International Lease Finance Corp (ILFC), the big aircraft lending business owned by AIG (AIG) is being pulled down by the financial woes of its parent. It makes money, which AIG does not. Its business is growing rapidly. Now, a potential drop in AIG’s credit rating could make ILFC’s cost of borrowing money higher.

The Wall Street Journal reports that "AIG’s problems could make it more difficult for ILFC to compete in the increasingly crowded airplane-leasing industry."

It is getting to be an old saw in the financial community. Good businesses are trapped inside their faltering parents. Their value is hidden and their ability to do business is often compromised by lack of faith in the companies that own them.

ILFC is a perfect example of a operation which is better spun-out than it is kept in. A share in an independent ILFC is undoubtedly very valuable. If AIG’s problems worsen, its stock price could continue to sell of sharply. AIG’s share price is down 30% so far this year.

The trouble at AIG is a fine example of what boards at big banks and brokerage companies do not want to admit. They do great damage to their stockholders by keeping together conglomerates which were formed one or two decades ago. Putting them together was probably a bad idea then and it is a worse one now.

It is nearly impossible to see why the Smith Barney unit of Citigroup (C) is helped by being attached to alternative investments or hedge fund operations which are volatile and, is some cases, dangerous drags on earnings. The Merrill Lynch brokerage network does not benefit one wit from being married to an investment bank which cannot get M&A work during a downturn in the deal economy.

AIG shareholders are being ill-served by its board of directors and that is on top of poor fiduciary activity over that last few years.

Douglas A. McIntyre

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