Why Did AIG Rally Yesterday?

I have no idea. However, Matt Phillips offers, among others, the following possible explanation:

Apparently there has also been some chatter swirling around trading floors that some sort of debt-for-equity swap may be in the works between AIG and the U.S. government, said David Lutz, managing director of equity trading at Stifel Nicolaus, who had heard the rumors during the day.

Although I would not underestimate the ability of Washington politicians to do extremely stupid things with taxpayer-dollars, I'd like to point out that such a swap should explicitly wipe out all the equity of AIG, rendering the value of the common shares worthless.

AIG owes the US government about US$170B. Without even considering whether or not AIG can ever repay this debt, why should the US government agree to any kind of swap that would benefit the common shareholders when it could own the whole company?

In other words, AIG's prospects don't just have to improve. They have to improve to the tune of repaying $170B to buy back its freedom a la Goldman Sachs (GS) et al before the equity has any value. Or, if you prefer, any interested party would have to come up with $170B to buy AIG. Why would this party pay anything to the common shareholders?

Even the guys in DC can't be that generous.

By the way FNM and FRE also rallied yesterday. Coincidence?

Caveat emptor.

Comments

[max12345:]

Another way of looking at the above:

"By the way FNM and FRE also rallied yesterday. Coincidence?
Caveat Emptor"

True enough, even though Caveat Emptor applies nearly all of the time and to most things one buys these days anyway.

A better question today (but right now and either just before or just after the opening bell rings in about one hour and not after the meetings in DC take place later on today) would be this:

What is the likelihood (and better yet a what is the precise statistical probability between zero and one) that "the guys in DC will be THAT generous" ....and finally go for that "bad bank / good bank" solution (or would it be the "good bank / bad bank" solution) that they had shied away from before so that FNM and FRE will live to fight again another day and pop up to about $ 5 per share, in just a couple of weeks as markets anticipate their becoming once again going concerns? (that used to trade at about 50 dollars instead of 50 cents)

That is, will FNM and FRE skyrocket in the next few days (or even hours) due to a bottom- fishing feeding frenzy from all those buyers throwing Caveat Emptor out the window? Or maybe all those people will definitely live to regret it, as Larry Summers and Tim Geithner decide it would really be much much better to just throw FNM & FRE to the dogs instead of to the usual feeding piranhas......but in that case, what would be (or possibly could be, either imaginably or un-imaginably) their Plan B?

Right now I feel caught between worrying too much about becoming a dog or a piranha but I will probably just play it safe and stay a Caveat Emptor s.o.b........(touch choice)

Aug 06 08:39 AM

[dato2020:]

AIG does not owe the government $170Billion. Please do your homework.

Aug 06 09:00 AM

[Harry Tuttle:]

Even if they go for a bad bank/good bank split, there is absolutely no reason to give current "equity" holders any stake in the good bank for free. Naturally, they would have a residual claim in the bad bank which should be worth (probability weighted) close to zero.

Statistically speaking, the only unknown in the analysis is the government's generosity. I have no doubt that if Geithner acted as if the money was his (as he should) FNM would be worth exactly zero.


On Aug 06 08:39 AM max12345 wrote:

> Another way of looking at the above:
>
> "By the way FNM and FRE also rallied yesterday. Coincidence?
> Caveat Emptor"
>
> True enough, even though Caveat Emptor applies nearly all of the
> time and to most things one buys these days anyway.
>
> A better question today (but right now and either just before or
> just after the opening bell rings in about one hour and not after
> the meetings in DC take place later on today) would be this:
>
> What is the likelihood (and better yet a what is the precise statistical
> probability between zero and one) that "the guys in DC will be THAT
> generous" ....and finally go for that "bad bank / good bank" solution
> (or would it be the "good bank / bad bank" solution) that they had
> shied away from before so that FNM and FRE will live to fight again
> another day and pop up to about $ 5 per share, in just a couple
> of weeks as markets anticipate their becoming once again going concerns?
> (that used to trade at about 50 dollars instead of 50 cents)
>
> That is, will FNM and FRE skyrocket in the next few days (or even
> hours) due to a bottom- fishing feeding frenzy from all those buyers
> throwing Caveat Emptor out the window? Or maybe all those people
> will definitely live to regret it, as Larry Summers and Tim Geithner
> decide it would really be much much better to just throw FNM &
> FRE to the dogs instead of to the usual feeding piranhas......but
> in that case, what would be (or possibly could be, either imaginably
> or un-imaginably) their Plan B?
>
> Right now I feel caught between worrying too much about becoming
> a dog or a piranha but I will probably just play it safe and stay
> a Caveat Emptor s.o.b........(touch choice)

Aug 06 09:02 AM

[Harry Tuttle:]

source: Wall Street Journal


On Aug 06 09:00 AM dato2020 wrote:

> AIG does not owe the government $170Billion. Please do your homework.

