Corporate Governance

AIG and the Bailout of the Government Bailout

By J. Robert Brown

The government is apparently about to provide AIG with access to another $30 billion.  As part of that deal, the government will convert previously issued preferred shares to a new class of Series E Non-Cumulative Preferred Shares on decidedly less advantageous terms for the government.  The main difference was that the preferred shares originally provided for a 10% dividend that would "cumulate," that is would accrue yearly if not paid.  The cumulated (unpaid) dividends must be paid before common stock holders can ever receive a dividend.  The new Series E shares do not cumulate.  If the 10% dividend is not paid in any year, the obligation disappears. 

Moreover, the term sheet pretends that the new Series E shares will pay a 10% dividend but that is highly unlikely to ever occur.  If AIG does not pay a dividend for four consecutive quarters, it must cede to the government two positions (or 20%) of the board. Even if that occurs and directors are inserted onto the board, they must resign whenever a dividend is paid "for four consecutive dividend periods following commencement of such right."

In other words, AIG can keep the government off the board with a 2.5% dividend once a year.  As a result, that is likely to be the effective dividend rate.  Moreover, if by chance, this is not paid (so that the effective dividend rate is lower), it is not clear that the government directors will ever actually get on the board.  The term sheet merely provides that the government gets the right "to elect" two directors.  This suggests the need for a shareholder meeting.  Since the term sheet does not say anything about the government's right to call a meeting, this presumably means the government must wait until the annual meeting of shareholders at which directors are elected.  This could be as long as a year away.  Moreover, the government's right to positions on the board terminates after four consecutive payments from the "commencement of the right" not the actual election of directors.  Thus, AIG could conceivably make the four dividend payments before the government actually elects the directors. 

In addition, it is not good governance to provide that directors may sit on the board for a brief time and then resign automatically once certain dividend payments are made.

This aspect of the bailout means that the government is giving more and getting less.

Full post as published by The Race to the Bottom on March 02, 2009 (boomark / email).