Puts and Calls: Prudential-AIG deal may be off

Tom Karol Occasional Political Commentator
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AIG deal may be off: Prudential initially agreed to pay $35.5 billion for AIA, the Asian insurance business of AIG, but the deal has gone sour. Faced with shareholder opposition and regulatory questions, Prudential has lowered its bid to $23 billion cash, $5.375 billion of shares in the combined companies and $2 billion in notes, for a total offer of $30.375 billion. It’s a blow to AIG, which received more than $180 billion from the U.S. government, and was looking to get $51 billion from the Prudential deal and the sale of its American Life Insurance division to MetLife. AIG said Tuesday it wouldn’t accept lower offer. In a statement, AIG said, “the company will adhere to the original terms of its previously announced agreement with Prudential PLC for Prudential to acquire AIG’s wholly owned pan-Asian life insurance subsidiary AIA Group Limited. The company will not consider revisions to those terms.” It is not immediately clear what role the U.S. government may have had in this decision.

“Clearly as majority owner of AIG, the hand of the U.S. government is writ large over the apparent rejection of price conciliation,” according to the senior strategist at BGC Partners in London. “Pity, but then again, why should they re-negotiate just because the other side got its sums wrong?”

First Greece, now Spain: Just as economic woes in Greece negatively affected world markets, the economic problems of other European countries may cause more problems. The European Central Bank warned on Monday that Eurozone banks face up to 195 billion euros in a “second wave” of potential loan losses over the next 18 months due to the financial crisis, and disclosed it had increased purchases of Eurozone government bonds. The ECB began buying up Greek, Portuguese and Spanish bonds in May to calm debt markets and support a $1 trillion stabilization package for the euro. Spain’s credit rating was downgraded on Friday after a 15 billion euro austerity program was approved in its parliament by one vote, but the effects on the world markets will likely come Tuesday, as the major U.S. and British markets were closed on Monday. The FTSE 100 fell early on Tuesday, on this news and as BP dropped over 12 percent. Prudential on news of the AIG deal collapse.

House approves tax hike on carried interest: On Friday, the House of Representatives passed a bill that would significantly impact the manner in which executives at some investment funds are compensated. Hedge fund and similar managers are typically paid a 2 percent management fee plus 20 percent of any profit they generate, known as “carried interest.” According to the New York Times, the House narrowly passed a provision that would change the tax treatment of “carried interest,” which is now considered capital gain and is taxed at 15 percent, instead of 35 percent for ordinary income. The House bill would tax carried income at as 3/4 ordinary income and 1/4 capital gains. The bill now moves to the Senate, where efforts to dilute or slow the provisions are underway. Given the present need for federal revenue to pay for existing programs — and this provision is estimated to garner $17 billion the next 10 years — it may not be a good year politically to protect income to hedge fund managers.