AIG: As Speculative as It Gets

Ah, AIG (NYSE: AIG  ) . What was once the epitome of destruction, failure, and stupidity is now the market's golden child, up several hundred percent for no apparent reason. The company that almost bankrupted the world is suddenly the easiest way to get rich quick.

And it's all purely speculative.

Before jumping on the bandwagon, it's important to know this about AIG: The only way it can ever be worth a dime is if the sum of its broken-up parts are sold for enough to repay taxpayers, and still have some scraps left over for current shareholders.

Here's what The Wall Street Journal recently reported about its conversation with CEO Robert Benmosche:

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.

He ain't kidding. AIG owes taxpayers more than $80 billion. Its current book value is about $58 billion. Break everything apart and sell it at carrying value, and AIG shareholders could still be wiped out. Easily.

Several unit sales have so far gone for less than book value. Bids for its crown-jewel aircraft leasing unit came in at around 34% below book value back in April. AIG's currently hoping to snag $2 billion for its Taiwanese life insurance unit, yet bids "may" come in between $1.2 billion and $1.5 billion, according to Bloomberg. There's a reason banks like Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) are reluctant to dismantle their balance sheets as well: This isn't exactly a seller's market.

Benmosche insists he'll wait out the storm and refuse to sell assets for less than favorable prices, but let's be real: It isn't up to him. The U.S. government effectively owns 79.9% of the company. If the Treasury and Federal Reserve, under political pressure to put this episode behind us, want to be paid back quickly, you can count on fire sales. The real shareholders of this company -- taxpayers -- want to get paid back quickly, and couldn't care less about much else.

On that note, one has to wonder how the operating segments can gain much value in a world where the AIG brand name is now a symbol of utter failure, and economic growth, at best, slogs along dazed and confused.

There's nothing wrong with speculation. Just realize that even the optimists are betting on the idea that the economy is getting less bad. But for AIG to ever be worth a single penny, things have to suddenly get really, really good.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.


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  • Report this Comment On August 31, 2009, at 5:25 PM, aresh wrote:

    I wouldn't call a pre-split run up from under $2 to over $2 a huge amount. After the 20 to 1 reverse split, and sell off, it put it near 60 cents pre-split, so coming back up to $2.25 doesn't make it a huge run up. If you want to see speculation, look at the old GM shares. They've already killed the underlying company, and the shares are still "fidgeting". With AIG's very limited shares in the float (until Uncle Sam sells), the price can run up a lot due to short covering, any signs of turning around (sales are looking better), or a recovery in the economy - not to mention some portions of the company being sold. And who cares how long it takes, I don't think anyone is in a rush. Fools can hold onto AIG for a while - there is plenty of up side.

  • Report this Comment On September 01, 2009, at 10:09 AM, 7351jay wrote:

    This stock has all the qualities of a Madoff.

  • Report this Comment On September 03, 2009, at 1:46 PM, frankwweiwuw wrote:

    Calm down! The sky is not falling. We should never be afraid of the end of the world when investing in stocks because if that day really comes, what purpose you keep money for? And we should know that the more banks collapse the better position AIG, FNM and FRE will be in.

    Usually people don’t buy penny stocks because they may go bankrupt. But penny stocks like AIG, FRE, FNM are quite a different story because they are backed by government with billions of taxpayers’ money. So government won't allow them to go bankrupt and taxpayers don’t want them to go bankrupt.

    Regarding real price of stocks, that’s a gimmick. Stock prices never really mirror their true value because nobody knows what their true value is. They all depend on your imagination. And stock markets are a place where people like to imagine. BTW, stock markets have always been cyclical as the world is itself cyclical which is because human beings’ emotion is always cyclical.

    In addition, stock markets are always forward looking. You won’t understand why those penny financial stocks surged in August until sometime next year. But for two things i am sure why they have been up so much. The fundamental one is there have been now 6.8 billion people in the world and population is increasing at historically astronomical levels, so houses are one of the hardest best assets you can rely on. They should be worth more than Google at $445/share, because you don’t have to have google but you have to live in a house. The other technical one is that they have been beaten up and shorted so badly. Buying these stocks now will guarantee your money back a lot more than $2 per share.

