AIG has allegedly stopped paying many of its bills in spite of its $180 billion in bailout cash, and a lawsuit filed against the firm by a Pennsylvania real estate developer managing 16,800 apartments owned by the global real estate arm paints a disturbing portrait of goings-on at the failed insurer that give emphatic new meaning to the term “zombie bank.”
In his complaint, King of Prussia, Pa. property developer Mitchell Morgan alleges numerous counts of fraud and breach of contract, and depicts AIG as an absentee landlord to its multibillion dollar real estate portfolio, halting maintenance and renovation fees to hundreds of properties and potentially deepening the real estate crash further, sabotaging its own investments at the expense of taxpayers. Striking a populist tone notable for an outspoken Republican who once hosted a Rick Santorum fundraiser featuring George W. Bush in his own (generously-sized) home, Morgan’s suit paints a portrait of a company that manages largely by never returning phone calls and blaming the Fed for everything:
There are real-world consequences for AIG’s financial irresponsibility and its failure to honor its commitments. Employees whose jobs depend on the project renovations will be faced with loss of jobs in an economy whose unemployment rate continues to rise dramatically… Unlike many of the large real estate transactions that were occurring at the time, the goal of this Limited Partnership was not to purchase and “condo convert” or “flip” the properties, but to renovate them and continue to rent them to low income and middle class families…Because of the failure to timely approve and fund the required capital contributions, the Partnership’s vendors, if not paid on time, which will constitute an immediate event of default under the Partnership’s loan agreements. To be clear, these are real loans, not federal bailout loans that can simply be restructured.
Morgan is far from the only partner AIG has stiffed, but thus far he appears to be the only one to have sued, perhaps because he remembers how the insurer ran things in the boom years.Explaining how Morgan came to do business with AIG, the lawsuit indulges some boom years nostalgia.
AIG was looking to raise its profile in the real estate community and participate in one of the “Mega Real Estate Transactions” that had become the rage in the spring of 2007… In the beginning of 2007, AIG had offered to purchase a larger property in New York that was marketed by Darcy Stacom of CB Richard Ellis, but was outbid by another investor. Stung by this failure to participate in a “Mega Real Estate Transaction,” AIG desperately wanted to buy this portfolio… AIG’s success in purchasing the portfolio “off market” was contingent upon it convincing the broker, [Darcy] Stacom, and the seller that it could (1) pay a premium price, (2) obtain financing for the transaction, (3) close the transaction quickly, and (4) successfully manage the properties. Because of its position in the property management business, the first three items were self evident. Not being in the property management business, AIG needed a partner to achieve the fourth item.
Last year, incidentally, “Skyscraper Queen” Stacom was listed as the 35th most important person in New York real estate by the New York Observer, just after #34 Ben Bernanke. She is currently retained trying to sell AIG’s New York headquarters.
Because of the highly competitive market for “Mega Real Estate Transactions,” the amount of due diligence that was completed on the portfolio prior to presenting the offer to purchase was less than what is customary in a normal real estate transaction.
Or in the words of an analyst quoted by Real Estate Weekly at the time:
“I have never seen a deal move so quickly,” said Alan Hammer, a partner at WolfBlock’s real estate practice. “The contracts were signed over the course of a single weekend, and the transaction closed in 90 days. This is an incredible timetable considering the magnitude of this transaction.”
That, of course, was then. Which appears to be part of the problem: shortly after its first bailout in September, AIG tells Morgan it’s putting its real estate division up for sale, that it’s secured an investment banker and already fixed on a “teaser offer.” More than six months later, of course, the company has sold barely sold a single property in its $23 billion real estate portfolio. According to the complaint, AIG repeatedly gives the impression it plans to sell off all its holdings in one fell swoop or in large chunks — even though, in Morgan’s case at least, the current partners are contractually guaranteed right of first refusal to purchase AIG’s interest in the properties.
By late October, AIG was nearly six million dollars past due on its monthly draw downs for maintenance and renovation costs that were provisions of Wachovia’s $1.5 billion financing of the Morgan deal, and the accounting department still couldn’t get any word on whether they’d get paid. Morgan and one of his senior executives began calling, emailing and mailing repeated requests for payment to assorted AIG executives. Not a single email went returned until November 24, which followed a $2.8 bank transfer from the company.
On November 24, [AIG Global Real Estate president] Kevin Fitzpatrick wrote an email to Mr. Morgan, explaining without any supporting documentation that the Federal Reserve Bank “would not make the money available to us until a new method was in place,” and that “although we were able to make the last funding (on an emergency basis) we still do not have a permanent solution in place.
Meanwhile, an October 3 email from a Wachovia Managing Director involved in financing AIG’s residential real estate projects goes un-returned until November 10, when AIG assures the bank, against all evidence, that things are running in a “business as usual manner.” But if AIG’s treatment of the government bailing it out as documented by Treasury Department lawyers trying to iron out details with the company that same week is any indication, a five-week email lag time is the new “business as usual.”
There was also obvious tension between AIG and the government — at least from Treasury’s standpoint. For example, an outside counsel, Marshall Huebner, an attorney at Davis Polk representing the government, was trying to clarify a meeting time for a conference call on Nov. 9. But AIG “rudely never replied to last night’s timing question,” the lawyer wrote. Another lawyer that same day said “I agree and I note that some of them do not have a sense of timeline.” AIG’s tone appeared to be casual, even cavalier. Anastasia Kelly, executive vice president and general counsel at AIG, responding on behalf of herself and Paula Reynolds, AIG’s chief restructuring officer, told Huebner later that day: “Paula and I love you (in the most appropriate way).”
We doubt anyone at AIG would share that sentiment with the business partners the company is using “government” as a vague excuse to stiff.
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