The Rescue of American International Group Module F: The AIG Credit Facility Trust

The AIG Trust was created to hold Trust Stock, which was issued to the government in connection with the FRBNY’s entering into the $85 billion RCF with AIG in September 2008 to address its severe liquidity needs (Federal Reserve Board of Governors 2008).  The RCF was the first of a series of government interventions for AIG over a number of years (Webel 2017; Wiggins et al. 2021). Interventions were funded by the FRBNY and Treasury; included loans, asset purchases, and capital investments; and became the government’s largest intervention for any one entity to date, totaling $182.3 billion (Treasury 2013, 14).

The RCF was established on September 16, 2008. After some deliberation, the FRBNY settled on the creation of a Trust to hold a 79.9% (later amended to 77.9%) equity interest in AIG received in connection with the Credit Facility (Starr v. United States and AIG 2015, 20–26; FRBNY 2009a, 1). Section 13(3) specified that, “in unusual or exigent circumstances,” the Federal Reserve could provide emergency liquidity to an institution that was unable to adequately acquire it from private markets.  Section 4(4)’s incidental powers provisions permits the Fed to undertake actions incidental to exercising it other powers. (Starr v. United States and AIG 2017, 14-22).

As additional consideration for the RCF, AIG issued the Trust Stock to the Trust. (FRBNY 2009a, 2). In September 2008, neither the Treasury nor FRBNY had the authority to own a controlling equity interest in the company, and thus the Trust was a viable solution to this limitation. The establishment of the Trust was “for the purpose of acquiring, holding, and disposing of the Trust Stock,” the issuance of which was “intended to provide compensation for the assumption of the risks arising from the Credit Agreement and to reduce those risks” (Trust Agreement - Preamble). If the government assistance to AIG was successful and AIG was able to restructure itself, its stock price would likely increase. Rather than have all that value, funded by the government’s lifeline, go only to private stockholders, the Trust Stock would ensure that the taxpayers also received some of that benefit, which they ultimately did to the amount of $17.6 billion dollars of profit (Geithner 2014, 196–197; Webel 2017). Although criticized by some AIG stockholders and others, “the terms of the Federal Reserve credit [including the requirement for the Trust Stock] were modeled on terms prepared for a private sector lender that ultimately decided not to take the risk of lending to AIG after Lehman failed” (Alvarez and Dudley 2018, 19).

Establishment of the Trust was deemed necessary by Fed counsel because although Section 13(3) of the Federal Reserve Act gave the Federal Reserve the authority to lend to a private company, it did not, nor did any other authority, allow the FRBNY to own a controlling equity interest and act as a shareholder in a company (Starr v. United States and AIG 2015, 59–60).  The Fed also considered “gifting” the Trust Stock to Treasury, and having it own the shares, but the Treasury only felt it could receive the shares this way if the Fed used a trust; Treasury also lacked the authority to hold voting stock in AIG^FNAccording to Scott Alvarez, Federal Reserve Board General Counsel at the time, Treasury was restricted by the fact that no funds had been appropriated for the purchase of AIG shares (YPFS 2018). The Anti-Deficiency Act states that “an officer or employee of the United States Government or of the District of Columbia government may not… (B) involve either government in a contract or obligation for the payment of money before an appropriation is made unless authorized by law” (Government Publishing Office 2007b). Additionally, after its passage in October 2008, the Emergency Economic Stabilization Act of 2008 (EESA), provided a basis for the Treasury to hold the shares (YPFS 2018). (YPFS 2018)

These conclusions were testified to in a later lawsuit brought by AIG shareholders challenging the Fed’s ownership as summarized by the court in its 2015 decision (Starr v. United States and AIG 2015, 60):

“The legal staffs of FRBNY and the Federal Reserve acknowledged that they could not obtain or hold equity, or acquire voting control, of a commercial entity.  FRBNY’s general counsel, Mr. [Thomas] Baxter, noted during an interview on May 11, 2010:

Neither the Fed nor the [T]reasury had authority to hold the shares. When we saw equity on term sheet—problem of legal ownership and the conflict.  Maybe strike that and not take equity. But then thought of taxpayer. Create a trust, put shares in trust. For benefit of American people.  We had to decide that right away.

. . . Mr. Baxter notified the Board of Governors’ counsel, Mr. Alvarez, on October 23, 2008, “we agree that there is no power” for the Federal Reserve “to hold AIG shares.”^FNHowever, Baxter also testified that he did not remember claiming such and that a statement that the Fed could not own shares “is not consistent with my views” (Zajac 2014).

