AIG Is Dead, Long Live AIG 33 comments
-
Font Size:
-
Print
- TweetThis
When Robert Benmosche was named CEO of AIG (AIG), I thought it was a good thing. Ed Liddy, possibly tired of the abuse, wanted to move on. Liddy was primarily skilled with personal lines P&C insurance, which was a small part of AIG, and has been sold off. Benmosche’s skills extend to that — MetLife (MET) has a small personal lines subsidiary, but he has run the largest life insurer in the US. AIG has grown to be as much a life insurer as a P&C insurer, having grown through the acquisitions of Sun America and American General.
Benmosche has his work cut out for him, and it may be an impossible task. Quoting from today’s WSJ article:
As shares of American International Group Inc. continued to ascend Thursday, newly minted Chief Executive Robert Benmosche said he is taking a far more patient approach than his predecessor toward selling assets to repay the government.
He is willing to wait as long as three years, he said, to offer stakes in two multibillion-dollar foreign units that the insurer had been racing to spin off.
“It’s not a question of if, but when,” Mr. Benmosche said in an interview with The Wall Street Journal at his home here. “Once the market gives us a price that I think is fair, we can go forward. … If we sell too soon, everyone loses.”
And the money quote:
After analyzing all of AIG’s businesses, Mr. Benmosche said, he determined the company wouldn’t be able to repay the government even if it sold everything. But he suggested that if he can bolster the businesses before selling off units, the situation might improve.
“The sum of the parts are a little below the whole. The whole has to be big enough to pay back the government, and with a little hard work there will be something left called AIG,” he said.
Okay, so the value of the equity is zero, but maybe AIG can grow out of the situation with government aid, waiting for higher valuations to appear? The article continues:
In May, AIG said it planned to “accelerate” that process for one of the units, American International Assurance Co., which sells life insurance in Asia. AIG hired lead underwriters in June, and the IPO was scheduled for the first quarter of 2010; it was expected to raise more than $5 billion.
Similarly, in July, AIG said it planned to accelerate the IPO for the other unit, American Life Insurance Co., known as Alico, which also sells life insurance overseas.
It isn’t clear how much the businesses are worth, but their value has been eroded by the financial crisis and AIG’s problems. In February, AIG was said to be valuing AIA at $20 billion to $40 billion.
In the interview, Mr. Benmosche said current estimates for what the businesses would fetch were too low.
“That kind of price talk is ridiculous,” he said, without specifying what he considers a fair price. “I’ve told the government that if we have to sell them right now, we may not be able to pay back what we owe.”
Then come the following contradictory statements:
Mr. Benmosche said his primary goal is to repay as soon as possible the government support that is still allowing the company to operate.
“If the U.S. government doesn’t continue to support AIG, we will fail,” he said. “We have no right to use the government funding to make a profit; that is inappropriate.”
Yes, AIG would fail without US Government support. US Government support allows AIG to profit off of its relatively cheap funding base. Benmosche is delaying the sale of units previously slated for quick sale by the prior management, because if valuations recover significantly, there will possibly be some value to share among shareholders.
That’s a big if, though. It is rumored, or rather, alleged by some insurance CEOs that AIG has been aggressively cutting prices in order to gain business for short-term liquidity reasons. After all, if you were an employee of AIG, your largest incentive might be having your salary paid for a few more years, before the reserving catches up. In the short-run, insurance reserving can be gamed. The majority owner, the US Government, has little expertise with such matters. Insurance is a black box to them.
What of AIG’s recent impressive rise in the stock price? Impressive, huh? Maybe.
What, that’s up over 400% from the nadir? Wow. What’s it down from the peak?
I’ll bet you don’t remember when AIG was trading over 1500. Well, I do. At my last firm, I sold our shares of AIG the day it entered the DJIA. We got prices of over $75, which, post the last reverse split, is over $1500 today.
This current rally is fueled by bullish comments from the new CEO, day traders who follow momentum (look at the recent rise in volume in the first graph), and short sellers buying in their positions.
Looking at the middle graph, short-covering isn’t that common yet through 8/14, but the rapid price move since then has likely had some shorts with weak balance sheets covering their trades.
This brings me to my last point regarding AIG for now. Benmosche wants advice from Maurice Raymond “Hank” Greenberg. I don’t know for sure, but I suspect that the two knew each other from their days as CEOs of NYC’s two largest insurers. It wouldn’t surprise me if AIG offered to demutualize and buy MetLife; back in the early ’90s, we tried to do the same thing with The Equitable when it was in trouble. AXA won because it was willing to bet on a real estate recovery, and AIG was not willing to take that chance.
Though Greenberg blames the woes of AIG on incompetent successors, I lay the blame at his feet. If AIG was such a great company, how could it be undone in three years? From the mid-1980s until 2005, leverage at AIG quadrupled. ROE achieved the hallowed 15%/year target, but ROA sagged, which is a better measure for financial services firms.
My last issue here is the accounting. It is rare for companies under financial stress to not have accounting that is liberal. Firms with conservative accounting typically have management cultures that retreat when times are not conducive to low-risk profits.
