AIG's Real Numbers Still Shrouded in Secrecy
By Jonathan Weil
Bloomberg (Opinion) News
October 7, 2010
American International Group Inc., the bailed-out insurance company, says it's poised to emerge as a "financially strong, independent company" once it repays the U.S. government. That claim might be more credible if AIG started showing a truer picture of its financial condition.
The choice belongs to AIG and, ultimately, the Treasury Department. Two years ago when the government seized control of AIG, the Treasury in effect took a 79.9 percent ownership stake in the company, through preferred shares and warrants it received as part of AIG's $182 billion bailout package. By keeping its stake below 80 percent, the government ensured that a financial-reporting method known as push-down accounting wouldn't be permitted under U.S. accounting rules.
The reason that was so important? Had AIG chosen to implement push-down accounting, it would have had to undergo a complete re-assessment of all its assets and liabilities. And, with a few possible exceptions, the company would have been required to begin showing them on its balance sheet at their fair market values, which may have left AIG's books looking a lot worse.
The government wanted to avoid the possibility of this outcome, as the Congressional Oversight Panel for the government's bailout program chronicled in a June report on AIG. So it structured the Treasury's ownership position to make sure that "push-down accounting is disallowed and not an issue," the panel said. Hence, the 79.9 percent limit.
The Treasury's stake is now set to increase significantly, however. One consequence, judging by the numbers AIG cited last week in a press release, is that push-down accounting would become optional, though not required. While AIG has given no indication that it's inclined to redo its balance-sheet, the issue of whether it should is now ripe.
Under AIG's plan to repay the government, the Treasury would swap its current holdings, now valued at $49.1 billion, for a 92.1 percent stake in AIG's common stock. Once the exchange is completed, the Treasury then would sell its shares on the open market, a process that could take years to complete.
Just how much demand materializes for those shares will depend partly on whether investors believe they can trust AIG's numbers. For many of them, an important question will be this: What are the items on AIG's balance sheet actually worth?
The government might not want the public to know the answer. Showing AIG's assets and liabilities at fair value conceivably could scare some investors away, reducing the Treasury's chances of recouping its money. As for taxpayers, divulging such information could reveal if the government paid more for its stake than it's worth.
Determining AIG's Worth
The rules for push-down accounting, which the Securities and Exchange Commission's staff laid out in a 2001 memo, hinge on rigid numerical tests for determining if a company has become "substantially wholly owned" by another entity. The method is prohibited with less than 80 percent ownership, permitted if ownership is 80 percent or more but less than 95 percent, and required (with some exceptions) at 95 percent or more.
The process works like this. When a transaction or series of deals results in a company becoming substantially owned by another entity, the new owner allocates its purchase price among the assets and liabilities it acquired, using their newly assigned fair values. Those values then are pushed down to the acquired company, which can cause either positive or negative adjustments to the items on its balance sheet.
Real World Numbers
The effects of push-down accounting on AIG's books probably would be sizeable. As of June 30, AIG said 54 percent of the $850.5 billion of assets on its balance sheet were measured at fair value on a recurring basis, meaning 46 percent weren't. Just 4 percent of its $745.9 billion of liabilities were.
One example of an asset carried at cost, rather than fair value, is a $29 billion line on AIG's books called deferred acquisition costs, which include sales commissions and other expenses related to acquiring and renewing customers' insurance policies. These deferred costs aren't saleable. It is money out the door. Their fair value wouldn't be anywhere close to $29 billion in the real world. Yet that figure represented 38 percent of AIG's shareholder equity as of June 30.
Other fair-value adjustments could result in increases to AIG's equity. For instance, AIG said the fair values for some liabilities were lower than what its balance sheet showed.
An AIG spokesman, Mark Herr, declined to comment for this column, as did a Treasury spokesman, Mark Paustenbach. My guess is that neither Treasury nor AIG wants to highlight that push- down accounting is back on the table as an option. If more investors knew that it was, they just might demand the additional transparency.
If AIG is truly healthy, it should open its kimono.
(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)
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