Timothy Travis

AIG and the Lunacy of GAAP Reporting

"What is the 'correct' current value of AIg based on their expected normalized earnings, normalized adjusted book value and cash flow? Has anyone figured that out with a reasonable degree of accuracy? Can the author tell us anything about that other than he thinks AIG's stock is 'too cheap'? If not, what is that notion of 'too cheap' based upon? "

I would have touched on some of this but the article was long enough as is. The market cap is $55 Billion as it stands right now. Their stated book is $78 billion to which I would conservatively add back $15 billion to come to about $93 billion adjusted book value.

This provides me with a considerable margin of safety as is and AIG has consistently proven that they can return 11-15% on equity over long periods of time. I'd estimate that their normalized earnings are arond $12-$15 billion per year assuming no growth which is probably far too conservative given the companies track record of growing earnings. Put a 10 multiple on those earnings and you will probably be lot closer to a reasonable market cap then you are right now. The point is the margin of safety is so large that it would be a waste of time and effort to try and come up with a precise DCF analysis. I'd be lying if I said I could accurately forecast exactly how this business will look in 5 years and what the cumulative losses will be. I feel extremely certain however that by observing the information available and making reasonable forecasts given the current strains on the US housing market and projecting further declines, that AIG is at least 50% undervalued under the most dire circumstances. The losses already taken are vastly overstated any reasonable assumptions. The capricousness of the ratings agencies could force a capital raise which would hurt shareholders but would also provide another buying opportunity for dollar cost averaging at absurd prices.

AIG and the Lunacy of GAAP Reporting

"Merrill's junk was super senior too. No, they did not get 22 cents on the dollar. They got a little over 5 cents cash and a promise for 17. What's the value at maturity of an empty rotting shopping mall? "

Merrill's fire sale was from the 2007 vintage which is significantly worse then the 2005 vintage. Even with that being said I think that it was foolish for them to sell those securities at those prices in addition to financing them. I think that it was more of an institutional decision by John Thain to wash his hands of the securites, as opposed to an actual business decision in which they would try to maximize value for their shareholders.

Investment Banks use far more leverage then insurers and have very different capital requirements in relation to mark to market losses then insurers, so it is not really an apples to apples comparison. Just think about the fact that these are secured first lien mortages for the most part. The CES and HELOC exposure is more risky but they also have more protection built into the structures, but on the first lien exposure come up with a default rate and severity that can possibly justify those prices. It is nearly impossible to come up with justification for the current pricing.