AIG was an aggressive company during its glory days. They have had their share of reserve restatements, and my own experience with AIG left me skeptical about their balance sheet.
The upshot here is simple. AIG is a leveraged play on the financial sector. If insurance company valuations rise far enough, AIG might have value. AIG common is behaving like a warrant on the underlying assets. But even at present levels, AIG common is worthless. Sell it to the speculators, but watch your own balance sheet; even when a stock is likely to go to zero, it is difficult to manage a short position all of the way to extinction.
With that, be wary. I still believe AIG common is an eventual zero, but it will be very noisy between now and the end. Complicating the matter is the asset inflation the Fed is trying to engender. They want to bail out financial company balance sheets without creating inflation that the average person can notice.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 33 comments:
Alex
Does AIG still have outstanding claims from insuring Credit Default Swaps? Maybe this is a short term way to generate claims payment for some troubled banks without the Fed having to contribute more money. Let the public think there's some value left, let them bid it up in their ignorance and use the capital to pay outstanding claims and save a few more banks. If this is so - there's another hit coming due to mortgages coming due.
Mortgages reset mid November in large volume.
There wasn't just sub prime - there was ALT A and Option ARM as well. Hell prime mortgages are taking a hit now. No work.
So investing in AIG is like a ponzi scheme where someone is going to get burned in the end. The question would be "WHEN?" if you were greedy and liked risk... LOL
I lay the chances of that at ZERO.
This is politics.
The sudden surge in share price is why I'm off to invest in my own business and not someone elses.
What company is a GOOD company (as Warren Buffet refers to them) when ANY company can be manipulated at ANY time for gain or loss. Wall St.'s a crap shoot. Vegas is more stable. At least you have a chance in black jack when the dealer isn't palming the cards.
Smart money isn't on the sidelines, smart money isn't even watching the game anymore.
Capital markets were for growing companies that produced something. Employed someone. Capital markets are one large PONZI scheme now.
All these naysayers may as well be in bed with socialism. There is no greed going on here. This is our govt stabilizing the American free market capital system....and so far it is working. Inflation is a myth.
Buy American - it is that simple. AIG, FNM, FRE
" I'm broke! But it's OK."
" You see, I have a Hummer that used to be worth over $40,000 a little while back. Now, though, I could only get maybe $8,000 or $9,000 if I were to sell it. I really don't want to sell it for such a low price...but, after all, I am broke...and I need some cash."
" Then my brother called. (what a lucky ba_tard I am!) He said he would loan me $40,000 to help out.....and then, once the prices of Hummers recovered, I could sell it, and then pay him back. I might even have a little left over."
" I'm so lucky to have such a good brother! I think things are going to be just fine."
MY prediction is that, within 2 years, all 5 of the companies currently representing 50% of Nyse volume (C, BAC, FNM, FRE, AIG) will be GONE. ZERO.
Unfortunately filled with pragmatic, fundamentally based commentary which is of little use for those in AIG or the markets right now as they daytrade their way to nirvana with government backstop.
I myself write very similar fundamentally based drivel so I'm glad to have you as a peer.
The great square has no corners.
Markets are a quantum oscillating entity that may have predictability at the level of HFT. Since this may be the case then any good conspiracy theory regarding the current sitch would have to include it with respect to the absurd volume on the 4 horseman (FRE, FNM, AIG, C).
The debt at FNM may be insolvent at present, although to argue that b/c it is currently insolvent, the share price should not be worth a penny, it is hubris.
In fact it closed today at 2 and change.
Sure it might plummet. Time is the great equalizer and hindsight is 20/20. Pick up a few shares and wait, along with the US govt, for the industry to return to solvency.
And for the love of God, buy American.
Consider:
- Unprecedented, gigantic Gov bail out to prevent the AIG house to go bust and burst open to the public eye, scrutiny.
- The ugly dozen investment banks kept entirely whole on their empty CDS bets - akin to reimbursing the losers on the roulette table. Keep them happy at all cost?
- Lame and tame political, media reaction to paying foreign banks in full for such pure casino gambling, eventually at the expense of the US taxpayer!
- Only most trusted members of the most inner circle of the US Treasury-Fed-Financial complex involved in the rescue effort.
- around the world, and specifically in Zurich, sizable office buildings, housing AIG related entities and nobody knows exactly what they are doing.
Unusual coincidences? Not so, if this is the reason:
AIG is/was the world wide offshore paymaster for the US intelligence agencies, the clandestine banker to the CIA & Co, to handle the myriads of financial transactions. AIG the secret G & A backbone of these US services. Without it, they cannot function. Hence the scramble to keep AIG from filing for ch 11 or similar open process... and at least some explanation for the relative resilience of the stock...
Nothing more exciting than a cockamamie conspiracy story to ponder over the weekend, no?
Have a good day
buygolly, your thinking is critically flawed in one area. With clients no longer trusting AIG and and price slashing by AIG underwriters, the value of AIG's operations is depreciating much more quickly than a Hummer. Benmosche is doesn't have the foggiest idea what he is doing or talking about, or else he is simply lying
As for selling off assets, sure a company is free to make gambles they can afford by not selling assets in the face of eroding asset prices. However, such gambles require the company to afford them, and not to put the taxpayers at risk. AIG fails on both points. I can not in any conscience condone their executives new business model. Once again, it allows bankrupt companies taake extrordinary risk with public funds. It is true things might end up better, but probably more so possible things get much worse. We don't let the government go bet on roulette, why should we allow the same thing to go on under our noses with AIG and Citibank?
