Fannie Mae-No Politics (FNMA)

[TheMotivatedTrader]

J.P. Morgan Dealmaker Lee to Take Stand in Greenberg’s AIG Suit:

http://blogs.wsj.com/moneybeat/2014/11/13/j-p-morgan-dealmaker-lee-to-take-stand-in-greenbergs-aig-suit/

November 13, 2014, 12:52 PM ET
J.P. Morgan Dealmaker Lee to Take Stand in Greenberg’s AIG Suit
ByLeslie Scism

Another top Wall Street deal-maker is poised to testify in the trial over the bailout of American International Group Inc., providing additional detail about the frenzied and ultimately unsuccessful efforts to find a private-sector lifeline for the company.

The government has told the court that it expects this week to call James B. Lee Jr., vice chairman of J.P. Morgan Chase & Co, long one of the most prominent bankers in the mergers-and-acquisitions world. He could take the stand as early as this afternoon, people familiar with the matter said.

Mr. Lee is expected to testify about efforts by J.P. Morgan to help AIG line up private-sector financing in the several days before the company accepted what turned out to be one of the government’s biggest bailouts of the 2008-09 financial crisis. The rescue, which has been fully repaid, reached nearly $185 billion at its peak.

The judge at the bench trial in the U.S. Court of Federal Claims in Washington, D.C., already has heard from other bankers–including John Studzinski, a Blackstone Group LP senior managing director–who were involved in the deal-making efforts.

The testimony has been entertaining at times. Asked if he was present at the AIG board meeting where the bailout was voted on, Mr. Studzinski answered: “What sort of advisor do you think I am? I was present in person. Oh, my God, shocking questions.”

The lawsuit was brought in 2011 by Maurice R. “Hank” Greenberg, who built AIG into a global powerhouse over nearly four decades as its chief executive until his departure in 2005. His Starr International Co. investment firm was AIG’s biggest shareholder at the time of the bailout.

The suit maintains the government didn’t have legal authority to take an equity stake in AIG, among other alleged improper aspects of the takeover. The deal-making activity is relevant because Mr. Greenberg contends that the government coerced AIG’s board into accepting the bailout by trying to quash private-sector opportunities. Its purported motive was to control the company and use it as a vehicle for funneling money to AIG’s counterparties on Wall Street and overseas in “backdoor bailouts.”

The government maintains it stepped in as a last-resort lender to rescue the insurance conglomerate after efforts by AIG and the government to come up with private-sector money proved futile.

In testimony in recent days, AIG’s deputy chief investment officer, Brian Schreiber, described how he had overseen an open house of sorts at AIG in the weekend before the Tuesday, Sept. 16, 2008, government bailout. Various private-equity firms, including J.C. Flowers & Co. and KKR & Co., and other potential bidders were in meetings to learn more about deal opportunities.

Mr. Schreiber, who then was a point person for strategic planning for the company, recalled one session in a jammed conference room. “There were, you know, maybe 50 or more people in the meeting… sort of packed to the rafters.” He recollected senior bankers from J.P. Morgan, Goldman Sachs Group Inc. and Morgan Stanley in attendance.

Mr. Studzinski, in videotaped testimony from London that was played in court, recalled how he had worked with a handful of Blackstone partners and “a cascade of junior people below them” to try to rummage up $20 billion for AIG in approximately 24 to 48 hours.

“You could argue among sane people” that the assignment was “in the category of fantasy,” he testified.

He said Blackstone had had “no ability to verify/analyze” exactly what kind of problems AIG had, both because of the time squeeze and shortcomings in AIG’s management-information system at the time—“slightly somewhere between the abacus and some variation thereof,” he said.

Among parties that Blackstone make contact with were representatives of sovereign wealth funds in Singapore and China, he said, and private-equity firms such as KKR and European insurance giants AXA SA and Allianz SE . He said Blackstone tried to identify AIG assets, such as real-estate holdings, that “could be seen to be either salable in the course of the weekend, which gets into the fantasy-land category,” or could be used as collateral.

He said he had entered the weekend thinking a challenge would be reaching senior decision-makers on short notice, but with the financial world focused on a global markets meltdown “the ability to access very senior people who were prepared to talk and be constructive was very real.”

However, no deals resulted because the parties needed a week to five weeks to make a decision, Mr. Studzinski testified.

AIG’s Mr. Schreiber echoed those thoughts, summarizing some reasons why transactions couldn’t be done: Investors had a hard time figuring out how much money AIG needed; interested parties weren’t willing to loan with the financial crisis growing more severe by the day; there was too little time to gain comfort with doing a large deal, and it was too hard to value assets amid the market turmoil.

By Monday, Sept. 15, 2008, the day before the bailout, the Federal Reserve Bank of New York had become involved in the matter, as AIG’s liquidity problems were rapidly worsening. The New York Fed asked J.P. Morgan and Goldman Sachs to team to line up a consortium of banks to lend to AIG, witnesses have testified.

That bank-consortium effort focused on a potential loan of $70 billion or more. A tentative term sheet was drawn up under which the lenders would have gotten a 79.9% ownership stake in AIG in exchange, according to testimony.

That term sheet became the basis for the AIG bailout by the government, former New York Federal Reserve President Timothy Geithner earlier testified.