decrease the capital needed to support the business.? Given the need for a 15% after-tax return on average equity (which was sometimes described as the “religion” of AIG), the easiest way to do it was to compromise the capital needed to support the business through reinsurance.? Equity goes down, ROE goes up.? That was the nature of AIG, and I could never be a lifer there because of the ethical problems I faced.

Now one of the assumptions that I have made about AIG is that the subsidiaries of AIG are well-regulated and solvent.? But why should I assume that things have gotten better since when I served in AIG?

If I had the Statutory data (regulatory accounting), I would look at all of the statutory statements of domestic insurers that AIG owns, and look for reinsurance and cross-shareholdings.? I would discount external reinsurance credits, and internal reinsurance I would check to make sure that reserves reinsured equal reserves insured.

If things are today like tkey were in the early 90s, I would expect to find the amount of capital needed to support the business compromised through reinsurance treaties.? Within a year, we will know if that is true.? There are some alleging large fraud here.

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Now, ther are other problems with the bailout of AIG, notably that it harms their competitors.? Government support may lead AIG to discount premiums because they don’t have to turn a profit in their current state.? This harms the rest of the industry.? Why should insurers with no government support have to battle an insurer with govenment support?

Also, as I have said before, there is no reason to bail out AIG the holding company, which is what our dear government has done.? We only care about the operating insurers, not the company that owns them.? For the nonregulated entities inside AIG, the only one that has a material impact on the rest of the world if AIGFP.? Guarantee this if the US government must, but stay out of the rest of AIG.? Let that go into insolvency, there is no compelling reason tfor the US to protect it with tax monies.

AIG — There are Many Criminals Here

Posted on 20 March 200920 March 2009 by David Merkel

It could probably be shown by facts and figures that there is no distinctly native American criminal class except Congress.
– Pudd’nhead Wilson’s New Calendar (from twainquotes.com)

There are many upset over the bonuses paid to AIG employees, most notably politicians seeking to curry favor with voters.? That these bonuses were known to the Fed, and the Treasury Department does not matter to many.? They see their tax dollars being taken by people who destroyed their own company, and they are angry at those getting the bonuses.? Better they should be angry at those who bailed them out, and who oversee the Fed — Congress.? That was the biggest crime.? By keeping AIG alive, they faciltated the crime they now decry, because bonuses would have disappeared in bankruptcy.

There was a better way, as I have written about before.? If there were systematic risk issues, guarantee the derivatives counterparty, and send the rest of AIG into Chapter 11.? The operating insurers and other financial companies would survive; those invested in the holding company (common and preferred) would lose their investments, and bondholders would have to compromise and receive equity in the new firm.

Is that what we did?? No, we invested in, and lent money to the holding company.? Money going to a holding company can go anywhere inside the network of companies (pay bonsuses, for example), whereas money to a subsidiary stays there until? conditions are good enough that dividends can be paid to the holding company.

In order to convince the Government that the recent? bailout of AIG was crucial to the financial system, they submitted this paper to the Fed and Treasury.? I’ll comment on it, page by page.

Page 2) They talk of a failure of AIG being a systemic risk when it is only the derivatives counterparty that is such.

Page 3) Same error, though the need to post capital is a reason why the holding company is insolvent.? That AIG would lose some of its foreign subsidiaries is no concern of the US Government.? Also, there would be no need to sell pieces of AIG if it were in Chapter 11.

Page 4) They overstate the life insurance systemic risk.? Yes, there is risk, but typically policyholders have to give up a great deal in order to surrender.? Their operation life insurance companies are likely healthy, but if not, the State Guaranty funds are around to protect things.? AIG is big in life domestically, and a failure would hurt, but not kill the life insurance industry.? The real risk is in the financial guaranty business, through AIG Financial Products, which is not regulated.

Pages 5, 6 ) Totally overstated.? Not likely at all.? AIG’s life subsidiaries are not that critical to the US economy.

Page 7) AIG is big, so what?? The regulated subsidiaries should survive.? Unregulated subsidiaries, aside from AIGFP, pose no systemic risk.

Pages 8-10) Overstated, and false.? The operating insurers are safe.? Let the parent company fail.

Page 11) Who cares if a consumer lender goes down — there is no systemic risk there.

