Chaos occurs when government uses private deal making to invest in corporations. AIG gives lessons in this (as William Sjostrom explores) that characterize scores of other deals the New York Federal Reserve and US Treasury have been cooking up for a year, on-the-fly and without any administrative law or other legal supervision (as David Zaring and Steve Davidoff explore).
To see some of the problems, start with the following rundown of AIG’s current capital structure, as constituted by the NY Fed and Treasury without any oversight.
Senior Debt. The NY Fed is AIG’s senior secured lender, with about $50 billion in credit extended, along with other lenders to whom the company owes another $130 billion in long-term debt.
Senior Equity. The US Treasury holds AIG’s senior equity, a series of non-voting, non-convertible preferred for which it paid $40 billion (which AIG used, in turn, to reduce borrowings from the NY Fed). The US Treasury also holds warrants to buy about 2% of AIG’s common. It says it is about to acquire another series of non-voting, non-convertible preferred for $30 billion.
Mezzanine Equity. A Trust whose sole beneficiary is the US Treasury holds convertible preferred stock which, before conversion, commands 77.9% of AIG’s total share voting power.
Junior Equity. Finally, junior equity, the common stock, is held by numerous institutional and other sophisticated investors, with 10% of that held by AIG’s former CEO Maurice Greenberg.
The presumed purpose of this unsupervised intervention is to put voting control in the Trust so that, eventually if AIG is rehabilitated, that controlling interest can be sold in an orderly transaction to private investors, perhaps along with Treasury’s senior equity, and certainly after the NY Fed’s senior debt is repaid. Trouble is, the deal for the Trust’s equity is incomplete, and the overall structure seems replete with conflicts of interest.