Liddy Pleads for Forgiveness as AIG Rescue Unravels (Update2)

Feb. 26 (Bloomberg) -- American International Group Inc. Chief Executive Officer Edward Liddy is under pressure to convince taxpayers they won’t lose billions of dollars in the U.S. rescue of the firm after his plan to sell assets stalled.

Liddy, appointed to fix the insurer after it needed an $85 billion lifeline that grew to $150 billion, is asking the government for help again, two people familiar with the matter said this week. His strategy to sell most of New York-based AIG’s businesses may be scrapped after not getting enough bids, and a restructured bailout may include giving units to the U.S. in exchange for forgiveness of some loans, the people said.

AIG’s ability to repay “every single penny” owed to taxpayers, as Liddy vowed in December, is doubted by investors who drove the company’s stock about 80 percent lower since he took over in September. AIG may post a fourth-quarter loss of about $60 billion next week, said the people, who declined to be identified because talks with the government are private.

“There isn’t a great deal of confidence we can take AIG’s word at face value,” said Bill Bergman, analyst at Morningstar Inc. “AIG shares trading this close to zero suggest there are real losses out there, and if there’s no value for shareholders, taxpayers may be taking some very significant losses.” AIG gained 10 cents to 56 cents in New York Stock Exchange composite trading at $10.47 a.m.

Auto Auction Stalls

Zurich Financial Services AG withdrew an offer for the company’s U.S. auto unit, which AIG expected to generate about $2 billion, after the companies couldn’t agree on a price, a person familiar with the matter said today.

Liddy, 63, joins two predecessors in misjudging the impact of the financial crisis on the insurer. Martin Sullivan, who was CEO for three years until June, had said losses tied to housing would be “manageable.” His replacement, Robert Willumstad, failed to deliver a turnaround plan in time to rescue the insurer, and was ousted in September when the company agreed to turn over an 80 percent stake to the government.

AIG has reduced the risk from derivative bets, sold units from Connecticut to the Philippines, and cut staff at its money- losing financial products business under Liddy, spokeswoman Christina Pretto said.

“Since September 2008, AIG has made progress in its restructuring,” Pretto said.

‘Road to Recovery’

Liddy, who said in November that AIG was “on the road to recovery,” deserves praise for taking on the job for $1 a year in salary and shouldn’t be blamed for failing to anticipate the severity of the global credit crisis, said Marshall Front, who oversees $500 million as CEO of Chicago-based Front Barnett Associates and sold his AIG stake last year.

“It was heroic of him to have stepped forward” to run AIG, Front said. “He was probably convinced he’d be able to deliver on the plan as proposed, and events overwhelmed him.”

Liddy, the CEO at auto insurer Allstate Corp. for eight years through 2006, was appointed to AIG by then-Treasury Secretary Henry Paulson, who knew Liddy from the executive’s service on the board of Goldman Sachs Group Inc., where Paulson was CEO.

Federal regulators said they rescued AIG from collapse to prevent losses at banks that did business with the insurer. Isaac Baker, a spokesman for the Treasury, and the Federal Reserve’s David Skidmore declined to comment.

Net Losses

The global financial slump has slashed the Standard & Poor’s 500 Insurance Index in half since Liddy announced the plan, reducing the prices AIG units can fetch and thinning the pool of companies strong enough to bid for them. AIG has disclosed agreements to sell assets for about $2.4 billion, including an equipment insurer and a private bank.

The recession continues to weigh on the value of AIG’s investments, after causing $37.6 billion of net losses in the first nine months of 2008 on declines in residential mortgage- backed securities and credit-default swaps tied to subprime home loans. The U.S. agreed in November to pay $50 billion to buy residential mortgage securities owned or guaranteed by AIG.

The insurer probably had further fixed-income losses in the fourth quarter and writedowns on swaps that provided protection on more than $300 billion of assets as of Sept. 30, including European bonds and corporate debt, said Donn Vickrey, analyst at research firm Gradient Analytics Inc.

“I think of AIG as a luxury liner that’s riddled with holes and taking on water from a variety of different places,” Vickrey said in an interview. “They’re in such a difficult situation, I don’t know how Liddy resolves it.”

Credit Line

AIG, once the world’s largest insurer, operates in more than 100 countries and has businesses that originate, insure and invest in home loans. The company has tapped about $38.9 billion of its $60 billion credit line as of Dec. 31.

The bailout package also includes an investment of about $40 billion in preferred shares. AIG and the government have discussed exchanging the preferred shares, in which the government is entitled to a 10 percent dividend, for common stock with no dividend, the people said. If the insurer turns over operating units to the government, the company may be divided into at least three divisions controlled by the U.S., the Financial Times reported late yesterday.

Lawmakers and competing insurers said that the U.S. should be wary of extending more money to AIG. Representatives Paul Kanjorski, a Pennsylvania Democrat who chairs a House Subcommittee on capital markets, and Republican Spencer Bachus of Alabama asked last month for a study from the Government Accountability Office into the impact of the AIG rescue on the insurance market.

Congressional Scrutiny

The U.S. Senate’s banking committee has scheduled a hearing for March 5 to discuss the bailout, another person familiar with the matter said today. New York Insurance Superintendent Eric Dinallo is scheduled to appear, said the person, who requested anonymity because no formal announcement was made.

Government help “allows unhealthy insurers to grab more market share in the short term at levels that are unsustainable in the long term,” said David Sampson, head of the Property Casualty Insurers Association of America, an industry group, in a statement this week.

-- With reporting by Zachary R. Mider in New York and Poppy Trowbridge in London. Editors: Dan Kraut, Dan Reichl

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

To contact the editor responsible for this story: Rick Green at rgreen18@bloomberg.net.