austin356
11-18-2008, 09:06 PM
Can our government become any more obvious with its corruption and stupidity?
http://digg.com/business_finance/The_Professor_s_Pop_Quiz_Who_Controls_A_I_G
The Professor’s Pop Quiz: Who Controls A.I.G.?
The terms of the government’s investment in the American International Group were released last week. After reading these terms, I have a multiple-choice question.
Who controls A.I.G.? Is it:
1) The Federal Reserve
2) The Department of the Treasury
3) The current shareholders of A.I.G. (but not the government)
4) All of the above collectively
5) No one knows
The best answer I can discern right now is number 5. The deal has become much more complicated than it was before, but the control rights over A.I.G. appear to be as follows:
Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the legal aspects of mergers, private equity and corporate governance. A former corporate attorney at Shearman & Sterling, he is a professor at the University of Connecticut School of Law. His columns are available at The Deal Professor blog.
1. In exchange for its $40 billion preferred share injection under the Emergency Economic Stabilization Act, the government is getting a 10 percent dividend on these shares (plus A.I.G.’s agreement to restrictions on lobbying), the same limitations on executive compensation as in other preferred equity injections, a further limitation on annual bonus pools for senior partners not to exceed 2007 and 2006 levels, and compliance with an expense policy. As for control rights — the $40 billion preferred is nonvoting except on certain major issues affecting the preferred. If A.I.G. misses dividend payments for four consecutive quarters, the Treasury has the right under the terms of this preferred stock to elect two directors and a number of directors (rounded upward) equal to 20 percent of the total number of directors after giving effect to such election.
2. In exchange for the new $60 billion Federal Credit Facility (down from $85 billion), the Federal Reserve obtains the general rights of a creditor including senior security over A.I.G.’s unregulated subsidiaries, but no real governance rights except for some negative covenants limiting A.I.G.’s operations and expenditures.
3. Finally, the government is receiving 100,000 Series C preferred shares convertible into 77.9 percent of A.I.G.’s outstanding common stock. This second preferred stock has a vote equal to 77.9 percent of A.I.G.’s share capital and is entitled to 77.9 percent of any dividends paid by A.I.G. on its common stock.
Thus, whoever controls these Series C preferred shares controls A.I.G. These Series C shares, the stock that will vote and control A.I.G., will be owned by is a trust for the benefit of the Treasury Department. The trust is called the A.I.G. Credit Facility Trust. And who are the trustees of this trust and the controllers of A.I.G.? I have no idea nor have I seen any public disclosure on the issue except for news reports in October that these trustees would be appointed by the Fed and that there would be three of them. Moreover, under Section 5.11 of the original credit agreement, a provision that appears to be unamended in the new deal, A.I.G. “shall use all reasonable efforts to cause the composition of the board of directors of [A.I.G.] to be … satisfactory to the Trust in its sole discretion.”
So, why this oddity? I must admit, I am puzzled. Perhaps it is related to accounting or some other legal requirement? But I also suspect it may be political — the government does not want to control A.I.G. directly. Rather, it is preserving some separation of ownership and control to bar future administrations from political meddling (read the Obama administration). This is probably a worthy goal — allowing A.I.G. to operate on an economic basis protected from political meddling.
However, there should be adequate oversight of the trust and some mechanisms to prevent the trustees from obtaining their own private benefits from controlling A.I.G. and its $1 trillion in assets. In addition, the trustees themselves should be chosen for their acumen and ability to right the sinking A.I.G. ship. Here, the government could begin by disclosing the terms of this trust once they are drafted.
http://digg.com/business_finance/The_Professor_s_Pop_Quiz_Who_Controls_A_I_G
http://digg.com/business_finance/The_Professor_s_Pop_Quiz_Who_Controls_A_I_G
The Professor’s Pop Quiz: Who Controls A.I.G.?
The terms of the government’s investment in the American International Group were released last week. After reading these terms, I have a multiple-choice question.
Who controls A.I.G.? Is it:
1) The Federal Reserve
2) The Department of the Treasury
3) The current shareholders of A.I.G. (but not the government)
4) All of the above collectively
5) No one knows
The best answer I can discern right now is number 5. The deal has become much more complicated than it was before, but the control rights over A.I.G. appear to be as follows:
Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the legal aspects of mergers, private equity and corporate governance. A former corporate attorney at Shearman & Sterling, he is a professor at the University of Connecticut School of Law. His columns are available at The Deal Professor blog.
1. In exchange for its $40 billion preferred share injection under the Emergency Economic Stabilization Act, the government is getting a 10 percent dividend on these shares (plus A.I.G.’s agreement to restrictions on lobbying), the same limitations on executive compensation as in other preferred equity injections, a further limitation on annual bonus pools for senior partners not to exceed 2007 and 2006 levels, and compliance with an expense policy. As for control rights — the $40 billion preferred is nonvoting except on certain major issues affecting the preferred. If A.I.G. misses dividend payments for four consecutive quarters, the Treasury has the right under the terms of this preferred stock to elect two directors and a number of directors (rounded upward) equal to 20 percent of the total number of directors after giving effect to such election.
2. In exchange for the new $60 billion Federal Credit Facility (down from $85 billion), the Federal Reserve obtains the general rights of a creditor including senior security over A.I.G.’s unregulated subsidiaries, but no real governance rights except for some negative covenants limiting A.I.G.’s operations and expenditures.
3. Finally, the government is receiving 100,000 Series C preferred shares convertible into 77.9 percent of A.I.G.’s outstanding common stock. This second preferred stock has a vote equal to 77.9 percent of A.I.G.’s share capital and is entitled to 77.9 percent of any dividends paid by A.I.G. on its common stock.
Thus, whoever controls these Series C preferred shares controls A.I.G. These Series C shares, the stock that will vote and control A.I.G., will be owned by is a trust for the benefit of the Treasury Department. The trust is called the A.I.G. Credit Facility Trust. And who are the trustees of this trust and the controllers of A.I.G.? I have no idea nor have I seen any public disclosure on the issue except for news reports in October that these trustees would be appointed by the Fed and that there would be three of them. Moreover, under Section 5.11 of the original credit agreement, a provision that appears to be unamended in the new deal, A.I.G. “shall use all reasonable efforts to cause the composition of the board of directors of [A.I.G.] to be … satisfactory to the Trust in its sole discretion.”
So, why this oddity? I must admit, I am puzzled. Perhaps it is related to accounting or some other legal requirement? But I also suspect it may be political — the government does not want to control A.I.G. directly. Rather, it is preserving some separation of ownership and control to bar future administrations from political meddling (read the Obama administration). This is probably a worthy goal — allowing A.I.G. to operate on an economic basis protected from political meddling.
However, there should be adequate oversight of the trust and some mechanisms to prevent the trustees from obtaining their own private benefits from controlling A.I.G. and its $1 trillion in assets. In addition, the trustees themselves should be chosen for their acumen and ability to right the sinking A.I.G. ship. Here, the government could begin by disclosing the terms of this trust once they are drafted.
http://digg.com/business_finance/The_Professor_s_Pop_Quiz_Who_Controls_A_I_G