Pages 12-16) Not relevant — those subsidiaries are solvent.

Pages 17-18) Relevant and true — AIGFP poses systemic risk.? But no concern for the Muni market — that will survive even without AIG.? Besides, why would they sell, even in insolvency?

Page 19) So ILFC is big — that does not mean it poses systemic risk.? The airlines will own the planes directly, if they can’t lease them.

Page 20) Sorry, the assets of the US Government and the Fed are already lost — they should not have bailed out AIG.

Page 21) Don’t overrate the importance of the insurance industry, and especially not AIG.

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AIG bamboozled the US Government (Fed/Treasury) into bailing them out.? Aside from their derivatives counterparty, there was no systemic risk associated with AIG.? The foreign subsidiaries are foreign, and should not be a concern of the US Government.? The domestic insurance subsidiaries are regulated by the states, and should be solvent.? If not, the guaranty funds will pick up the slack.

There was no reason to bail out AIG as a whole, and there remains no reason to continue to do so.? Congress has no one to blame but itself in the current brouhaha over bonuses at AIG.? They could have done it differently.

Send AIG to Chapter Eleven

Posted on 24 February 2009 by David Merkel

There are two reasons to bail out a financial company.? The first is that it’s failure would lead to a run on liquidity at similar companies duewith those of to a lack of confidence.? The second is that it their promises are so interlaced with those of other companies that failure would cause many other companies to fail.

For the first reason, we have the FDIC and similar institutions for deposit-takers, and the insurance guarantee funds for the insurers.? For the second reason, the government should be minimalistic, and only guarantee the entities that threaten systemic risk.

For AIG, what should have happened back in September, and what should happen now, is that the government should have let the holding company fail, and guaranteed the obligations of AIG Financial Products in exchange for a senior loan that would subordinate all existing holding company debt.? [Essentially a DIP loan, because the holding company would be in Chapter 11.]

Aside from Financial Products, most AIG’s subsidiaries are probably fine, and don’t need any help.? Those that might fail don’t pose any systemic risks.

So, when I see AIG coming back to the government for more, I think of several things:

1) When Hartford Steam Boiler was sold for a cheap price, I commented that if that was the price for a good asset like HSB, then AIG common was worthless.

2) Why are we messing around with the holding companies as we do bailouts?? Regulated entities I understand.? There is no compelling interest for the US government to own AIG holding company stock.

3) Let the bondholders suffer a little.? AIG did not trade like a AAA credit, even in its glory days.? It traded more like single-A.? If you didn’t take the warning that the bond market was giving you as the leverage built up, then that is your fault.

4) Back to point 2 in a more general way.? If the government is going to intervene, let them inject money into the regulated subsidiaries, not holding companies, and then limit dividends and transfer payments to the holding company.

5) If large derivative counterparties are so critical to the financial infrastructure, then they need to be regulated as well.? Open the derivative books to the regulator, and let the new regulator set leverage/capital policy.? What?? They can’t do as much business?? Too bad.

6) As I commented regarding the automaker bailouts, the important thing is to get your foot in the door and get some money, so that the legislators/regulators feel they must protect their initial investment with more money later.? With AIG, that is in full force, as this could be the fourth bailout.? When does it dawn on a bureaucrat that you have been bamboozled?

7) The government was hoodwinked on the first few iterations of the bailout.? Shame on them, if they don’t realize that they are throwing good money after bad again.

AIG is a case in point of why I don’t like the way we are doing bailouts now.

We bail out the holding company, which is not in the public interest.
We accept the creeping costs of bailout rather than use better-understood bankruptcy process.
It’s obvious that the government does not understand what it is doing/buying.
We do incrementally bad deals, rather than squeezing the stakeholders, as a clever lender of last resort would.

If the US Government wants to prevent systemic risk, fine!? Guarantee the subsidiaries that pose that risk, but let the rest go into bankruptcy.

AIG: America’s Insurance Giant

Posted on 17 September 200820 June 2017 by David Merkel

How Much Can the US Government Guarantee? For now, whatever they want, or so it seems.? Perhaps the new question should be what dodgy assets can the Federal Reserve cram into the monetary base?

