Paula Rosput Reynolds reflects on her year at AIG

By Maria Saporta
Friday, February 4, 2011

As the restructuring officer for American International Group Inc. in 2008 and 2009, former Atlantan Paula Rosput Reynolds had a front-row seat to the largest corporate bailout ever and the inner workings of Wall Street.

Reynolds has now had a year to reflect on her AIG experience. During a visit to Atlanta Jan. 31 that included a speech to the Rotary Club of Atlanta, she summarized her thoughts about AIG.

“First, regulators were asleep at the wheel,” she said.

Second, Reynolds said that when the government intervenes in rescues or bailouts, “it ends up picking winners and losers,” which she said is not healthy for the U.S. free enterprise system or corporate governance.

“Third, when badly performing companies are rescued, they don’t learn their lessons about prudent courses of action,” Reynolds said. “The hubris and culture of complicity that led to such disastrous results is alive and well on Wall Street today. Our credibility in the world remains impaired because we continue to tolerate, if not reward, such a mind-set.”

And fourth, Reynolds said, citizens should demand greater transparency from government. And the president must sent a tone of accountability with federal agencies.

She says it’s now time for the country to put AIG behind it and to focus attention on restoring the overall financial condition of the United States.

Until 2005, Reynolds was CEO of Atlanta-based AGL Resources Inc. She then left town to become CEO of Seattle-based Safeco Insurance. After Safeco was sold, she was asked to help in AIG’s restructuring, a task that she took on for nearly a year. She continues to serve on the board of Delta Air Lines Inc.

AIG, a Fortune 50 financial services company (NYSE: AIG), had ventured far beyond its base of selling life insurance. The firm that was founded in 1919 had evolved into one of the world’s largest property and casualty insurers under the leadership of a “take-no-prisoners CEO,” Hank Greenberg.

“By the last half of the decade of the 1990s, AIG had doubled its revenues through a series of acquisitions — in life insurance, retirement services, consumer finance, mortgage insurance and aircraft leasing — acquisitions it paid for principally using the stock of its company,” Reynolds said. “AIG also began to build a business trading in commodities and financial products — what later became the infamous ‘AIG Financial Products’ subsidiary.”

Reynolds said AIG was “larger than life” in terms of numbers, with revenues of $110 billion on a balance sheet of more than $1 trillion, the year before its collapse.

“If you could wade through the company’s reports, you would find an overstressed balance sheet — too much leverage for a company whose core operation was supposed to be insurance,” Reynolds said, adding that the company had a large and increasing exposure in the residential mortgage market.

“As mortgage-backed and mortgage-related securities lost value beginning in 2005, AIG was taking on more risk at a time that its collateral became less valuable and its credit rating had been reduced,” Reynolds said. “By the summer of 2008, AIG had run out the ability to borrow or to sell stock to raise capital.”

But that was too little too late to save the company.

Reynolds said it was valid to ask about where were the regulators in all this.
“Insurance regulators never tried to understand the larger landscape of AIG; they merely relied on the filings they received on individual insurance companies,” Reynolds said. “Although AIG was lightly supervised by the Office of Thrift Supervision (OTS) because of a small banking operation it owned, AIG was not a bank. Thus, it was not subject to the supervision of the New York Fed.”

Plus, against the backdrop of the Bear Stearns rescue in March 2008 and the insolvency problems of Lehman Brothers, “AIG was just another problem in the background for which the Fed did not have direct responsibility to intervene.”

Complicating the issue was the role of Goldman Sachs.

“Goldman had an additional $13 billion of collateral owed to it by AIG,” Reynolds said. “It is clear from numerous published accounts that Goldman was agitated and making itself heard in the corridors of power. But clearly, AIG’s bailout was inspired by a recognition by the Fed and U.S. Treasury that markets could not accept the failing of yet another institution that was deeply interconnected to the rest of the financial system.”

The New York Fed advanced $85 billion to AIG that went to cover its debt obligations. Then AIG sought $40 billion in TARP (Troubled Asset Relief Program) funds.

The U.S. government became a 79.9 percent shareholder in the company. Also, the Fed invested another $50 billion to buy securities from AIG, removing toxic securities from its insurance companies.

“Even with these extraordinary steps, the government’s assistance was not enough,” Reynolds said. “AIG continued to reel from various accounting losses and other business problems, including an inability to sell anything at close to book value to raise capital.”

Reynolds acknowledged that AIG had some valuable businesses.

“But as an intact company, it was not one worth saving,” Reynolds said. “Everything that AIG did wrong — concentrations in troubled asset classes, too much leverage, a flawed risk-management process — it brought on itself.”

Those included weak accounting and management information systems, an unwieldy corporate organization, poor communications across its businesses, a hyper-competitive management that worked in silos, a hubristic culture, a history of pushing the envelope in its business dealings, and a poor understanding of capital market risk.

“But here’s the irony. AIG acted irresponsibly, but its counter-parties — who failed to recognize AIG’s weakness — just so happened to be many of the largest banking institutions in the world at the time of the global financial crisis,” Reynolds said. “Because they had to be saved to prevent a collapse of the global financial system, AIG was able to stave off the worst consequences of its own ineptitude.”

As for the government’s exposure, the U.S. Treasury has paid $68 billion for 92 percent of the company and the right to certain proceeds, Reynolds said.

“On the back of an envelope, it looks like to me like there is a gap of $20 billion if the investment were to be liquidated today,” she said.

It’s still too early to know what the final government outlay in AIG will be.

But Reynolds said the real goal of the U.S. Treasury “was to restore financial stability overall — not save an individual company — and that has happened.”