Aug 06 09:05 AM

[Perry B:]

AIG is a junk stock even trading at $20.00. It is still only worth $1.00 dollar. Considering the reverse split of two months ago of 20/1. Therefore I have seen this government sanctioned SEC, G-Sachs, break the retail trader or dumb money trick before. Using AIG as the bait. The feds should have shut them down long ago and prosecuted many of the execs who run the show. To do that though. One would have to believe in fairy tails and that politicions are not corrupted by their own personal greed and self interests. On FNM and FRE. Maybe you havent been watching. But the feds are gobbling up all sorts of so called bad banks through FRE and FNM. These so called bad banks are worth a fortune in future revenues. As well as government control of the banking industry at a poor mans level of lending. Which after all is said and done will be the majority of the American people. Thank you congress and Legislative crooks.

Aug 06 09:20 AM

[chinooking:]

well if you know the number ,why not state it ,instead of being a ========


On Aug 06 09:00 AM dato2020 wrote:

> AIG does not owe the government $170Billion. Please do your homework.

Aug 06 09:22 AM

[djj420:]

Total subsidies from Treasury & Fed: $182 billion. The market cap went from $2.8 billion to $3.8 billion in one day yesterday. Trailing 12 month EPS is -$720.


On Aug 06 09:22 AM chinooking wrote:

> well if you know the number ,why not state it ,instead of being a
> ========

I have a small short position that I may be forced to cover just to keep my sanity if it keeps shooting up; but yesterday I wasn't covering, I was trying to double down on the short. If yesterday was a short-covering rally, why were no additional shares becoming available to short? Why would anything move this much in the absence of news? Something is rotten in Denmark...

Aug 06 09:55 AM

[Perry B:]

Dijj420 I have had similar experiences trying to buy shorts of AIG. They become available when they have enough dumb money in the game to short thier own stocks. At little or no cost to the powers controlling the game. I am glad you pointed that out to traders. AIG should be a prime target for shorts at any cost. With plenty of shares to buy. Another thing The SEC made a rule that companies do not have to disclose their short positions. ( so much for transparancy) This rule makes it easier for companies like AIG to let shorts out when they feel like dumping and close the door while they lure in idiots to thier deception. Bring back the up tick rule. Or the market is just a gamble market makers in control of the dice.

Aug 06 10:17 AM

[djdrunkinmo...:]

You are wrong, AIG does not owe $170billion, CNBC, WSJ and you have just repeated the number over and over so much that it is now excepted as fact. Yes, the government used $170billion in the bailout but AIG had given the FRBNY assets in exchange for $$$, as in Maiden Lane I and II, received Commercial Paper and given them securities from their securities lending facility. Go to AIG.com and they outline it fully. It is still a large number but AIG owes about $80billion not the $170billion you continuously suggest.

Do yourself and other "finical" expert authors a favor and set the record straight and admit your mistake.


On Aug 06 09:05 AM Harry Tuttle wrote:

> source: Wall Street Journal

Aug 06 10:29 AM

[Harry Tuttle:]

Thanks. I'll take your comment at face value since I do not think the guys at CNBC and the WSJ even understand the difference.

In any case, they owe $80B which still renders the equity worthless which was the point of my comment.


On Aug 06 10:29 AM djdrunkinmonkey wrote:

> You are wrong, AIG does not owe $170billion, CNBC, WSJ and you have
> just repeated the number over and over so much that it is now excepted
> as fact. Yes, the government used $170billion in the bailout but
> AIG had given the FRBNY assets in exchange for $$$, as in Maiden
> Lane I and II, received Commercial Paper and given them securities
> from their securities lending facility. Go to AIG.com and they outline
> it fully. It is still a large number but AIG owes about $80billion
> not the $170billion you continuously suggest.
>
> Do yourself and other "finical" expert authors a favor and set the
> record straight and admit your mistake.

Aug 06 10:50 AM

[djdrunkinmo...:]

Correct, for example, there is an undrawn $30billion line of credit that everyone includes in the $170billion figure.


On Aug 06 09:00 AM dato2020 wrote:

> AIG does not owe the government $170Billion. Please do your homework.

Aug 06 10:57 AM

[djdrunkinmo...:]

Agree. On a caffeine high, sorry if I came across harsh.


