AIG claws back $2bn from banks on crisis loan bonds

Settlements close a contentious chapter in insurer’s history

American International Group has recovered more than $2bn in settlements with banks over the soured mortgage bonds that helped push the world’s biggest insurer to the brink of failure during the financial crisis.

The mostly private deals mean that AIG is unlikely to pursue further legal action against big banks for mis-selling mortgage-backed securities before 2008, effectively closing one of the most contentious chapters in the company’s 95-year history.

“We have had settlement discussions with many banks that have ended up, I think, very favourably for both sides,” Peter Hancock, AIG’s incoming chief executive, said in his first interview since the insurer announced that he would take over from Bob Benmosche, the strident CEO who helped return the company to profitability.

AIG was once one of the biggest buyers of mortgage bonds and also wrote $50bn worth of credit default swaps – a financial product developed by Mr Hancock while he was a banker at JPMorgan – that offered payouts should housing markets plummet.

After the subprime crash, the insurer became the epicentre of the ensuing financial shock and narrowly avoided collapse thanks to a $182bn US government bailout.

AIG has since embarked on an effort to rebuild its business, repay the vast infusions of taxpayer funds and recoup some of its losses from its mortgage investments.

The insurer announced last week that it had reached a settlement worth at least $650m with Bank of America Merrill Lynch over mortgage securities that AIG had once claimed were “marred by fraud, misrepresentations and omissions”.

AIG has also recouped at least $1.3bn in a dozen out-of-court settlements with banks including Morgan Stanley and JPMorgan Chase, according to people familiar with the matter.

Mr Hancock declined to comment on specific deals but said that AIG had reached private agreements as it strives to cut down on costs and boost profit margins from its insurance business.

When he takes control from September he will inherit a company whose stock has recovered to $55.50 from a nadir of $7 in early 2009, but which remains under pressure to boost returns to shareholders.

AIG also faces new regulatory oversight from the Federal Reserve after being designated “systemically-important” by US regulators who are worried that non-bank members of the so-called “shadow banking system” could pose a threat to financial stability.

AIG has been increasing its lending to businesses as it seeks to raise returns on its vast portfolio of securities amid continued low interest rates. Last month, it said it would team up with Oak Hill Capital Partners, the private equity group, to create a joint venture to make at least $1.5bn worth of loans to midsized companies.

The move comes as shadow banks are increasing their lending to US businesses. More than a quarter of the loans extended last year to middle-market companies were made by financiers that fall outside the realm of traditional banking.

“If you’ve got long-term liabilities, that cash has got to be put to work somewhere, and putting it all to work in rated securities is, frankly, putting way too much store in the value of a rating,” Mr Hancock said. “It’s harder and harder to find attractive yields, and the direct lending is certainly one area where it makes sense [to try to counter that].”

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