Lesson to Pru: AIG isn’t a normal corporation

June 1, 2010

The wrangling over AIG’s Asian insurance unit AIA clarifies what Prudential’s board should have known all along: AIG is beholden to the U.S. taxpayer. While accepting a lower price might have been a rational business decision, it also would have further opened AIG to charges of shortchanging its owners — this time to help Pru.

Prudential Chief Executive Tidjane Thiam may be fighting for his job. His shareholders couldn’t get past sticker shock on the $35.5 billion deal to buy the pan-Asian insurer. That forced him to try to renegotiate at a lower price.

Had he been dealing with a run-of-the-mill distressed company, this might have seemed reasonable. Market turmoil clobbered valuations, with life and health insurers in the S&P 500 down 10 percent last month. Moreover, there are no other obvious contenders for AIA and the government-controlled insurer’s aborted plans to spin off a portion of the unit in an IPO would have brought far less than Pru was willing to pay.

But AIG isn’t just any old insurer. Its bonus fracas last year and the messy use of bailout funds to pay counterparties including Goldman Sachs  have already put the U.S. government in the hot seat for not doing more to protect taxpayer funds. The $132 billion AIG bailout has become a symbol of all that went wrong with the rescue of reckless financial institutions.

U.S. voters are already losing patience. With Thiam on the ropes with his shareholders, the pitch would have been especially tough. Taxpayers are still irate at the help provided to Wall Street titans, and could easily take umbrage with the perception of a deal alteration to save the Pru CEO’s job at their expense.

The IPO of AIA may now be back on the cards. Any flotation would delay a full exit for some time and runs the risk of fetching a lower valuation. The AIG board probably knew full well that explaining such financial nuance wouldn’t have worked against a screaming headline of “AIG gives away $5 billion of taxpayers’ money.” At least other suitors for AIG assets should now be fully aware of the considerations on the other side of the negotiating table.

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