Jim Millstein is no stranger to troubled companies. With a long career as a bankruptcy lawyer and former head of Lazard Ltd’s restructuring practice, he’s done his share of turnarounds.
But nothing prepared him for the firestorm that was American International Group when he arrived at the Treasury Department in the spring of 2009.
Controversy over $165 million in retention bonuses paid to employees of AIG Financial Products — the unit that brought down the company — was raging. Edward Liddy, then AIG chief executive, had just been excoriated in a House of Representatives hearing and public sentiment was rapidly turning against bailouts.
“Suffice it to say, when I got to the building, everyone was shell-shocked,” Millstein said of the Treasury. “And the company was completely shell-shocked.”
The son of famous New York corporate governance lawyer Ira Millstein, he had been enticed to come to Treasury as chief restructuring officer to manage a wide range of bailout investments. But he quickly learned his sole focus would be AIG — much to the relief of others working on the politically toxic project.
“It was like, ‘Thanks for coming. It’s your problem,”‘ he said.
A year and a half later, with the Treasury about to execute a complex stock conversion deal that will pave the way for an eventual exit of AIG — potentially at a massive profit — Millstein, 55, is ready to consider a new assignment in Washington. He wants to see the transaction completed first.
“I am still looking around. There are still some problems around town that need fixing,” he said. While he would not be specific, he noted that among the problems “sitting there” were mortgage finance giants Fannie Mae and Freddie Mac.
Starting in the new year, the Treasury will embark on a massive effort to restructure Fannie and Freddie, which were seized by the government just two months before the AIG bailout in July 2008. They dominate the U.S. mortgage market with their guarantees, so any overhaul would entail finding a new business model for securitizing mortgages and providing affordable loans to the housing market.
Millstein said the early days of the AIG workout had some “lonely moments” for him and his deputy, Thomas Casarella, with whom he had worked at Lazard. Unlike the bailout of General Motors Co., which had political support from the White House and throughout Congress, AIG was a pariah that seemed to bring negative headlines to the Obama administration at every turn.
The two worked largely on their own at the Treasury, in close contact with AIG management and the team at the Federal Reserve Bank of New York.
The first task was to survey the wreckage, sifting through the opaque web of intra-company guarantees that contributed to the insurer’s collapse.
This was a “series of onion layers,” each one revealing more disturbing and confusing information, said Casarella, 32. “It wasn’t just figuring out what one thing was. It was figuring out what all of these things were.”
Worse, no one knew where the bottom was. AIG was still burning through cash at an alarming rate and it was not clear whether the $182.3 billion bailout would be enough to save it.
They began contemplating how they could break it up and sell it off in bankruptcy court.
Fortunately, the stock market rallied in the summer of 2009 after bank stress tests opened the door to capital raisings, providing some breathing room. They began to size up asset valuations and the core option soon become clear — sell off the foreign insurance units and other non-core assets to repay the Fed and retain Chartis and SunAmerica as the core of the company.
Millstein spoke almost daily with AIG Chief Executive Robert Benmosche on options to accelerate the repayment to the Fed and allow the company to regain an investment-grade credit rating. With 28 years of sparring in and around bankruptcy proceedings, he found ways to settle disputes between and within the three major partners — AIG, Fed and Treasury.
“Jim speaks the language, and he doesn’t let anyone get away with anything. He often mediated between folks,” said Sarah Dahlgren, who headed the New York Fed’s AIG team.
Another person involved in the turnaround effort said Millstein was able to “leaven tense moments with a sharp sense of humor.”
Millstein all the while had to deal with an unprecedented level of scrutiny from bailout oversight bodies that are still questioning the handling of the AIG bailout and the wisdom of payments to counterparty banks.
In May, the Congressional Oversight Panel seemed shocked at his testimony predicting that U.S. taxpayers could wind up profiting from AIG. It issued a report just weeks later saying taxpayers were “at risk for severe losses” on the bailout and it was unclear whether they would ever be repaid.
Based on the exit plan and a stock price that shows a paper valuation of some $90 billion for the government stake, that view is changing.
“The AIG story has improved greatly. Despite earlier criticisms, Treasury deserves credit,” Congressional Oversight Panel member Richard Neiman, who is the New York state banking superintendent, said in a statement. “Jim has brought a strong set of skills that has well served the taxpayer and public.”
(Reporting by David Lawder in Washington, Paritosh Bansal in York and Kristina Cooke in New York, writing by David Lawder; Editing by Claudia Parsons and Jim Impoco)