AIG's wind-down has $1.6 trillion left

Retention payments cloud the real issue: Ed Liddy has a long way to go in 'de-risking' the company.

By Carol J. Loomis, senior editor at large

NEW YORK (Fortune) -- The public uproar over the retention payments that American International Group made to the employees of its Financial Products (FP) division has drowned out all other revelations about the huge, government-controlled insurer. But certain new facts and assertions that have emerged in the company's 10-K and recent hearings seem worth more attention than national outrage has permitted.

One such fact concerns FP's derivatives, the hotbed of trouble at AIG (AIG, Fortune 500). In 2008 their notional value fell from $2.7 trillion to $1.6 trillion. And why? Some contracts matured, more than $60 billion of credit default swaps were terminated by government action, and a great many contracts were closed out by negotiations between AIG and its counterparties.

That much progress is obviously a major step toward CEO Edward Liddy's goals of both "de-risking" AIG (that's one of Wall Street's latest vogue words) and getting it back to home base, insurance. But the remaining $1.6 trillion of derivatives are inevitably going to be a more difficult problem.

FP is loaded with contracts that are complex, long in duration, and likely to be extinguished only after intense negotiations between AIG and its counterparties. At the hostility-ridden House hearings about AIG held in mid-March, Liddy himself cited an energy-related contract not due to mature for another half-century: "How," he asked, "do you know what oil prices are going to be in 50 years?"

Pressed to say when FP might be completely wound down, he estimated four years. In his financial plan, he said, was $2 billion to help FP extricate itself from troublesome contracts.

That figure, of course, has nothing to do with the $165 million in retention payments - the "bonuses," as they are somewhat loosely called - that AIG paid to keep FP's employees on the job and that so infuriated the public. Liddy arrived at AIG months after the retention plan was created. But he made it clear in his House testimony that FP has a burning need for skilled people and that his wish to keep them onboard (as opposed to a wish to avoid legal problems) was what mainly drove him to make the payments. Just how many FP employees will in fact be staying on at their newly politicized workplace seems totally uncertain.

The whole problem of unwinding FP is so complex, and AIG itself is so weakened today by controversy, that it is impossible to say that the company - fortified so far with $180 billion in government commitments - won't come asking for more funds in the future. If it does, public anger will be a force not easily swept aside. To top of page

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