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Three Trustees of AIG Are Quiet, Perhaps to a Fault

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AP

In an early sign of just how tricky corporate governance has become in the era of taxpayer bailouts, three little-known trustees with no office, no staff and almost no mission will soon be deciding questions that affect the fate of American International Group, the giant insurance company.

The trustees include a retired Wall Street executive, the head of a Texas pipeline company and the chairwoman of a firm in Bermuda that provides administrative services to hedge funds.

Even though the government has bailed out AIG with $170 billion in federal money, and even though the Treasury owns nearly 80 percent of its shares, the voting power is in the hands of the three trustees.

Yet for all their responsibility, the trustees have studiously remained invisible to the public. Even after the nationwide uproar last month over bonus payments made to AIG executives at a time when taxpayers were rescuing the company from collapse, the trustees have said nothing in public about their activities or their plans.

The unusual arrangement will face its first test next month, when AIG holds its annual shareholders meeting. Dissident shareholders, led by labor unions, are pushing for shareholder votes to oust an AIG board member and to further restrict executive pay.

Fed and Treasury officials are likely to resist additional pay restrictions, fearing they would aggravate the exodus of crucial employees and make it even harder for AIG to repay taxpayers. That could leave the trustees, who are each being paid $100,000 a year, in the awkward position of having to vote on a proposal that many taxpayers might support but that the government opposes.

The arrangement has raised questions about who really is in charge when the government bails out a major financial institution. Those questions could soon spread far beyond AIG

The Treasury Department is poised to become Citigroup’s biggest shareholder, obtaining as much as 36 percent of its voting shares, and officials plan to turn over those shares to outside trustees as well. And if any of the 18 other large banks now undergoing government “stress tests” are told they need more capital, the government is likely to acquire more voting shares and turn them over to trustees, too.

Some analysts say the setup provides cover for officials who, despite the government’s large stake in various banks, want to preserve the notion that neither the Treasury nor the Fed “owns” AIG or controls any major banks.

“This was the best idea they could come up with at 4 in the morning on how to avoid the conflicts of government ownership,” said Karen Shaw Petrou, president of Federal Financial Analytics, a consulting firm in Washington.

Their public debut at AIG’s next shareholder meeting could also reinforce doubts that anybody — the government or the trustees — is really in control.

“If you own 77.9 percent of the shares, you’re an owner and you should act like an owner,” said Espen Eckbo, director of the Lindenauer Center for Corporate Governance at Dartmouth.

All three trustees were recruited by the New York Fed and have extensive business backgrounds.

One of them is Jill M. Considine, a former chief executive of the Depository Trust and Clearing Corporation and a former banking regulator, now chairwoman of the Butterfield Fulcrum Group in Bermuda, a firm that provides administrative support to hedge funds.

The two other trustees are Chester B. Feldberg, a former senior official at the New York Fed and a former chairman of Barclays Americas; and Douglas L. Foshee, the chief executive of the El Paso Corporation, a natural gas producer and pipeline operator.

The Treasury’s peculiar form of noncontrolling control over AIG reflects a deeply rooted, bipartisan political aversion in Washington about “nationalizing” private enterprises, or having the government actively control them.

According to government documents, the trustees are legally independent of the Treasury and the Federal Reserve. They cannot be fired or replaced simply because their votes clash with the positions of policy makers.

And though they are not supposed to get involved in day-to-day management or set AIG’s broad strategy, they have full power to vote the government shares. If they wanted to oust AIG’s current board and chief executive, for example, they would have ample power to do so.

Citigroup agreed to a similar arrangement in January, when it reached an agreement with the government to convert its nonvoting preferred shares into shares of common stock. That conversion, which could occur as early as next month, would reduce Citigroup’s debt but give the Treasury 36 percent of the company’s voting shares.

The Treasury Department plans to put its Citigroup shares into a trust, just as at AIG, and turn over the voting power to little-known trustees.

Similarly, Treasury and Fed officials later are expected to push several of the 19 largest banks now undergoing special examinations to raise more capital by converting their existing government loans into common stock with full voting rights.

In any other country, such moves would add up to at least a partial nationalization of major financial institutions. But nationalization remains so politically explosive in the United States that President Obama and his top advisers are straining to avoid the slightest hint of it.

Officials who helped draw up the plan for AIG said their main goal was a practical one: how to avoid conflicts of interest between the government’s role in setting broad policy and its role as a corporate shareholder.

“It wasn’t about ideology and it wasn’t about philosophy. It was about crisis management,” said Thomas C. Baxter Jr., general counsel for the Federal Reserve Bank of New York, which engineered much of the AIG bailout last September. “We were at a very fragile point, and we had to come up with a decision right away about how to deal with the hand we had been dealt.”

The result was a plan to separate the ownership of AIG shares, which lies with the Treasury, from the power to vote those shares.

Mr. Baxter said the closest thing to a precedent arose during the collapse in 1991 of the scandal-ridden Bank of Credit and Commerce International. In that case, bank regulators created a trust to separate the bank from First American Corporation, a holding company that B.C.C.I. had secretly controlled and that the government wanted to sell.

In the case of AIG, the trustees’ silence has frustrated the company’s critics.

“If this is going to be the model going forward, taxpayers and other investors have a right to understand how this trust arrangement is going to operate,” said Richard C. Ferlauto, a lawyer representing labor unions that called for the ouster of an AIG board member, James F. Orr III, who was chairman of the committee that approved the bonus plan. The unions received no response from the trustees.

“It’s absolutely essential that the trustees flex their ownership rights,” Mr. Ferlauto added.

Thus far, the trustees have not set up an office or hired any full-time staff. A lawyer at Arnold & Porter, Kevin F. Barnard, advises them on legal issues. This month, the trustees hired a part-time spokesman to field questions from the news media.

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And what have the trustees been doing?

“The trustees meet once a month in person and have a standing weekly conference call,” the spokesman, Peter Bakstansky, wrote in response to an inquiry. The group is also meeting with AIG executives and government officials, he continued. “And yes, there have been more meetings recently, many in the context of the upcoming AIG shareholders meeting.“