Who’s your boss, Mr. Liddy … and for how long?

November 10, 2008

Edward Liddy was appointed chief executive of insurer American International Group Inc within hours of a Sept. 16 government rescue, averting the 89-year-old insurer’s collapse.

On Monday, fifty-five days after stepping into the corner office, Liddy unveiled the company’s biggest-ever loss. Concurrently, the U.S. government restructured most elements of  its initial AIG bailout in favor of a new better-for-AIG scheme, overshadowing the bad quarterly news.

Under the revised plan, AIG gets easier repayment terms and, most importantly, the U.S. Treasury will sink $50 billion  into a fund that will buy and hold mortgage derivatives, including those underlying AIG credit default swaps — a thorny area that has led to massive losses for the insurer.

That leaves the government, not AIG, most exposed to potential future losses if markets for these securities grow darker still.  If things go the other way, a clause baked into the new agreement means the insurer will get a portion (a third in the case of credit default swaps) of gains as market values rise.

“We’ve tried to thread that needle as best we can so that we are protected from the downside and have some opportunity on the upside,” Liddy told investors on Monday.

Any way you cut it, the U.S. now has the most to gain or lose.

Public company CEOs typically answer to a board of directors, and make decisions based on what is best for shareholders. For Liddy, that basically means the U.S. taxpayer, since the government is entitled to a 79.9-percent stake as part of the AIG bailout, which has already heavily diluted those holding stock before the bailout.

“I boldly assumed I can help the country by helping AIG get on its feet, and that is what I intend to do,” said Liddy, in an interview with Reuters.

He said he was seen as ”an acceptable candidate to the Treasury and the U.S. Federal Reserve” to step in at AIG’s darkest hour. Liddy had spent the last 16 years at U.S. auto and home insurer Allstate, stepping down as chairman earlier this year.

Liddy said he weighs the interests of various shareholders when he makes decisions at AIG. “When you are the CEO of a company in distress you have an obligation to shareholders, bondholders, other stakeholders — that is who you work for.”

And AIG is in distress. The company’s third-quarter net loss of $24.47 billion, more than three times the $7.8 billion loss it had in the first quarter, then the largest ever. Liddy says he will stay at AIG as long as necessary to fix its financial woes, planning to sell off assets over the next few years to repay the government debt. After that’s accomplished, his plans are anyone’s guess.

“I want to stabilize the company, generate sufficient asset sales so that at the end of 2009, 2010, people feel really good about this company. Then I will start thinking about how long I am here for,” he said.

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