I’m talking about AIG, and this is one place where only the Fed could have acted, aside from the State of New York (too small).? The Fed can act because in a crisis, they can lend to anyone on a collateralized basis.? Essentially, they took most of the company as collateral for the loan with 80% ownership if things go right.? If things go wrong it will only increase our monetary inflation.? (Note: regulators typically take over financial companies, and though AIG is a holding company with many insurers domiciled in NY, most of the company is not regulated by the State of New York.? The Treasury could not act, and the State of New York did its best, but it was not enough.)

Consider some of the good articles posted on the deal:

- Fed Ponders Provides $85 Billion Rescue for AIG (Update: Now Official)

(Naked Capitalism live-blogs, almost)

- U.S. to Take Over AIG in $85 Billion Bailout; Central Banks Inject Cash as Credit Dries Up

(WSJ)

- AIG Bailout: $85B in Loans, 80% AIG Taxpayer Owned

(Big Picture)

- Fed?s $85 Billion Loan Rescues Insurer

(NYT)

- AIG Gets $85 Billion Fed Loan, Cedes Control to Avert Collapse

(Bloomberg)

I find it amusing that the former CEO of Allstate, Ed Liddy, is the new CEO.? Allstate, for all its complexity, is a matchbox car compared to AIG’s non-functional Maserati.? That said, I like the pick.? He will simplify, simplify, simplify.? He will also have the time to do it.? (And, if he found getting Allstate’s stock price up to be a challenge, so he said to me once, oh my, here is the challenge of a lifetime.)? I also find it amusing because AIG often did not think much of Allstate.

Now, the senior secured bank loan effectively subordinates all other holding company debt.? That said, that debt will probably rally as a result of the rescue.? I’m not so sure about the stock, though, this is a lot of dilution to swallow.? Even though the preferred may not get dividends for two years, that might rally on the rescue.

But could this have been avoided?? Yes.? It comes down to one simple concept: Risk Based Liquidity.? Never finance illiquid assets with liquid liabilities.? Doing so invites a run on the bank.? Now in the modern context, one has to consider contingent liquidity: do you have ratings triggers in your bonds, insurance agreements, or derivative agreements?? That sets up a slippery slope where a cliff used to be.? AIG got killed primarily because they allowed for short-term calls on cash as credit ratings declined.? If the troubles from Life Insurers regarding GICs is not enough, nor utilities or reinsurers with ratings downgrade clauses, certainly this should show the folly of allowing ratings triggers in insurance/financial agreements.? I’m not saying that insureds are stupid to ask for them; I am saying that they should be illegal.

AIG left itself in a position where a very bad credit environment could destroy the company.? That resulted from writing insurance on seemingly unlikely credit events that are now more likely than one could have expected.? Also, there are the years of accounting misstatements because of the culture of fear that pervaded the company.

What can I say?? The financial companies that have failed had liquid liabilities and illiquid assets.? The first job of risk control is to assure sufficient liquidity under 99.5% of all scenarios.? This was not true of Fannie, Freddie, Merrill, Bear, Lehman, AIG, Countrywide, etc.? LIquidity costs money, which is why short-sighted managements intent on current earnings scrimp on liquidity.? But liquidity is the lifeblood of business, far more so than earnings.

Remember this when you invest, and look for companies that provide for significant adverse deviation.? And, all this said, I worry for our republic.? Our liberties are slowly disappearing before us, in a haze of government rescues.

AIG Borrows from Itself

Posted on 15 September 2008 by David Merkel

The Governor of New York, possibly thinking about his tax base, and perhaps 30,000 jobs, has allowed AIG to borrow $20 billion from its subsidiaries.? Details are scant, but this can be one of three things:

AIG has surplus assets in its NY-domiciled subsidiaries in excess of their risk-based capital requirements.? If true, borrowing against these would be a no-brainer that should have been pursued long ago.? Favoring this view is the NY Governor, who says AIG is “extraordinarily solvent.”
AIG has surplus assets in its NY-domiciled subsidiaries, but not in excess of their risk-based capital requirements.? Borrowing against these would be a risky gamble, because it lowers the amount of risk margin available to absorb adverse deviations.
Some combination of both — say that AIG has only $15 billion in surplus assets in its NY-domiciled subsidiaries… $5 billion would reduce risk margins.

