The Dwindling Value in AIG

The demise of AIG has been well documented in the business press over the last year. The company’s insatiable thirst for cash to satisfy its derivative contracts will likely become the stuff of legends in future business school case studies.

While the company has survived in its pre-bailout form since September via the use of government funds, it has not been easy. The high interest rate on the government money has and will likely continue to make it difficult for AIG to operate in its current state for a prolonged period. Fortunately, AIG’s management team has vowed to take proactive steps to reduce the company’s debt level in 2009 via the sale of non-essential divisions.

Unfortunately, these efforts have so far seen the company take one step forward while at the same time taking one step back. It now appears entirely possible that the valuations that the company’s assets deserve in the event of the sale will likely not be achieved during 2009. This is unfortunate, as it will likely put tremendous pressure on the company.

Over the last several weeks, investors have learned in greater detail how the company’s divestment activities are doing. While the disclosure that AIG could bring in over $8 billion from the sale of its International Lease Finance Corp. to a variety of sovereign wealth funds is certainly welcome news, it is more than offset by another significant disclosure. Namely, the possibility that the company will sell its asset management division at a price that would have been absurd only a year ago.

A significant driver of this reduced sale price has been the decline in assets under management. While a certain percentage is certainly as a result of the markets collapse, it is clear that withdrawals have soared. At the end of September, AIG’s asset management unit had over $676 billion under management; however, recent reports put this figure at only $210 billion. This decline, when coupled with a decline in valuations likely means that the unit’s current value to AIG has declined by over $10 billion dollars in only a quarter. This type of value erosion is an ominous sign as AIG seeks to sell other non-core assets.

Should the sale of AIG’s asset management unit go through, as rumored, it will be to the detriment of the federal government and AIG’s current shareholders. Despite a lack of divestitures of any significant foreign holdings, it is already readily apparent that the federal government must renegotiate its advance to AIG in such a manner so that it lowers the company's interest rate on its loan. This should give AIG’s management more time to sell off assets over the next several years, once asset prices and valuations return.

Disclosure: Long AIG

Comments

[One AIG shareholder]

I have no problem on your view of dwindling value in general. However I believe the number $600B assets includes the internal assets and $200B is outside assets alone.

2009 Feb 03 07:42 AM

[User 349908]

If I was "long AIG", I wouldn't want to put my name on this article either.

2009 Feb 03 11:58 AM

[Jim O]

Then, why "Long AIG"?

2009 Feb 03 12:41 PM

[Happy Trader]

I fully agree that when the panic get's in full motion, like today, this stock is a bargain for the long term, and a buy, for investors with iron nerves and patience

2009 Feb 03 01:29 PM

[Prudent Speculations]

I'm long AIG because I believe that the government will extend the loan terms and reduce the interest rate on its loan to AIG. While I am down slightly on the stock since my purchase of it in late September, I still believe that long term value exists. However, it is without a doubt a risky bet.

2009 Feb 03 05:45 PM

[drl274]

the most important concept is to watch out for spineless fairies that don't put their name on an article.

2009 Feb 04 02:58 AM

[Dave Wrixon]

Dead Man Walking.

2009 Feb 04 03:53 AM

[orca]

I said it @ 50, said it @ 25, said it @ 15, said it @ 5 and I say it again @ 1: do you trust this company? Do you trust uncle Hank, do you trust the STARR shell in the Carribean, do you trust their financial reporting (on/off balance sh*t oops sheet specifically)?

2009 Feb 04 04:40 AM

[monday1929]

As I never tire of telling all the Ex- free-marketers who now have their hands out, Assets are worth what they are worth to the marginal buyer at the time you sell them. They do not have some "intrinsic" value which the market is too blind to see. Markets are not efficient, and one can make money buying underpriced assets, but the only one paying up for assets will be US through our taxes to the Govt. as it overpays for near-worthless Bank holdings.

2009 Feb 04 07:21 AM

[nukldrager]

would dividend machine care to explain to the layman?

2009 Feb 04 10:04 AM

[Jeff B.]

One thing that separates AIG from some of the other limping, bleeding train-wrecks that have been bailed out is that AIG's insurance model is very sound & profitable. They had soem divisions that scrwed up royaly, and Hank is certainly to blame fo rsome of that. However, they fill a large important niche in the marketplace (at least for P&C) that no other carrier can approach -- even though some think they can. AIG is far from perfect, but it really is a critical player in the insurance market worldwide. I thik they will recover and we'll all wish we had bought lots of it now.

2009 Feb 04 10:44 AM

[Timmothy Posey]

Being Long in AIG's common equity isn't really a good idea, especially since the gov't owns 79.9% of the equity, with the right to purchase the other portion if it ever has to extend another loan.

One way to play AIG is buying its corporate debt, which trades as low as 60 cents on the dollar for the debt that is maturing in October.

2009 Feb 04 05:36 PM

[Chuch]

I had lost all my value in AIG months ago, they're a joke. Banks are probably in for a rude awakening, see here crashmarketstocks.com

2009 Feb 04 06:22 PM