Fed to Appoint Trustees to Oversee its AIG Stake

In its unprecedented role in propping up one of the world's largest insurers, the Federal Reserve will be appointing trustees to oversee the U.S. government's stake in American International Group Inc. (AIG).  
  
The central bank plans to select three individuals with business experience to manage the public's nearly 80% stake in AIG. The move sketches one possible blueprint for managing the government's ownership stakes in financial companies during the months ahead.  
  
The three independent trustees, who are expected to be named within the next two weeks, would exercise control of the government's equity stake in AIG, taking over that role from Fed and Treasury officials who executed the bailout.  
  
The government received the AIG equity stake in exchange for lending the insurer as much as $85 billion last month. The Fed last week extended almost $38 billion in additional credit to address AIG's latest cash crunch. The new loan underscores the government's expanding role in keeping AIG from bankruptcy, which government officials say would be disastrous for financial markets world-wide.  
  
The bailout puts the U.S. in the unusual position of being both AIG's owner and lender. The two roles generally would favor the company prospering, but could involve conflicts.  
  
As lender, the Fed is responsible for ensuring that AIG pays interest on its loan -- which has a hefty peg of the London interbank offered rate plus 8.5% -- and repays the central bank. A lender's interests would be served by AIG operating conservatively with a primary focus on loan payments.  
  
As the company's controlling shareholder, the government -- which holds a 79.9% ownership stake -- might want operate more aggressively to maximize AIG's value in both the near and long term. That would ensure that taxpayers, who effectively became shareholders by making the loan, have a better chance of being rewarded. The bailout also effectively makes the government a competitor with private firms in the global insurance business.  
  
The trust arrangement could be one model for how the government manages potential ownership stakes in any financial institutions it might acquire in the months ahead. Trustees can help to insulate a company under government control from political influence and make decisions in the company's economic interest.  
  
The trust structure isn't a first for the government. However, the unique federal involvement in AIG requires independent trustees to protect the interests of the insurer's shareholders, who are now primarily the taxpayers.  
  
The AIG trustees would oversee the government's ownership stake and voting rights in the insurer. Eventually, the trust would sell the government shares, with the profits going into federal coffers. The trustees are expected to hire their own advisers.  
  
AIG will maintain a board of directors, but the loan agreement allows the trustees to direct its makeup. The agreement requires the insurer "to use reasonable efforts" to make its board "satisfactory to the trust" within 10 days of the trust's creation, AIG said in a statement last month.  
  
The Fed thus far has approached its role primarily from the perspective of a lender to ensure that its credit agreement is satisfied. But Fed officials expect to remain involved in discussions about asset sales because they are critical to the AIG loans being repaid.