Moreover, as Board of Governors General Counsel Scott Alvarez later testified, there would also have existed a conflict of interest if the FRBNY was both the lender and owner of AIG, because “the owner and the lender don’t always have the same interest” ( Starr v. United States and AIG 2015, 60).

Alvarez noted in an interview with the Yale Program on Financial Stability, however, that the Fed authority to hold shares was not perfectly clear: “there is a good argument that we could [hold the shares], we just didn't want to get to that bridge because there were a variety of policy implications and other reasons” (YPFS 2018).^FNSee page 18  for discussion of a concurring opinion by Justice Wallach of the Federal Circuit Court of Appeals considering this issue (Starr v. United States and AIG 2017).

Additionally, a draft memo written by the Fed’s Legal Division on September 17, 2008 notes that the issue of whether a Reserve Bank could “acquire, hold, vote the equity securities it obtains . . . does not need to be addressed at this time” (Legal Division 2008).

According to the Credit Agreement for the RCF, a preferred stock investment was to be issued to a Trust established for the benefit of the United States Treasury (FRBNY 2008b, Exhibit D). The later executed Trust Agreement clarified that the Trust was established for the “sole” benefit of the Treasury, and explained that, “for the avoidance of doubt, [sole benefit] means that any property distributable to the Treasury as a beneficiary hereunder shall be paid to the Treasury for deposit into the General Fund as miscellaneous receipts” (FRBNY 2009a). The Trust’s three trustees were to be appointed by the FRBNY in consultation with Treasury (FRBNY 2009a, 2).

The Trust Stock itself was held in a “securities account” at a commercial bank selected by FRBNY (FRBNY 2009a, 3). However, the Trustees had sole access. FRBNY had no ownership interest in any of the Trust Stock or other assets (FRBNY 2009a, 4). The Trustees also had access to a deposit account with a balance of $100,000 to be used for any compensation and expenses needed to facilitate the operations of the Trust (FRBNY 2009a, 14). Should the balance fall below $25,000, AIG was required to inject enough funds to increase the balance to $100,000 (FRBNY 2009a, 14). In addition to these accounts, the Trustees could hire “full-time and part-time administrative, secretarial, and clerical staff,” as well as lease or sublease office space needed to perform their duties (FRBNY 2009a, 5). Any litigation efforts against the Trust would be fought and paid for by FRBNY, though it would be reimbursed for these efforts by the Trust, if needed (FRBNY 2009a, 10).

Last, Section 4.01 of the Trust Agreement mandated that the Trustees meet with FRBNY on at least a quarterly basis to “discuss the administration of the Trust and other topics of interest to the parties” (FRBNY 2009a, 17). The same section also required the Trust to provide FRBNY with the following reports (FRBNY 2009a, 17–18):

1. “Monthly custodial reports;
2. Quarterly summary of significant actions (votes, consents, etc.);
3. Quarterly reports summarizing the efforts and activities to effect the sale or other disposition of the Trust Stock or other Trust Assets;
4. Minutes of any meetings of the Trustees; and
5. The Divestiture Plan, as amended from time to time by the Trustees.”

A number of provisions of the Trust Agreement were designed to ensure the Trust’s independence, including provisions (i) giving the Trustees “absolute discretion and control over the Trust Stock including how to exercise the voting rights, (ii) limiting the Trustees ability to elect FRBNY affiliates to the AIG board, and (iii) stating that the Trustees were not relieved from exercising their independent judgement despite receiving information from the FRNY.  (Starr v. FRBNY 2012, 9-10)

On January 16, 2009, the FRBNY, in consultation with Treasury, appointed three individuals to manage the Trust. The Trustees were not involved in the decision to develop the Trust; but were all seasoned professionals. Trustee Feldberg had worked at the FRBNY for 36 years; Trustee Considine was a former member of the FRBNY’s board; and Trustee Foshee was the sitting chair of the board of directors of the Federal Reserve Bank of Dallas while a Trustee (Starr v. United States and AIG 2015, 30).   

