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Morgan Stanley Gains as Fed Adviser on AIG Sales

Posted on 20 Jul 2009

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Morgan Stanley, the world's third-biggest stock underwriter, stands to reap tens of millions of dollars for advising the Federal Reserve Bank of New York on the dismantling of American International Group Inc.

Morgan Stanley is guaranteed a role as global coordinator in any initial public offering of AIG units, according to documents released July 17 by the New York Fed on its Web site. The bank will earn percentage fees if AIG sells any of 11 businesses, in addition to an initial $4 million payment and $2.5 million a quarter.

The New York Fed has turned to banks and other financial firms to auction assets and manage portfolios after helping to stave off the collapse of the financial system. AIG got an $85 billion credit line in September after losses tied to housing market bets, a rescue that has swelled to $182.5 billion.

“The Fed will get in trouble politically for this because the very people seen to be responsible for the mess are getting paid to fix it,” said Phillip Phan, professor of management at the Johns Hopkins Carey Business School in Baltimore. “The Fed really has no other choice. They don’t have the depth of talent to manage something like this.”

Morgan Stanley received $10 billion in federal bailout money, which the bank has repaid.

The IPO fees may be the most lucrative part of Morgan Stanley’s arrangement. The bank may earn about $72 million on the public listing, for example, of AIG’s American International Assurance, an Asian insurer to be listed in Hong Kong, according to calculations based on figures disclosed by the New York Fed.

$8 Billion IPO

The IPO, slated to take place next year, may raise as much as $8 billion, people familiar with the matter said in May. Deals of that size in Hong Kong have typically yielded their underwriters a total of 2.5 percent of the IPO, and Morgan Stanley, as co-global coordinator, might get about 36 percent of that amount, according to the Fed document. Deutsche Bank AG was selected as AIA’s other global coordinator.

MetLife Inc. offered $11.2 billion for AIG's American Life Insurance Co. unit earlier this year, people familiar with the bid said in February. The talks haven’t led to a transaction yet, and AIG announced plans this week to sell shares of Alico to the public. A sale of the business could earn Morgan Stanley about $23 million.

Morgan Stanley will also bill the New York Fed for expenses including travel costs and outside advisers, the bank said, and must get permission for expenses beyond a total of $5 million.