The risk here is that you end up with insolvencies of some of AIG’s subsidiaries.? Though poential losses to policyholders would be unlikely to be large, assessments would be made to other insurer though the state guaranty funds in order to keep policyholders whole, but potentially at a cost to the other insurers.

This has the potential to look really bright or really stupid, and in a short amount of time, too.? Final note: It’s not impossible, but I would be surprised if the Federal Government or the Federal Reserve intervenes on AIG when it would not with Lehman.

What of AIG?

Posted on 13 September 200821 June 2017 by David Merkel

Over the past 24 hours, i have received half a dozen calls/messagesasking me what about AIG?? Before I start that, let me point to a few of my posts on AIG:

Let me say that it took this long for the price to fall below where it was when I left the firm in 1992.? For many firms with significant slack assets, they could have resisted this fall in the stock price, but AIG could not.

Why not?? It is a complex firm.? Complex firms have a hard time splitting/understanding the results of their various business units.? Management’s view of free cash flow is cloudy.

With AIG, the best thing that they can likely do is spin/sell off their US Life and P&C arms separately or together.? Those units have a relatively easy to determine value.? WIth the cash, AIG can focus on improiving the remaining units.? If they can’t do that, AIG is heading for the scrap heap.

Call me a bear here.? I have no idea how good the current management team will be, but so many are mezmerized by the past of AIG.

A New CEO at AIG

Posted on 17 June 200817 June 2008 by David Merkel

Before I start this evening, I just want to say to new readers who are reading me because my piece, Ten Notes on Crude Oil: The Fixation made an unexpected splash, that my blog is a hodgepodge. I write about a wide variety of topics, but mostly it boils down to macroeconomics, stocks, bonds, portfolio management, value investing, insurance, speculation, real estate and mortgages, and structured products and derivatives. When I wrote more actively for RealMoney, I realized that I was probably the columnist with the widest field, including Cramer. I like to think that I am a good generalist, but I try not to push my expertise beyond its limits. Writing about energy fits into many of my posts, but it is not what I write about most of the time.

On to AIG. I write about AIG this evening, because businessweek.com cites my blog post as the source of “buzz” for breaking up AIG. (I like what I do in blogging, but my voice isn’t that big.)

Well, the dissident shareholders won. Martin Sullivan is out, Robert Willumstad is in. Whether having been part of Citigroup when it grew into a behemoth is an advantage here is questionable. He is clearly a bright guy, but so is Martin Sullivan. One thing is certain, and I wrote about it when Greenberg was shown the door in 2005, no one can replace Greenberg. He built AIG, and he is a bright guy who had his fingers on the pulse of a very complex operation. No one else can match his institutional knowledge, or the culture of fear that he ran.

This brings me to my controversial point for the evening: what if AIG did so well for so long by shading/shaving their reserves? A new CEO coming in to clean up would find a continual stream of assets marked too high, and liabilities markets too low. Martin Sullivan found that out the hard way. What then for Robert Willumstad?

If there are large holes on the balance sheet, the old mantra about eating elephants applies. How do you eat an elephant? One bite at a time. Much as the credit rating has fallen, AIG would not want to see it fall further. If I were in Mr Willumstad’s shoes, I would do a thorough scrubbing of every asset and liability on the balance sheet, and then do the following exercise:

If the restatement is small, take it all at once, declare victory, and make a splash to the media.
If the restatement is moderate, such that it would wipe out a year of earnings or so, take some writeoffs quarter by quarter, until the hole is filled.
If the restatement is large, such that it would wipe out 3-5 years of earnings, or wipe out a large amount of book value, I would create a plan for a turnaround, and then sit down with the rating agencies and the regulators. That would minimize the ultimate damage. The stock price would get killed when the problems are revealed, though.

I have a few other thoughts if the loss is larger still, but I will leave those to the side, because they would be too sensational. Now as to breaking up AIG, this WSJ article suggests that some units could be sold. That’s a good idea; as companies get huge, diseconomies of scale set in. It becomes more and more difficult to manage behemoth firms.

