Government owns financial institutions like AIG but doesn’t govern them?

While the government tries to pull the financial and other systemically crucial institutions out of the collapse its main dilemma is how to help the economy without nationalizing private companies. In the course of its financing of the banks and other organizations government increased its stake in these companies. Thus, to preserve the notion that neither the Treasury nor the Fed authorities decided to set up an arrangement under which voting shares are held by the special trustees. Such a structure has already been applied to AIG where, as the New York Times notes, “three little-known trustees with no office, no staff and almost no mission will soon be deciding questions that affect the fate of American International Group, the giant insurance company”.

At the moment the government owns about 80% of AIG’s shares with $170 billion injected into the company in federal money. Yet the voting power is in hands of the three trustees. One of them is Jill M. Considine, a former chief executive of the Depository Trust and Clearing Corporation and a former banking regulator, now chairwoman of the Butterfield Fulcrum Group in Bermuda, a firm that provides administrative support to hedge funds. 

The two other trustees are Chester B. Feldberg, a former senior official at the New York Fed and a former chairman of Barclays Americas; and Douglas L. Foshee, the chief executive of the El Paso Corporation, a natural gas producer and pipeline operator.

As the New York Times notes for all this time these three persons has been staying in the darkness invisible to the public. It is noteworthy that they remained silent in the scandal over the bonus payments to the company executives while the American public hooted in a rage.

The structure of the three will supposedly show the first signs of its acting power next month when AIG has scheduled to hold its annual shareholders meeting. While a large part of shareholders instigated by the work unions are pressing for dismissing an AIG member and further restrictions of the executive pay Federal Reserve and Treasury are not very excited about such measures and are likely against them as restrictions imposed so far on the executive bonuses led to massive exodus of the best brains from large companies. Such a trend in AIG might turn pernicious for it. Thus the trustees, notes the NY Times, are left in a situation when it is uncertain should they vote on a proposal that many taxpayers support but that opposes the government’s objectives.

Thereby a reasonable question arises as to who really is in charge when the government bails out a major financial institution. The question will soon be relevant not only for the AIG, as the Treasury Department plans to set similar arrangement at Citigroup as it is supposedly to obtain as much as 36% of the bank’s voting shares.

New York Times says: “Officials who helped draw up the plan for A.I.G. said their main goal was a practical one: how to avoid conflicts of interest between the government’s role in setting broad policy and its role as a corporate shareholder.”

“It wasn’t about ideology and it wasn’t about philosophy. It was about crisis management,” said Thomas C. Baxter Jr., general counsel for the Federal Reserve Bank of New York, which engineered much of the A.I.G. bailout last September. “We were at a very fragile point, and we had to come up with a decision right away about how to deal with the hand we had been dealt.”

In the absence of any actions on the part of this arrangement which has not even established any office yet the AIG’s critics are getting frustrated.

“If this is going to be the model going forward, taxpayers and other investors have a right to understand how this trust arrangement is going to operate,” said Richard C. Ferlauto, a lawyer representing labor unions that called for the ouster of an A.I.G. board member, James F. Orr III, who was chairman of the committee that approved the bonus plan.

“It’s absolutely essential that the trustees flex their ownership rights,” Mr. Ferlauto added. 

The three trustees are advised by a lawyer at Arnold & Porter, Kevin F. Barnard, on legal issues. This month the three hired a part-time spokesman to address the questions from mass media.

“The trustees meet once a month in person and have a standing weekly conference call,” the spokesman, Peter Bakstansky, wrote in response to an inquiry. The group is also meeting with A.I.G. executives and government officials, he continued. “And yes, there have been more meetings recently, many in the context of the upcoming A.I.G. shareholders meeting.“