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June 30, 2009 7:51 AM

Checking in with AIG Trust Lawyer Kevin Barnard of Arnold & Porter

Posted by Julie Triedman

Barnard Since last September, when the American International Group, Inc., tipped into insolvency, the U.S. Treasury and Federal Reserve have committed up to $180 billion in financial aid to the global insurer. On March 4 AIG officially turned over the shares to the U.S. Treasury and a government-created trust now holds nearly 80 percent of the company.

How that trust exercises its majority ownership of AIG has been the focus of Arnold & Porter partner Kevin Barnard, cohead of the firm’s financial services practice and a former deputy superintendent at the New York State Banking Department. For the past four months, Barnard, 58, has been advising the three government-appointed trustees overseeing taxpayers’s interest via the so-called AIG Credit Facility Trust.

The trustees tackle their first public test on Tuesday, June 30, when AIG holds its annual shareholders meeting. Shareholders--of which the Trust is really the only vote that matters--will be asked to vote on a number of issues, including a motion by dissident shareholders to further restrict executive pay. The government, meanwhile, opposes additional restrictions.

We talked to Barnard about his work on these issues and about what to expect on Tuesday.

How did you get this matter?

I was contacted by Thomas Baxter, the general counsel of the Federal Reserve Bank of New York in January, after the trust documents were first signed. Charles Bethill, a trusts lawyer then at Thacher Proffitt, advised the trustees on the original document. I, in turn, asked Peter Zimroth, a litigator who was once the corporation counsel of the City of New York and who has a lot of experience counseling corporate boards, and Pat Doyle, head of the firm's financial services practice, to join me. 

What has been the focus of this work?

Initially we focused on coming up with best practices in [AIG's] governance structure. Particularly after seeing the public drama in the media over executive bonuses, it was clear to us that the company needed to get a 'reset' where they weren't constantly looking to the past.

A lot of efforts were aimed at helping [AIG CEO Edward] Liddy to get some new board members to sign on. Surprisingly, after what some were referring to as the "pitchforks and torches parade" in the media,
the people we got are quite exceptional.

More recently, we've had a team in Washington helping our trustees prepare for what they might face in Congressional hearings. There's so much taxpayer dollars pumped into this company that there almost has to be Congressional oversight.

How has the trust handled the major issues roiling the company, such as the flap over the bonuses, and more recently the news that the U.S. would pay out billions of dollars to banks involved as counterparties in AIG swaps contracts?

We want to be somewhere between a passive shareholder, like a sovereign wealth fund, and a super-activist shareholder. We're not in there to replace company management. We don't function as a board. That would potentially create chaos in the company. We also have tried to get across that, while we operate for the taxpayer, we can't have 300 million active shareholders.

What we do is we make sure the company has the right processes and people in place so that the board and management can make good decisions. A few times, as in compensation policies, we have told [CEO] Liddy, this is something you should give consideration to. But even then, it was not 'pay this, don't pay that,' it was the principles that should be followed that reward the right things and not the wrong things.

There was a lot of anger directed at the Treasury and the Federal Reserve [over honoring billions of dollars in swaps contracts with bank counterparties, many of them TARP recipients, and then not disclosing the amounts paid and to whom.] There was the sense that, "the taxpayer owns the company, so we should be able to do anything we want." What we tried to do was to help explain that, while sunshine is a good thing, it at least makes sense to pause and consider whether putting everything up on a Web site may in fact be bad for business. Will Citigroup or some other bank just say, "Look, I don't need to do business with a company where everything becomes fodder for a hearing or a public outrage?"

Remember, part of the plan for getting the taxpayer paid back is to, bit by bit, sell parts of the company for the best price. It doesn't make sense to beat the hell out of the company and then try to sell it. That's sort of what happened in March and April, where every published report was about what a horrible place AIG is. There's no question that talent has left the company as a result.

Are we likely to see more government ownership trusts?

The Obama administration appears to be trying to walk the line of owning but not having major direct control over private companies. And we understand that they are actively considering this as a means for holding the shares of the U.S. government in GM and Citigroup. There really is concern about potential or actual conflicts and the appearance of conflicts if you have arms of the government having a controlling ownership stake.

We've had some very good dialogue with leaders of key Congressional committees. There have been questions and interest in the AIG trust structure. It's the only trust that has been set up and the lights are on. Not surprisingly, they want to know if we think it has worked.

In AIG, at least, we think it has worked. You have three very experienced, knowledgeable business people, two of whom were also high-level regulators, and all come to this from a background that is not political at all. The trust agreement says they should use their judgment to vote the shares held in the Trust to protect the taxpayers' interests. But one thing they can’t do is dispose of the shares without approval of the Federal Reserve.

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