Perhaps AIG can get back to areas where they had a true sustainable competitive advantage: serving foreign markets where there is little/less competition. Maybe ILFC [International Lease Finance Corp]. Beyond that, what is truly distinctive about AIG? In my opinion, not that much.

More on AIG

Posted on 21 May 2008 by David Merkel

Aside from Abnormal Returns (one of my favorites, good to see him back), my comments on AIG were also cited by Felix Salmon at Market Movers.? I tried to post this comment there, but the software would not let me, and I have no idea why:

Thanks, Felix.? With the Wells Notice served to Hank Greenberg, this chapter of the AIG story is not over yet.

Sometime in the future, I’ll find and post a copy of the memo where Hank Greenberg discovered the massive under-reserving at ALICO Japan, giving his response to the problem… but given the billion dollar hole, it was amazing that AIG did not miss earnings that quarter, because it was much larger than their quarterly earnings.

And some of my insurance analyst friends wonder why I don’t find AIG to be cheap…

But, regarding the recent AIG news flow, my timing is not something that I attribute to skill.? I don’t believe in luck, but that Greenberg would get the Wells Notice so soon, that AIG would indicate willingness to sell off non-core units, or that they would raise significantly more capital than they previously indicated was not something I would have expected would happen the next day.

As I mentioned at RealMoney back when Greenberg left AIG, my experience in my three years inside AIG was that we (the small actuarial unit that I was in in Wilmington, Delaware) found five reserve errors worth more than $100 million, but none of them ever upset AIG’s quarterly earnings.? That is why I remain a skeptic on AIG.

Break up AIG!

Posted on 19 May 2008 by David Merkel

I worked for AIG for three years of my life 1989-1992.? In general, though I learned a ton while working there, I did not like the experience.? As my boss at Provident Mutual said to me, “My greatest doubt about you was that you survived there for three years; it made me wonder about your character.”

That’s probably a bit severe, but turnover was high among employees in the first five years; after that, there were many who would “lifers.”? Turnover would be low after five years.

Now, my stylized history of AIG takes it through the glory days of the 1980s, where return on assets [ROAs] was high, and financial leverage low.? ROA is a much better way to measure insurance company performance than return on equity [ROE].? Earning a spread between assets and liabilities is tough.? Earning an underwriting profit is tough.? Borrowing money to buy back stock is easy.? From the early 90s to the present, AIG became increasingly more levered.? ROE stayed near 15%, but it was less and less ROA, and more and more leverage.

I was never a great fan of my former employer, but I convinced the hedge fund that I worked for to buy some AIG when it was cheap.? We sold around $76, on the day it went into the DJIA.? It hasn’t seen that level since.

When AIG had their big problems, and ejected Greenberg, I wrote a lot at RealMoney about the situation.? The possibilities of accounting manipulation did not surprise me; my own experience there was that we played it to the edge.? AIG has been downgraded by the ratings agencies since then, but because they were big, they delayed the downgrading.? It should have happened years earlier, but Hank intimidated the ratings agencies.

So, I’m not surprised that Hank Greenberg might have directed his employees to achieve a certain GAAP earnings result through a reinsurance treaty.? To me, that would be normal.

It also does not surprise me that Hank is going after present AIG management regarding their recent disappointing earnings.? What does surprise me is the thought that International Lease Finance wants to go its own way.? When the deal originally was done, there was some skepticism inside AIG, but the word was that the tax benefits made the deal work on its own.??? My skepticism today is that AIG will not want to let go of a successful division.? It doesn’t make sense.

Now, Hank can fight AIG management as much as he wants.? (One, two, three.)? My opinion is that poor Martin Sullivan is not capable of managing such a large enterprise, and that it would be better if AIG were broken up.? (Okay, ILFC, see if you can survive on your own.)? Create a US life company, an international life company, a US P/C insurer, one for the foreign P/C business, and one more company to hold everything else.

Hank can complain, but the problems are bigger than the current management team, or Hank, can deal with.? AIG needs to shrink– reduce leverage, focus on underwriting profitability, exit unprofitable lines, as AIG did back in the 80s.? Give up market share, shed employees, become more profitable.? Essentially, they need to undo a lot of what Hank did.? The synergies of the combined enterprise are small, so break up AIG and let new managers focus more intensely on their less diverse enterprises.