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An Upside Down World

We’re living in a make-believe business world. Business news reports that AIG stock was up 264% in the month of August on reports of profits and a new CEO at the helm. But, here’s the thing, none of it is real:

Since the government holds its 79.9% interest in AIG in preferred shares, taxpayers don’t stand to gain from a steep rise in the company’s common stock price.

Instead, the preferred shares pay a dividend. But the dividends on the TARP part of the bailout — $41.6 billion, or about half of its overall loan — are “noncumulative.” That means that the company can skip dividend payments without the obligation to make up the difference later.

And that’s just what AIG did on Aug. 3, failing to declare its dividend payment to Treasury. Should AIG miss three more dividends, the government will have the right to nominate two more directors to the insurer’s board.

Despite Benmosche and investors’ enthusiasm, AIG is still a very troubled company with a sizeable debt to repay to the government.

Think about this for a moment. You’ve got a company that doesn’t have to pay dividends to 80% of it’s owners (i.e. U.S. taxpayers), yet it gets to pretend it profitable. This is all surreal. What I don’t understand is why this is being reported in the business news. A company that is 80% owned by the federal government is for all intents and purposes a government entity, not a business entity.

You disagree? Well, think about who is hiring the new CEO and approving his salary:

In the Securities and Exchange Commission filing, AIG also said that Kenneth Feinberg, the Obama administration’s pay czar, “expressed approval in principle” for Benmosche’s compensation package. Feinberg still must formally approve the new CEO’s compensation.

By the way, the compensation package for running this bailout created government agency is really pretty impressive:

AIG, the bailed out insurer whose pay practices sparked outrage earlier this year, has agreed to a $10.5 million pay package for its new CEO — a stark contrast to his predecessor’s $1 pay but drawing zero outcry from politicians or regulators.

The approval for a package, with a cash component that dwarfs what many competing insurers’ CEOs have received, may be a sign that the Obama administration and lawmakers have begrudgingly accepted that even firms that took federal funds will have to pay top dollar to attract, and keep, executives.

Who are we trying to kid here? This is no longer a firm that took federal funds. This is a federal firm. The CEO of this firm does not create shareholder value. The CEO of a company like this should be on a government pay schedule.