AIG's Resuscitation Quite a Surprise

NEW YORK ( TheStreet) -- AIG ( AIG) used to be a four-letter word.

No one liked American International Group as little as a year ago. It was the poster child for everything that went wrong before the financial crisis. Politicians and pundits assumed that the Federal Reserve's hasty rescue of the company --- to prevent a terrible crisis from spilling over into a catastrophic one -- would be a financial burden all taxpayers would carry for years, if not decades, to come.

The idea that AIG might one day be actually able to pay back the government was laughable.

Consider these facts:
  • The Federal Reserve, with the help of the Treasury Department, had to step in to orchestrate a $182.3 billion bailout to keep AIG going;
  • For this loan, AIG has been paying 14% interest to U.S. taxpayers;
  • In exchange for the bailout, the government took preferred shares which give it effectively 92% control of the company.

Robert Benmosche was appointed the CEO of AIG on Aug. 3, 2009. He was immediately self-confident.

"The government might even make a little bit of money when we're done," he said at the time of his hiring.

Such a notion at the time seemed preposterous to many.

Financial blogger Barry Ritholz appeared on Yahoo! Finance's popular Tech Ticker on Aug 20, 2009, and called Benmosche's claims that AIG could one day repay all its loans to the government "totally absurd."

Benmosche has been a colorful CEO. He remained at his Croatian vacation home for the first few weeks on the job, even inviting reporters into his home and holding impromptu press conferences. Stories were written about the fact that his home had 12 bathrooms that were gold-plated. He talked about his vineyard. The image Benmosche projected wasn't one of a government bureaucrat living at below-market salary rates.

He immediately started holding internal town hall meetings with AIG employees, promising that the government wasn't going to bully them around anymore or get in the way of them running a great company. He promised to fight for employees to get the compensation they deserved. Stories also circulated about him pressing his own board for a better pay package for himself. Finally, AIG's board -- made up of people selected by the government -- told Benmosche to cool it. He stopped being so public, except for when he had to admit a few months ago that he was being treated for cancer and would leave the company when a proper successor could be chosen.

I wrote in TheStreet on Aug. 26, 2009, that I liked Benmosche's style. For AIG to have a future, its own employees had to believe it had a future.

As I wrote back then:

Benmosche said in an internal town hall meeting that he sees the government as only one of several critical stakeholders -- the others being clients in the U.S., Asia, and Europe; employees, and then "the people we owe money to" (otherwise known as the government).

Benmosche said undoubtedly AIG would have to sell some of its businesses to pay back the government but ruled out an imminent sale for its investment advisory business and said other asset sales could wait until the company received full value. "I don't liquidate things; I build things," he said. "If the government wanted this money back quick, they shouldn't have come in in the first place."

I also wrote that the skepticism which many expressed about Benmosche was unwarranted:

Barry Ritholtz called him "totally absurd" to think he's going to pay back the government "in our lifetime." Maybe. But, if you worked for AIG (or were a stockholder), you cheered last week. It's clear who's in charge at this company. It's not the regulators but actually the AIG and its employees. This is quite a contrast in styles from his caretaker predecessor, Ed Liddy..

Finally, I suggested that Benmosche's leadership style was likely to pay off in the coming months for AIG:

Ask yourself, if you were working in the bowels of one of these companies owned by the government, who would your dig deeper for: Benmosche or Pandit of Citigroup? That hidden effort will start to show itself in the operating results and stock price in the coming quarters.

Ritholz disagreed with my article and left the following comment:

Sorry if my appreciation of financial reality regarding $185 billion in taxpayer money thrown at this bankrupt company somehow interfered with your cheerleading of yet another CEO's sales pitch. I don't know your investing track record, but this sort of CEO worship typically leads to enormous investing losses.

Since Ritholz's Web appearance, AIG has seen its stock rise 122% vs. the S&P 500's return of 29%.

Fairholme Fund founder Bruce Berkowitz has been one of the company's biggest supporters and shareholders. In a recent interview with Fortune, Berkowitz described why he invested in AIG:

The good thing about AIG is that it's just so complex. ... For a mere mortal with an average intelligence, it takes a long time to try to put all the pieces together. It's all there to be put together, it's just that you need to have no social life and not too many investments.

And to the Wall Street Journal last summer, Berkowitz said of AIG:

It's a company that's well run and is resuscitating itself with a significant global presence. And the price was right.

Berkowitz currently owns 29% of AIG common stock.

AIG announced last week that it was on track to repay all of the government's money it borrowed in the bailout. It already paid back the Fed the $47 billion it borrowed and now only has to repay Treasury. To do that, the Treasury announced plans to sell its 92% stake in AIG within the next 18 months. Benmosche plans to leave the company around that time too, health permitting.

Treasury acquired its stake in AIG at effectively $30 a share. The stock is currently trading at $54.

AIG will be far different when it finally emerges from government ownership at that time. It has had to sell down many of its former crown jewel assets, including a non-U.S. life insurer to MetLife ( MET) for $16.2 billion, and an Asia-based life insurer to the U.K.'s Prudential ( PUK) for $35 billion, and hold an initial public offering of AIA Group for more than $20 billion.

Yet AIG is still a great company with a bright future, a company with employees who can be proud of its future as a standalone company, not a ward of the state.

To Berkowitz, who did the homework before investing, go the spoils.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson

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