On Aug 06 10:50 AM Harry Tuttle wrote:

> Thanks. I'll take your comment at face value since I do not think
> the guys at CNBC and the WSJ even understand the difference.
>
> In any case, they owe $80B which still renders the equity worthless
> which was the point of my comment.

Aug 06 10:58 AM

[djj420:]

So, as we hold hands and sing "Kumbuya" here, we're all agreed this is a worthless security? The most conservative estimates here have the firm on the hook for obligations that total at least 20 times the market cap. How can the stock possibly even have ANY value?

Aug 06 11:22 AM

[David Ristau:]

How about AIG?

Crazy. Crazy.

So, what is happening? Here is my take. We had some good news on Monday with the CEO coming out, and the company is starting to price in earnings. But that wouldn't be more than at top 4-5% on a normal stock. Well, enter the big guns...With this good news and the earnings coming up, we see a lot of big sellers start to cover shorts, which sets an upward swing.Then, that makes more and more short squeezes occur. At this point, the little guy starts to buy up on small 2-3% upward movements and sells off, pushing it even higher. The stock is sooooooo underbought for so long that this movement and process that should happen over several months, is happening all at once.

My take.

David Ristau
President, The Oxen Group
Oxen Newsletter Editor, Phil's Stock World
www.philstockworld.com.../

Aug 06 11:26 AM

[djj420:]

Thanks for your input. It looks like the insanity may be ending. AIG shot up to 29.39 shortly after the bell, quickly gapped down to 22.05, then got range-bound between 24 and 25 for about an hour. It broke the 24-25 range on the downside, and 24 is now resistance. The crazy uptrend seems to have finally collided with reality. I, for one, am no longer a panicky short repeatedly refreshing my position page shuddering at the thought of having to cover a short position in a security that I'm sure will eventually prove to be worthless.


On Aug 06 11:26 AM David Ristau wrote:

> How about AIG?
>
> Crazy. Crazy.
>
> So, what is happening? Here is my take. We had some good news on
> Monday with the CEO coming out, and the company is starting to price
> in earnings. But that wouldn't be more than at top 4-5% on a normal
> stock. Well, enter the big guns...With this good news and the earnings
> coming up, we see a lot of big sellers start to cover shorts, which
> sets an upward swing.Then, that makes more and more short squeezes
> occur. At this point, the little guy starts to buy up on small 2-3%
> upward movements and sells off, pushing it even higher. The stock
> is sooooooo underbought for so long that this movement and process
> that should happen over several months, is happening all at once.
>
>
> My take.
>
> David Ristau
> President, The Oxen Group
> Oxen Newsletter Editor, Phil's Stock World
> www.philstockworld.com.../

Aug 06 11:55 AM

[djdrunkinmo...:]

Perhaps that's the reason they are not even having an analyst call.


On Aug 06 11:22 AM djj420 wrote:

> So, as we hold hands and sing "Kumbuya" here, we're all agreed this
> is a worthless security? The most conservative estimates here have
> the firm on the hook for obligations that total at least 20 times
> the market cap. How can the stock possibly even have ANY value?

Aug 06 01:10 PM

[DeckChair 1912:]

FYI: More info on what's going on with AIG.

blogs.barrons.com/stoc...

Aug 07 11:32 AM

[JasonC:]

AIG is a giant bond fund, as well as several sound operating insurance companies. Bonds have been in an epic rally since November, accelerating since March. They just reported earning $1.8 billion for the quarter. The shares are a warrant. Yes they have a huge hole to climb out of...

Aug 07 03:08 PM

[askcalvin:]

...errr I still owe $80 B and when the market recovers and LIBOR moves up to 2% I need to pay $1.6 B in interest ONLY...now did I ever earn more than $1.6 B a year?....hey! maybe I can pledge my shares as a collateral and say to the world I pay by my stocks which is worth $50/stock? ....which school will teach the high power people math to agree on this?

Maybe no need to go to school to learn math...just need to learn the art of selling ice to Eskimos! As they teach me before in some obscure sales class: IF enough people believe a perception, then it’s a FACT!


On Aug 06 10:29 AM djdrunkinmonkey wrote:

> You are wrong, AIG does not owe $170billion, CNBC, WSJ and you have
> just repeated the number over and over so much that it is now excepted
> as fact. Yes, the government used $170billion in the bailout but
> AIG had given the FRBNY assets in exchange for $$$, as in Maiden
> Lane I and II, received Commercial Paper and given them securities
> from their securities lending facility. Go to AIG.com and they outline
> it fully. It is still a large number but AIG owes about $80billion
> not the $170billion you continuously suggest.
>
> Do yourself and other "finical" expert authors a favor and set the
> record straight and admit your mistake.

Aug 31 11:31 PM