AIG: Spiraling Downwards, And Awarding Bonuses on the Way

The recent history of American International Group (AIG) reads like a continuous train wreck complete with horrendous risk management, obscene losses, enormous government bailouts, and of course repugnant taxpayer funded bonuses. The culmination of these misdeeds has made AIG the poster child for everything that is wrong with the financial system and one of the most despised companies on the planet. As far as their stock goes, it had been trading in the very low range between $.50 and $2 for about the last six months. Surely, this was an embarrassment for the formerly distinguished insurer.

At Ockham, we were surprised and dismayed when the board approved the 20-for-1 reverse stock split because this would open the door to a whole new round of short selling. You will be hard-pressed to find someone optimistic about the company’s near-term future as it is selling off assets at steep discounts. These sales are made necessary by the fact that AIG still owes billions in loans to the government from its portion of emergency bailout money. The future of the company is in serious doubt, and the earnings potential for what remains of the company is, at this stage, highly speculative. With so much uncertainty impacting the company, you can bet that short sellers find AIG a compelling target. The battered stock was largely protected from short sellers while languishing at very low price levels, because of SEC rules barring the short sale of a stock with a price below $5 (a level AIG hadn’t seen since Lehman’s collapse). The recent reverse stock split was far too premature and is of absolutely no benefit to shareholders. Since the reverse split took effect on July 1st, the stock has lost about half its value.

Continuing the trend of seemingly irrational behavior, AIG management has now petitioned the administration’s new compensation czar to allow the company to pay millions of dollars in bonuses, justifying this impolitic move with the caveat that it is necessary to retain top talent. When AIG disclosed bonuses back in March there was a public outcry as the company had been on taxpayer funded life support for quite some time and there was no end in sight. This time AIG opted to clear the bonuses with the compensation czar and with $235 million in bonuses slated for the much maligned financial products unit, the situation is extremely delicate.

Regarding bonuses, there is an argument to be made for both sides. The government has already sunk tens of billions of dollars into the firm and if the taxpayer is ever to be repaid, AIG will need to retain experienced, talented and smart people in key positions. However, the counter-argument is more compelling, at least in our opinion. In this environment, how can you justify paying millions of dollars in bonuses to the key personnel of a failing enterprise, when many of those people who stand to be bonused played a role in that failure to begin with? Mismanagement of AIG has resulted in hundreds of billions of dollars of lost shareholder value and tens of billions in government bailout money, compelled at a time of severe economic crisis. Everyone is struggling in the current economy and to reward key personnel of this one particularly notorious business is, at the very least frustrating. It’s not like AIG has successfully emerged from troubled waters; the future of the firm is still very much in doubt and the latest news from the company concerns further asset sales (at huge discounts) rather than a strengthening of its under-lying business prospects.

We are further astounded by the fact that AIG stock has been up as much as 22% today. The only news that we have seen on the company is in regards to seeking approval for the bonuses. What does one make of this? We really don’t know, unless the bonuses are a sign that the company is doing better than might be expected. Perhaps the shorts have decided to cover their positions after the more than 50% gain they have achieved over the past 10 days? This whole situation is a conundrum and keeps us scratching our heads as developments continue to come to light.

Original post

Comments

[Jim Bond:]

Everyone keeps finagling and talking around the point when it comes to these bonuses. What needs to happen here, is that someone has to step forward and do the right thing for a change, and let the chips fall where they may. Paying these bonuses with taxpayer money is just plain wrong. What kind of society have we become when the conduct of this company and this financial products unit is so egregious, and yet people are still debating what to do? They gave us the reverse split to boot, and Ockham is absolutely right. This just created a new downside for shorts, and the rest will be completely washed out. Greenberg, love him or hate him, has this right. He never would have let the company come to this, and no way he would have paid these people bonuses. Just my humble opinion.

Jul 10 05:46 PM

[snagglesnarf:]

It's the same old story in this sucker's rally: if a company hasn't tanked by now then it is assumed they must be okay and "investors"
load in. They will get burned in the end because AIG has massive hidden liabilities that must eventually be exposed.

Jul 10 08:39 PM

[willyum:]

Let the AIG creeps go under...the planet will survive.

Jul 11 07:18 PM

[thetruthhurts:]

Agree with willyum. Do we really need AGI and the "experienced, talented and smart" people sucking off the government dole based on their prior deeds? What AGI needs is responsible management instead of these egg suckers.

Jul 12 09:05 AM