PhillyDeals: Harrisburg's OK needed for AIG asset exchange

The plan by federal and New York State officials to save

American International Group

, the largest U.S. insurer, from choking on decayed subprime home loans, requires the permission of officials in Harrisburg who are pledged to protect policyholders, not Wall Street.

AIG - one of the stocks in the Dow Jones Industrial Average - has fallen all year as the economy slowed and the complex financial arrangements set up by ousted chief executive officer Maurice Greenberg frayed.

But things worsened Friday, when Standard & Poor's analyst Rodney Clark said his firm would cut AIG's credit rating unless the company found a way to pay for "expected cash losses on [its] mortgage-related assets."

"If they are downgraded, they are liable for calls on collateral of $18 billion. They don't have that kind of liquidity," Mike Moriarty, New York's deputy superintendent for Property and Capital Markets in the state's Insurance Department, told me yesterday.

So New York is looking for extra cash in some of AIG's 250 subsidiaries, scattered among more than 20 states and 20 nations.

New York Gov. David Paterson tried to slow AIG's collapse yesterday when he announced he was letting his insurance department engineer what Moriarty called "an asset swap, taking some readily liquid assets out of [AIG's] property and casualty insurance companies."

He added, "These companies have excess liquidity," so they can accept other assets "that are less liquid but more valuable."

But New York can't order those transfers, because it doesn't regulate those AIG property insurers.

Pennsylvania does. It's the legal home of National Union Fire Insurance Co., of Pittsburgh, and it is AIG's lead property-casualty regulator.

"The holding company is desperately in need of liquidity," and AIG's Pennsylvania subsidiaries "do have some of that," agreed Pennsylvania Insurance Commissioner Joel Ario. "We have been contacted [he won't say by whom] and we've expressed an openness to consider that, with two conditions:

"First, any tapping of those liquid assets would have to be in exchange for other assets of equal or greater value. So the policyholder comes out as well or better.

"Second, we would do this only as part of an overall transaction that would resolve their liquidity problems."

I reminded New York's Moriarty he'd need Pennsylvania support. "Pennsylvania is on board," Moriarty said.

I recounted my conversation with Ario, and a similar conversation with his Delaware counterpart, Commissioner Matt Denn, who oversees 50 AIG life insurance subsidiaries and other units.

And I reminded Moriarty that states don't always rubber-stamp. Reliance Group Holdings, a very substantial New York company, failed in 2001 after Pennsylvania refused to allow more money to be stripped from its property insurance subsidiaries to bail out the insolvent holding company.

"The details need to be worked out," Moriarty acknowledged. He said he expected that would take "days, not weeks."

Meanwhile, back in the real economy, people with cash are getting deals done.

LLR Partners Inc., of Philadelphia, and Philadelphia native Stanley Tuttleman's Blue Nine Capital, of New York, are putting a total of $17 million into Five Below, the Philadelphia store chain that sells low-priced footballs, books and toys to middle-class middle-schoolers.

The new money is supposed to help Five Below grow from 80 stores to 200 in the Boston-Washington corridor by 2011.

"Our No. 1 store today is in the Gallery at Market East. Have you been there? It's bigger than our original stores. We're going to build more like that," said David Schlessinger, who cofounded Five Below in 2002 with Tom Vellios, his partner from their earlier toy-store chain, Zany Brainy.

Schlessinger finds new and expanded store sites. Vellios does marketing, merchandising, distribution, planning, and scouts the world for attractive product lots at low prices. (Tuttleman has a roughly similar background: His father, Stan Tuttleman, ran Philadelphia's Mast Industries, which helped The Limited move U.S. clothing production to cheaper sites in Asia.)

"Once a decade, David comes up with a new idea that's highly differentiated," said Howard Ross, of LLR. "He did Encore Books in his 20s, Zany Brainy in his 30s, Five Below in his 40s."

LLR added $10 million to its original $9.5 million investment from three years ago.

How big can this get? "Extreme value retail is in. Could a teenaged retail concept expand it? This could be 2,000 or 3,000 stores," Ross said. "I don't think we'll get there on our own. We have choices. Do we do an IPO and use the proceeds, or sell to another retailer?"

First Derivatives P.L.C.

, a software consulting company to investment banks based in Newry, Northern Ireland, says it has bought

Market Resource Partner L.L.C.

, a Center City software marketing and sales firm that counts

Microsoft, Cisco

and

Sun Microsystems

among its clients. The price was $4.5M cash, $1.5M stock, and up to $14M in future profit-based payments.

First Derivatives will keep Market Resource's 100 Philadelphia jobs, and use the office as its North America base, said Brian Conlon, the Irish company's chief executive.

Owners Kevin Cunningham, Jim Regan and Jack Butler built Market Resource, starting in 2002. "With $1,000 each," Regan said. "We worked out of our apartments."

He and Cunningham met at Holy Ghost Prep in Bensalem. Regan went to La Salle and took a marketing job at Merck; Cunningham went to Delaware and was a Price Waterhouse consultant. Butler is an MBA who worked in sales operations for Johnson & Johnson.

How'd they find First Derivatives? "My dad's from Newry. We knew them personally," Cunningham said.

"We have clients in the U.S., but this is our first physical presence," Conlon told me. "Philadelphia is attractive because of its proximity to New York, our biggest market. The cost of headcount and desk is exorbitant on Wall Street compared to Philadelphia. But it's only an hour away by train."