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Eric Bischof Helped New York Fed Avoid AIG Disaster

Co-head of Morgan Stanley’s financial institutions group, New York–based Eric Bischof advised the New York Fed on its epic restructuring of American International Group.

  • Jayne Jung

One cold scottish afternoon in 1995, a young Eric Bischof sat with his fellow Lehman Brothers Holdings bankers in the back of a black Daimler limousine. Bischof alone would brave the Edinburgh snows to meet potential investors in Renaissance­Re Holdings, a reinsurer planning an initial public offering. At the time, Lehman doubted that its Bermuda-based client would pull off the IPO, because its portfolio was too specialized, recalls Samuel Weinhoff, then Bischof’s boss and now a New York–based board member of Swiss insurer and reinsurer Allied World Assurance Company Holdings. Not Bischof, says Weinhoff: “Eric was highly regarded because, first, he understood the concept when no one else did and, second, he got the deal done.”

Today, Bischof, 47, co-heads the financial institutions group at Morgan Stanley in New York. Promoted with Jonathan Pruzan early last year, the Los Angeles native joined the bank from Lehman in 1996 as a senior associate and climbed the ranks by focusing on insurance. Among his many deals, he’s advised Zurich’s Swiss Re on its $6.8 billion takeover of GE Insurance Solutions in 2005, Boston-based Liberty Mutual Insurance Co. on its $6.2 billion buyout of auto insurer Safeco Insurance Co. in 2008 and the Federal Reserve Bank of New York on its restructuring of American International Group.

On the AIG deal, his biggest to date, Bischof co-led a team of 30 bankers after the New York Fed hired Morgan Stanley in October 2008. AIG was almost bankrupt because of bad bets on credit default swaps linked to subprime mortgages, and the U.S. Federal Reserve had authorized the New York Fed to lend it as much as $85 billion in return for a 79.9 percent stake in the firm.

Bischof, who has an MBA from Dartmouth College’s Tuck School of Business, knew he had to stabilize AIG’s credit rating and protect its most valuable assets. AIG, which then operated in some 130 countries and had more than 30 million U.S. policyholders, saw its market cap plunge to $945 million from a $240 billion peak.

The Morgan Stanley team decided that AIG would dispose of its international units. New York’s Metropolitan Life Insurance Co. bought AIG’s American Life Insurance Co. (Alico) for $16.1 billion in March 2010. Last October, Hong Kong–based American International Assurance (AIA) went public. The two transactions reportedly will net $51 billion to help pay back the $180 billion in bailouts that AIG ultimately received.

In early 2009, Bischof created two special-purpose vehicles in which Alico and AIA could sit until the market stabilized. In exchange for putting all of the subsidiaries’ common shares into the SPVs, the New York Fed got preferred stock and agreed to cancel as much as $26 billion of AIG’s loans. Meanwhile, the U.S. Department of the Treasury offered AIG a credit facility of about $30 billion via the Troubled Asset Relief Program.

“A big part of the Federal Reserve loan was repaid at the time,” says Bischof, who began his career as a corporate strategist at San Francisco–based Providian Financial Corp. and covered European insurers and reinsurers at Morgan Stanley’s London office from 1999 to 2003. “The combination of those actions did a lot to stabilize the rating situation and some of the external pressure on AIG and from there allowed the company to get back on its feet.”

As of last month AIG’s market cap topped $43 billion, while the bailout tab had been reduced to about $50 billion.

Bischof recently led equity offerings for RenaissanceRe, Swiss Re and New York–based Transatlantic Holdings, but insurance mergers and acquisitions are scarce. Ranked second in 2010 for insurance deal volume, with $65 billion, Morgan Stanley has dropped to No. 6 with just $4 billion so far this year, according to Dealogic.

Bischof admits that he’d hoped for a better 2011. “What is clear as we engage with our clients is that one of the keys to success for Morgan Stanley’s financial institutions franchise is its global reach,” he says. It’s also clear Bischof can take the heat and fight off the cold. • •