    Lastly, will you ever believe in so-called financial or stock experts? Are they ever right? Very rare. If you look back history you will find this. They either pretend to know a lot or they are just liars, either way, they are always trying to put your money in their own pockets. They want you to dump them so they pick them up because they have missed out on the rally since March. A simple math will tell you that even taxpayers own 80% of AIG, FRE and FNM, 20% of them is still worth $300/share, $15/share and $15/share, respectively. I believe those buy AIG, FRE and FNM now will see a flood of money toward them in the coming 24-48 months.

  • Report this Comment On September 04, 2009, at 5:24 PM, Netteligent09 wrote:

    AIG, FRE, FNM are in transition and deserve a 2nd chance. New management is in place. We wish that our government will hold accountable and prosecute these crooks.

    AIG, FRE, and FNM along with other America corporations are the Beast and Medallion in a dynamic changing world. AIG was and still is the best run company with its unique characteristics, the world's biggest insurer, and does business in nearly every country.

    Recessions separate weak companies from strong ones. I do not deny a painful reality that AIG's likely to face continuing troubles. New management and AIG team will face these problems head on. At the end, they will prevail.

  • Report this Comment On September 07, 2009, at 8:42 AM, newmoorkha wrote:

    AIG is speculative!!, It was when $100+ pre reverse split and when so called experts were recommending it as AAA+ rated company. Yes with the collapse financial markets it lost MOST if not ALL of it's value. Without understading details of balance sheet issue, here are my questions can some one help?

    What is the best case scenario for AIG?

    Are all it's assets which were marked down to pennies on dollor, will remain so far ever?

    I see AIG has close to 100,000+ employess. Is it possible for that may people to go to work every day and not add any value to the company( It is hard but possible!!), I am sure there are smart people working there ( you can be optimist!!)

    Is it not in US govt interest to see AIG succeed? Does that success not translate to better stock price from this higly dipressed stock price ( eve now).

    I wish I was smart enough to know and analyze this company so either I can bet farm ( get rich or become poor) or stay away and remain poor!!.

    Only reason or should I say one good reason I feel ( as don't know) AIG will be much higher in may be 2 years is because all smart people and especially financial experts think this is a bad investment and we should stay away.

    Any comments or input on future of AIG stock proce with good arguments from smart FOOLS is higly appreciated.

    Thanks in advance

  • Report this Comment On September 09, 2009, at 1:42 PM, think101 wrote:

    With all the gossip over AIG's worth - market value/book value - little is said about its companies other than the aviation leasing unit. How about its enormous insurance web of companies, AIU, National Union, ALICO and more... how about its insurance lines of P&C, Personal Business, Health & Life business... no one discusses its reinsurance partners and the breadth of reinsurance programs in place with tremendous security... the adequacy of [regulated & audited] reserves... the latter being the pinnacle of an insurance company's health... ????? Another fact omitted from speculation: was there reinsurance on its derivative swaps?... the impact of time on spiral on claims from these swaps...

    Is it maybe due to the fact that all commentaries come from folks poorly educated in insurance/reinsurance who assume that their financial business savvy covers all financial lines? Whatever, if it appears in the media, it's gospel... Or from people like a friend of mine who made a fortune in real estate. He has an opinion of AIG without any understanding of basic concepts of its operations...

    Yes, AIG may eventually be broken apart and units sold off to repay taxpayers... but in the meantime it's a strong global insurance giant that is experienced literally & figuratively in weathering & surviving storms,... it's done that for many decades... C.V. Starr is gone… Hank, as key shareholder in the CV Starr Foundation is AIG's largest shareholder and the man is a genius who is as sharp in his eighties as ever... and we all know the kind of guy who pushed Hank out... but then these are the times...

    Last but not least let's not forget insurance, finance and the economy - just like the weather - their operational patterns are cyclical. If you want to talk about AIG learn its intrinsic components in light of its business nature, its historical performance, business posture ---- LONG TERM view… While none of us holds a crystal ball to the future we can use history to model future outcomes… as for gossip - it’s just that – here today gone tomorrow

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