Bankruptcy Experts Discuss AIG's Legal Options
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Copyright 2009 A.M. Best Company, Inc.All Rights Reserved BestWire
February 26, 2009 Thursday 05:23 PM EST
730 words
Bankruptcy Experts Discuss AIG's Legal Options
Alyn Ackermann
NEW YORK
Amid speculation that American International Group Inc. may consider filing for bankruptcy protection as the company's stock price continues to slide, closing at 48 cents a share on Feb. 26, bankruptcy experts say if the insurer were to file, it could become the biggest and most expensive in U.S. legal history.
"The size of this is almost incomprehensible," said Paul Johnson, a partner with Pittsburgh law firm of Thorp Reed & Armstrong's bankruptcy and financial restructuring group.
Johnson said the massive scope of AIG - a global corporation with tens of billions of dollars in assets in highly regulated businesses - could be a brake on thoughts of letting the company go into bankruptcy. Even more compelling for federal officials, he said, would be the widespread impact on financial markets worldwide.
"The issue is, has the government gotten to the position where they realize that putting more money into AIG doesn't matter?" he said. "And if they have, then can they brace themselves for the financial freefall that an AIG bankruptcy could bring about? I think that's what the people in the back rooms are thinking about right now."
Responding to a blizzard of media speculation, AIG (NYSE: AIG) has acknowledged it is negotiating "potential new alternatives for addressing AIG's financial challenges" with federal officials.
The federal government provided an $85 billion bailout in September to prevent AIG from falling into bankruptcy. Later, a $150 billion program was instituted to keep the company solvent while it reorganizes and sells assets to repay the federal aid (BestWire, Feb. 24, 2009).
Media reports have said the company has been unable to attract a sufficient number of buyers with enough funding to buy the companies it is trying to sell to help pay off the federal aid. The week of Feb. 23, anonymous reports said plans were considered ranging from breaking up the company, with the federal government taking control of key units, to bankruptcy.
"It's mind-boggling," said Kenneth Miller, a partner at the Los Angeles law firm of Moldo Davidson Fraioli Seror & Sestanovich LLP.
Given the potential global ramifications of such a massive bankruptcy, Miller said he questioned if federal officials would let AIG take that step, because functional control of the company and its assets would be tied up in court.
"The implications are huge," Miller said. "I don't think you want a bankruptcy judge making those kinds of decisions with those kinds of impacts."
The federal role in an AIG bankruptcy would also be unusually broad, the lawyers said. It is a secured creditor through loans it has made to the company, and it holds 80% of AIG's equity as part of the rescue plan.
Miller called it "a fascinating scenario."
"The federal government is a lender," he said. "The federal government owns 80% of the equity. Even the bankruptcy judge is a federal employee. And you need financing to keep it going during the bankruptcy - is that going to come from the government too?"
Johnson said that as a lender, the government has secured rights concerning AIG's assets. Owning the company's stock offers little protection, he said.
"Equity holders are at the end of the line," when it comes to recouping losses in a bankruptcy, he said.
Another complicating factor could be the terms of the credit default swap contracts that AIG's Financial Products unit wrote, many on mortgage-backed securities, which forced the company to seek federal aid last year to stay solvent. The company has had to pay out tens of billions in collateral on the contracts.
"The CDS contracts may make bankruptcy irrelevant," said Jonathan Lipson, a faculty member at Temple University School of Law in Philadelphia.
Depending on the wording in each individual contract, Lipson said, AIG's counterparties may be permitted to keep many billions in collateral. Normally, such funds would be included in the bankruptcy proceedings and divided among creditors as the judge decides.
"The counterparties would get to take whatever they have and go home, notwithstanding the bankruptcy," Lipson said. "AIG wouldn't have to post any new collateral, but the counterparties could keep what they already had."
Most AIG insurance companies currently have a Best's Financial Strength Rating of A (Excellent) with a negative outlook.
