AIG Fights a Fire at Its Paris Unit-Executives' Resignations Put Billions in Contracts at Risk

[kpete]

Source: Wall Street Journal

AIG Fights a Fire at Its Paris Unit
Executives' Resignations Put Billions in Contracts at Risk of Default

By LIZ RAPPAPORT, LIAM PLEVEN and CARRICK MOLLENKAMP

Amid the flap over bonuses at American International Group Inc. two of the company's top managers in Paris have resigned. Their moves have left the giant insurer and officials scrambling to replace them to avoid an unlikely but expensive situation in which billions in AIG trading contracts could default.

Representatives of the Federal Reserve, AIG's lead U.S. overseer, are talking with French regulators and AIG officials to deal with the consequences of a complicated legal scenario in which the departures of the managers in Banque AIG, a subsidiary of AIG's Financial Products unit, could trigger defaults in $234 billion of derivative transactions, according to people familiar with the situation and a document AIG provided to the U.S. Treasury.

Defaults, by no means inevitable, could not only hurt AIG but also could force European banks involved in the trades to raise billions in capital to cushion potential losses, according to AIG documents.

That is because the banks used Banque AIG to hedge the risk in some of the assets they own, allowing them to hold less capital against those assets, which could include securities such as mortgages and corporate debt.

Read more: http://online.wsj.com/article/SB123802506167942421.html#mod=testMod

[Rosa Luxemburg]

1. well they'll have to find new managers

[Tansy_Gold]

13. I can't imagine any company, of any size, not having some kind

of back-up for every position. People get sick. They get hit by cars. They have sudden massive heart attacks on the way to work. NO ONE should ever be indispensable.

To me this all looks like more royally bad management.


Tansy Gold

[Demeter]

15. Or Flagrant Criminality

or a spot of blackmail. It sure as hell isn't good business practice!

[Tansy_Gold]

16. Actually, I'd go with the blackmail.

I don't think they were incompetent, which means they have some kind of "back-up" plan and/or what we used to call cross-training.

Criminal? Not probably in a srictly legal/illegal sense, but in an immoral/unethical sense.

That leaves blackmail, the kind of thing that's instituted after the fact, to cover their asses when the whole freakin' pyramid comes crashing down around 'em.


Wankers.




Tansy Gold

[No Elephants]

17. Bad management? At AIG?

[Skink]

2. I'd hate to be the EU right about now.

[Turbineguy]

3. If AIG had only been around

when the Soviet Union wanted to run the world.

[acmavm]

4. So, is this legit? I see it as being a way to game the system

<snip>

If they don't, French regulators may appoint their own designee to manage the bank -- an outcome that could trigger defaults under the bank's derivative contracts. The private contracts say that a regulator's appointment of a manager constitutes a change in control, according to a person familiar with the matter; the provision is often included in derivative contracts where parties want to preserve a way out if something about their counterparties changes.

____________________________________________________________

These two guys leave and that invalidates the contracts?

[mbperrin]

5. Apparently so. Now tell me why these are company contracts and

obligations when evidently individuals are actually the ones in control?

This would be some sort of non-feasance in any other industry.

For example, I wouldn't get free checking when my bank manager changed.

[acmavm]

6. Exactly, they weren't doing business with these two 'managers'.

The were doing business with the 'company'.

That's why I say they're gaming the system yet again.

[mbperrin]

7. Yes, again. Or maybe "still"?

Again sort of implies a pause and then more action.

These guys never stop!

[Igel]

14. It seems simple enough.

I could be wrong.

But AIG has a board or some sort of long-standing control system and process for replacing these two execs--whether it's a president appointing new execs with the approval of the board, whether it's the board approving appointing/approving them, whether it's the AIG mother company doing the appointing or approval. So who has control? Dunno--the board, AIG-central, but it's some part of AIG.

Now let's have the execs that resign get replaced not by AIG, but by the French government. "Regulators." Who controls AIG? AIG? No. The French government controls AIG.

"Control" by these two execs is beside the point.

Here's the rub: The regulators want veto power over the new guys. Fine, but what happens if AIG doesn't cooperate, if it doesn't appoint anybody that's acceptable. It's presumably bad for the company to be missing these two execs, otherwise they wouldn't have them (I'd like to think). So not appointing them dings the company's reputation, reliability, and chances of survival. French regulators wouldn't want that, because it means the French government would have to come riding in wearing its taupe hat and dappled horse.

The only out the French government would have is to appoint the replacements. Wham, suddenly AIG is in default because of this provision, because now the government has de facto control. Life sucks, unless the government can simply decide that contracts don't matter. (Then see the previous paragraph).

There's a third option: Since the execs left because of bonus-related issues, pressure, and having nasty things said about them, reverse it. It's far and away the cheaper of the options, short-term. Whether it's cheaper long-term is a tough call.

[katsy]

8. Is it possible to pass a law that invalidates that clause

in the face of an economic disaster like this?

[acmavm]

10. Anymore I don't know what's possible and what isn't. The law of

contracts used to be guided by some pretty common sensical rules. Now who the hell knows what goes?

[xchrom]

9. ok -- so who are these contracts with -- and could these guys

since these contracts are with them and not the company -- run off and start a new 'AIG'?

[SOS]

11. Lemme get this straight

Two AIG employees resign and $234 billion in derivative transactions could default?
Baloney.
It's propaganda attempting to legitimize the bonuses.

[amandabeech]

12. I used to practice securities law here in the U.S.,

and I've worked on various deals or contracts in which a change in control could trigger certain provisions or payouts.

Here, change in control would most likely be judged by control of voting or convertible securities, but rarely by a change in management in and of itself.

French law and practice could be very different from ours in judging control.

[No Elephants]

18. This does not seem to be about a change in control at the regulatory level. The

regulators seem more concerned with having certain positions vacant than with change.

If the positions are filled, it does not seem to matter if the people filling them have changed. If change in management were the issue, simply replacing the departing employees would not solve anything. Of course, on either side of the pond, private contracts can define chane in control however the parties wish.

The article says, in part"

"If they don't , French regulators may appoint their own designee to manage the bank -- an outcome that could trigger defaults under the bank's derivative contracts. The private contracts say that a regulator's appointment of a manager constitutes a change in control, according to a person familiar with the matter; the provision is often included in derivative contracts where parties want to preserve a way out if something about their counterparties changes."

Change in management, even without a change in ownership, is a trigger for many purposes in the U.S. under both private contracts and local, state or federal regulation.

Maybe it's more accurate to say that change in management was not a significant event in your particular line of work, rather than to say the meaning of change of control must be different in France than it is in the U.S.