I would suggest someone monitor the expenses
Now, anyone with a calculator can figure out the market cap AIG needs to reach to repay Sam and still have any shareholder value.
$180B = 80% gov't stake, making total market value $225B. At current price of about $50, shares would have to rise to $1600. Good luck with that.
Had our leaders/policymakers done "the right thing" they would have simply dissolved the casino division of AIG. leaving what was a strong, well run viable company. We need to not forget that AIG was brought down by one division - the rest of the company was doing well.
Remember when the slogan was, What's good for General Motors is good for America?? The new slogan our leaders in DC are going by is What's good for Goldman Sachs (and the health insurance companies and Big Pharma) is good for America.
I don't care who says it, there's NO CHANGE in DC. It's business (first) as usual.
FRE pfd Z on Bloomberg, FRE.Z on others
On Aug 28 08:47 PM Mark Alexander wrote:
> Alex_G, thanks for highlighting the situation with FRE. That's too
> funny. Can you provide a ticker for the preferred shares? There are
> lots of issues (it looks like most trade as if they were junior in
> the capital structure to common), but it would be interesting to
> know which one you are referring to.
>
> buygolly, your thinking is critically flawed in one area. With clients
> no longer trusting AIG and and price slashing by AIG underwriters,
> the value of AIG's operations is depreciating much more quickly than
> a Hummer. Benmosche is doesn't have the foggiest idea what he is
> doing or talking about, or else he is simply lying
On Aug 28 02:17 PM KDG wrote:
> Who here would sell low on underwater if they had to? Absolutely
> no one. Govt assisting AIG getting help on it's feet (FNM and FRE
> for that matter) might just be akin to an underwater homeowner on
> the west coast getting help from his family in the midwest so they
> can carry debt into a more liquid and beneficial circumstance. <br/>
>
> All these naysayers may as well be in bed with socialism. There is
> no greed going on here. This is our govt stabilizing the American
> free market capital system....and so far it is working. Inflation
> is a myth.
>
> Buy American - it is that simple. AIG, FNM, FRE
Buy American these days means Apple, Google and Amazon - outstanding products, outstanding companies.
Just buying American products for the sake of buying American is a disfavor to the world free market economy and a flawed legacy from the cold war 50s.
On Aug 28 05:40 PM KDG wrote:
> WFC made it this far based on criteria for debt rating to would be
> borrowers and even they are not out of the woods by any means. It
> is a singular factor.
>
> The great square has no corners.
>
> Markets are a quantum oscillating entity that may have predictability
> at the level of HFT. Since this may be the case then any good conspiracy
> theory regarding the current sitch would have to include it with
> respect to the absurd volume on the 4 horseman (FRE, FNM, AIG, C).
>
>
> The debt at FNM may be insolvent at present, although to argue that
> b/c it is currently insolvent, the share price should not be worth
> a penny, it is hubris.
>
> In fact it closed today at 2 and change.
>
> Sure it might plummet. Time is the great equalizer and hindsight
> is 20/20. Pick up a few shares and wait, along with the US govt,
> for the industry to return to solvency.
>
> And for the love of God, buy American.
"Now there s a juicy conspiracy theory rumored in Europe."
There is definitely a conspiracy. Just look at Obama and how fast he "got on board" continuing GWB policies.
We do not know what these conspiracies are all about but the FED, the Treasury, and financial participants are doing everything in their power to prevent any information about their operations and their real intentions.
Some of Obama actions look crazy but may be he is crazy like a fox. Most disturbing, America public knows nothing about real intentions of Obama regime and leading politicians. However, America interests are not on the top of their agenda!
Regards.
On Aug 28 10:45 AM Alex_G wrote:
> In other news regarding Govt owned financials, FRE common is trading
> higher than their $25 par pfd. Any rational explanation would be
> appreciated.
AIG will be in a much better position at global scale. I whoheartedly support transformation with no hidden agenda.
Dear Mr. Maurice Raymond “Hank” Greenberg,
It's kind of fun to do the impossible. Please do it for our beloved America and leave your legend behind for 100 years to come. AIG was and is your mind and heart. Do not let these crooks destroy your lifetime achievement.
This is state induced speculation and it is ill advised simply because it always fails, without exception. The AIG play is based in large part on its new banking relationship with the US Govt.
But It is state capitalism such as marked Italy and Germany in the WWII period, and it did not work then. Today France has its version and you can read the score: dismal at best. Mexico and Japan have whole sectors of government backed business, banking, oil and airlines all pop to the top of the swamp.
One reason the US flourished was the hacks in government could not rescue their favorite businesses (they would not know how).
Give it up before it kills us, GM, AIG, GSEs, Chrysler, and Health Care? The disease is metastatic !
AIG will prevail again. No Pain No Glory.