In a joint statement before a House Committee, the Trustees noted that the use of a trust was “viewed by Federal Reserve and the Treasury Department as a way to place the government’s interest in AIG in the hands of experienced individuals who could act without risk of conflicts of interest that would be present if such controlling interest was held by the FRBNY or the Department of the Treasury” (HOGRC 2009, 77)

FRBNY General Counsel Baxter also has stated that nominating three Trustees to run the Trust rather than one acted as an “additional safeguard” for the oversight of AIG, one of the world’s largest insurance companies (US Court of Federal Claims 2014, 937).

The purpose of the Trust was to serve as the shareholder of the Trust Stock “for the sole benefit of the Treasury” and to provide returns for “the American people”; any Trust assets transferred to Treasury would be transferred directly to Treasury’s General Fund (FRBNY 2009a, 2). The Trustees were to exercise the rights of the Trust Stock, receive dividends, and participate in shareholder meetings and votes in place of the FRBNY, but not for the benefit of the Treasury and taxpayer (FRBNY 2009a, 6–8).

Moreover, to avoid “conflicts and legal impediments that could arise from either the US government or the FRBNY exerting control over the world’s largest insurer,” the Trust provided that the three Trustees would independently manage the Trust and oversee the Trust Stock (FRBNY 2010a). The Trust Agreement states that since the Trust aims “to avoid any possible conflict with its supervisory and monetary policy functions, the FRBNY does not intend to exercise any discretion or control over the voting and consent rights associated with the Trust Stock” (FRBNY 2009a, 2).

Prior to the creation of the Trust, the Trustees sent a memorandum to FRBNY General Counsel Baxter pointing out that there was a potential conflict between the goals described in Section 2.04(d) of the Trust Agreement ( Starr v. United States and AIG 2015, 31). The Trustees were expected to maximize AIG’s ability to repay advances under the Credit Agreement, but they were also expected to avoid disrupting financial market conditions in the “best interests of the stockholders of the Company.” The government later clarified that the two goals were “non-binding” on the Trustees’ discretionary power to vote the Trust Stock ( Starr v. United States and AIG 2015, 31).

Trustee Feldberg testified that “the three-Trustee model . . . expects us to act through a consensus, and to the maximum extent possible to act in unanimity” (HOGRC 2009). Mr. Feldberg stated that the Trust provided “a mechanism so that if we cannot agree, two of the three trustees could go forward” (HOGRC 2009).

The Trustees were to use their own discretion in managing the shares and exercising the powers and rights of the preferred stock held by the Trust (FRBNY 2009a, 2). As shareholders, they voted to elect directors. Trustees did not attend AIG Board meetings but they did have regular discussions with senior management, board members, and Federal Reserve and Treasury officials (HOGCR 2009).^FNIn contrast to the Trustees’ lack of attendance at AIG board meetings, former AIG CEO Ed Liddy testified before Congress that representatives of the Federal Reserve attended nearly every meeting (HOGRC 2009).

Additionally, there were still some limitations on the Trustees’ independence. According to the Trust Agreement, before selling or disposing of the Trust Stock, the Trust required approval from the FRBNY, which would consult with Treasury (FRBNY 2009a, 8– 9).

The Trust was mandated to provide the FRBNY various records, such as: “monthly custodial reports; quarterly summar[ies] of significant actions (votes, consents, etc.); quarterly reports summarizing the efforts and activities to effect the sale or other disposition of the Trust Stock or other Trust Assets; minutes of any meetings of the Trustees; and the Divestiture Plan, as amended from time to time” (FRBNY 2009a, 17–18).

The Federal Reserve’s first press release regarding the RCF, dated September 16, 2008, explicitly mentions that in connection therewith, “The U.S. government will receive a 79.9 percent equity interest in AIG” (Federal Reserve Board of Governors 2008).  However, the Fed and Treasury had not yet worked out the details of the structure or governance of the equity interest (FRBNY 2008b).  The Fed and AIG signed the Credit Agreement and Pledge Agreements on September 22, 2008, and AIG released those agreements publicly in a Form 8-K filed with the SEC on September 26, 2008, which specified the trust as a part of the agreement.^FNThe 8-K is a summation. References to the Trust in total are these (AIG 2008b): “The Credit Facility contains customary affirmative and negative covenants, including a requirement to maintain a minimum amount of liquidity and a requirement to use reasonable efforts to cause the composition of the Board of Directors of AIG to be satisfactory to the trust described below within 10 days after the establishment of the trust. Under the agreement, AIG will issue a new series of perpetual, non-redeemable Convertible Participating Serial Preferred Stock (the “Preferred Stock”) to a trust that will hold the Preferred Stock for the benefit of the United States Treasury.”

