AIG: Nothin' from Nothin' Leaves Nothin'

Suggestions today that AIG’s equity value may be zero should come as no surprise to anyone who has read Michel Lewis’s account in Vanity Fair of how the firm’s Financial Products group dug itself such a big hole.

Lewis skewers former FP group head Joe Cassano, essentially arguing that Cassano’s tyranical control-freak management style effectively stifled any warning signs that AIG was becoming catastrophically exposed to credit default swaps insuring subprime mortgages.

It’s hard to know what Joe Cassano thought and when he thought it, but the traders inside A.I.G. F.P. are certain that neither Cassano nor the four or five people overseen directly by him, who worked in the unit that made the trades, realized how completely these piles of consumer loans had become, almost exclusively, composed of subprime mortgages.

In a note to clients Thursday, Citi Investment Research analyst Joshua Shanker said the continued risk of more credit default swap losses and its management’s eagerness to sell off businesses at a low value jeopardizes AIG’s equity position, Business Week reports.

“Such collateral calls could also pressure rating agencies to lower their credit ratings for the company, leading to a similar cycle to the one that the company experienced prior to the massive government intervention in the third quarter.\,” Shanker wrote.

He cut his price target on AIG stock to $14 from the split-adjusted target price of $36. Shanker maintained his “hold” rating.

Our valuation includes a 70% chance that the equity at AIG is zero.

Yves Smith offers some analysis at naked capitalism.

In a June 16 Update on AIG’s Capital restructuring, CreditSights was less pessimistic:

We think it is likely that AIG’s systemic importance to the international financial system will result in the continued support of the U.S. Treasury and Federal Reserve though we note that there is a high degree of regulatory risk.

Based on the current performance of AIGFP’s credit default swap portfolio as well as our discussions with AIG’s CFO and structured finance professionals, we believe that our previous negative equity valuation of AIGFP may have been overly punitive.

For more analyst comment on AIG, see Alacra Street Pulse.

Comments

[kingn:]

Why do you put AIG valuation at $14 which includes 70% chance that equity will go to zero? Based on that thesis, this stock should be valued close to a buck or less. Is that correct? Would really appreciate a response.

Jul 11 12:34 AM