The Work

September 17, 2008 11:54 AM

Davis Polk, Sullivan, Simpson on Fed's Bailout of AIG

Posted by Zach Lowe

Details are slowly leaking out about how close American International Group came to following Lehman Brothers into bankruptcy, only to have the Federal Reserve Bank of New York bail it out with an $85 billion loan.

Davis Polk & Wardwell represented the Treasury Department and the Fed in the deal, according to the firm. The team was led by partners Bradley Smith and Marshall Huebner, the firm says. The lawyers declined to comment on the deal when reached by The Am Law Daily.

Two sources with direct knowledge of the deal say Sullivan & Cromwell represented AIG and Simpson Thacher & Bartlett represented AIG's board of directors.

A spokesman for Sullivan officially declined comment. A Simpson spokeswoman did not immediately return calls or e-mails seeking confirmation of the firm's role.

Sources say H. Rodgin Cohen led the Sullivan team, capping off a busy two-week period in which he advised both Fannie Mae and AIG in their government bailouts. Cohen did not return a call or e-mail seeking comment.

There's an informative post about the AIG deal at D & O Diary, a blog focused on management liability issues. The author, attorney Kevin LaCroix of Oakbridge Insurance Services, analyzes several aspects of the government bailout, including the interest rate AIG will have to pay: a whopping 11.31 percent. If AIG draws the full $85 billion the Fed has offered, it will be on the hook for $9.61 billion in interest.

LaCroix also looks at the question of whether the sale of AIG's non-core assets could even cover the $85 billion loan; the Wall Street Journal's Deal Journal quotes an analyst who estimates AIG's non-insurance assets could raise about $42 billion.

And what, LaCroix asks, does the U.S. government intend to do with its 80 percent interest in AIG? Will it be involved in AIG's major business decisions? As LaCroix puts it: "Left unanswered in the Fed press release is the question of what this development means for AIG’s continuing business operations. The primary goal of the Fed facility is the orderly sale of AIG’s businesses. What does this imply about the future of AIG’s operating companies? And what will be left of AIG after the 'orderly sale'?"

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As equity holders the Fed will get whatever is left after AIG's debts are satisified. In other words, not much.

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