It was only on January 16, 2009, that the FRBNY issued a press release on the creation of the Trust (FRBNY 2009b). In addition to naming the Trustees, the press release specified that, “the Trust has been structured so that the New York Fed cannot exercise any discretion or control over the voting and consent rights associated with the equity interest in AIG” (FRBNY 2009b). Approximately a week later, the FRBNY posted the executed Trustee Agreement providing further information about the Trust’s structure and guidelines (FRBNY 2010d).

In an effort to better explain the purposes of the Trust and the roles and responsibilities of the Trustees, the three Trustees testified before the House Committee on Oversight and Government Reform on May 13, 2009. The purpose of the hearing, as expressed by Chairman Edolphus Towns of New York, was to investigate “the shroud of secrecy that has blanketed the entire sequence of [the AIG collapse and the government’s actions]” and to provide answers about the use of funds, AIG’s long-term goals, and protection of the taxpayers’ interest (HOGRC 2009). This hearing followed significant backlash that AIG received for paying out millions of dollars in bonuses to some of the same executives that were instrumental in AIG’s difficulties. The most recent set of payments, revealed the week before the hearing, totaled about $454 million (HOGRC 2009).

The Trustees  spoke at length about their ability to influence the upper-level management of AIG by “ensuring that AIG has the best, most qualified, independent board of directors that it can have.” They were able to nominate members to the board and, as of date of the hearing, they had nominated five new candidates to the board and anticipated that they would all be approved (HOGRC 2009). Following the 2010 shareholders’ meeting, the Trustees would have  nominated and voted for 11 of AIG’s then 13-membe board.

In other testimony and interviews, the Trustees, repeatedly discussed how seriously they took their fiduciary duties to the Trust. See  for example Feldberg 2019.

To recoup the investment by the FRBNY and the Treasury, the Trust was tasked to create a written Divestiture Plan to sell or otherwise dispose of the Series C preferred stock (FRBNY 2009a, 8). The Trust Agreement spelled out that the divestiture of the Trust Stock was to be done in a value-maximizing manner. Furthermore, the sale or disposition of Trust Stock could be completed only after the FRBNY was fully repaid for funds drawn under the RCF, and after Treasury no longer owned any TARP-related preferred stock of AIG^FNThe preferred stock references mentioned here refer to the more senior Series D preferred stock (later Series E preferred stock) and Series F preferred stock that Treasury acquired through the AIG Investment Program; see Buchholtz and Lawson 2021b for further discussion. (FRBNY 2009a, 18). Even with a Divestiture Plan, the Trustees could only sell or dispose of any stock after the FRBNY, in consultation with Treasury, granted approval to the Trust. (FRBNY 2009a, 8). As far as we have been able to discern, the Divestiture Plan was never completed or executed upon since Treasury took over the sale of the Trust Shares.

The Trust Agreement provided that the Trust would terminate upon the earlier of “(i) the sale or other disposition of all of the Trust Stock [including any common stock received on conversion, which could only occur after repayment and termination of the RCF] such that no Trust Stock continues to be held in trust hereunder; or (ii) the Company shall have been liquidated and shall cease to exist or a plan of reorganization or liquidation shall have been confirmed and consummated providing for no distribution in respect of the Trust Stock”  (FRBNY 2009a, 21). Thus, from its inception, the Trust Agreement anticipated two different outcomes: one where the rescue was successful and the Trustees followed their mandate to transfer the Trust Stock to the Treasury, and a second that likely would have been the result of failure of the intervention.

On January 14, 2011, a Master Transaction Agreement, effectuating the Recapitalization Plan, was entered into by AIG (and certain related entities), the FRBNY, the Treasury, and the Trust (FRBNY 2010c). The agreement and plan provided for the repayment of all amounts owed to the FRBNY pursuant to the RCF and for the RCF’s termination.  Following the termination of the RCF, the Trustees converted the Trust Stock and transferred the resulting common stock to the Treasury General Fund (FRBNY 2011). As discussed, this had the effect of dissolving the Trust and terminating the Trust Agreement (FRBNY 2009a, 21). The Trust Agreement also provided that any additional funds held in the Trust’s deposit account as well as any other assets (or the proceeds thereof), were also to be transferred to the Treasury (FRBNY 2009a, 21).