(By Alyn Ackermann, senior associate editor, BestWeek: Alyn.Ackermann@ambest.com)
February 27, 2009
Copyright © 2009 LexisNexis, a division of Reed Elsevier Inc. All Rights Reserved.
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February 26, 2009 Thursday 05:23 PM EST
730 words
Bankruptcy Experts Discuss AIG's Legal Options
Alyn Ackermann
NEW YORK
Amid speculation that American International Group Inc. may consider filing for bankruptcy protection as the company's stock price continues to slide, closing at 48 cents a share on Feb. 26, bankruptcy experts say if the insurer were to file, it could become the biggest and most expensive in U.S. legal history.
"The size of this is almost incomprehensible," said Paul Johnson, a partner with Pittsburgh law firm of Thorp Reed & Armstrong's bankruptcy and financial restructuring group.
Johnson said the massive scope of AIG - a global corporation with tens of billions of dollars in assets in highly regulated businesses - could be a brake on thoughts of letting the company go into bankruptcy. Even more compelling for federal officials, he said, would be the widespread impact on financial markets worldwide.
"The issue is, has the government gotten to the position where they realize that putting more money into AIG doesn't matter?" he said. "And if they have, then can they brace themselves for the financial freefall that an AIG bankruptcy could bring about? I think that's what the people in the back rooms are thinking about right now."
Responding to a blizzard of media speculation, AIG (NYSE: AIG) has acknowledged it is negotiating "potential new alternatives for addressing AIG's financial challenges" with federal officials.
The federal government provided an $85 billion bailout in September to prevent AIG from falling into bankruptcy. Later, a $150 billion program was instituted to keep the company solvent while it reorganizes and sells assets to repay the federal aid (BestWire, Feb. 24, 2009).
Media reports have said the company has been unable to attract a sufficient number of buyers with enough funding to buy the companies it is trying to sell to help pay off the federal aid. The week of Feb. 23, anonymous reports said plans were considered ranging from breaking up the company, with the federal government taking control of key units, to bankruptcy.
"It's mind-boggling," said Kenneth Miller, a partner at the Los Angeles law firm of Moldo Davidson Fraioli Seror & Sestanovich LLP.
Given the potential global ramifications of such a massive bankruptcy, Miller said he questioned if federal officials would let AIG take that step, because functional control of the company and its assets would be tied up in court.
"The implications are huge," Miller said. "I don't think you want a bankruptcy judge making those kinds of decisions with those kinds of impacts."
The federal role in an AIG bankruptcy would also be unusually broad, the lawyers said. It is a secured creditor through loans it has made to the company, and it holds 80% of AIG's equity as part of the rescue plan.
Miller called it "a fascinating scenario."
"The federal government is a lender," he said. "The federal government owns 80% of the equity. Even the bankruptcy judge is a federal employee. And you need financing to keep it going during the bankruptcy - is that going to come from the government too?"
Johnson said that as a lender, the government has secured rights concerning AIG's assets. Owning the company's stock offers little protection, he said.
"Equity holders are at the end of the line," when it comes to recouping losses in a bankruptcy, he said.
Another complicating factor could be the terms of the credit default swap contracts that AIG's Financial Products unit wrote, many on mortgage-backed securities, which forced the company to seek federal aid last year to stay solvent. The company has had to pay out tens of billions in collateral on the contracts.
"The CDS contracts may make bankruptcy irrelevant," said Jonathan Lipson, a faculty member at Temple University School of Law in Philadelphia.
Depending on the wording in each individual contract, Lipson said, AIG's counterparties may be permitted to keep many billions in collateral. Normally, such funds would be included in the bankruptcy proceedings and divided among creditors as the judge decides.
"The counterparties would get to take whatever they have and go home, notwithstanding the bankruptcy," Lipson said. "AIG wouldn't have to post any new collateral, but the counterparties could keep what they already had."
Most AIG insurance companies currently have a Best's Financial Strength Rating of A (Excellent) with a negative outlook.
(By Alyn Ackermann, senior associate editor, BestWeek: Alyn.Ackermann@ambest.com)
February 27, 2009
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