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This Is Why AIG Is Up? Really?

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By now, you've probably seen your fair share of articles on AIG's (NYSE: AIG  ) speculative run. Although no one is certain how effective AIG's underlying business remains, how much coming asset sales will net the company, or how much damage its remaining asset-backed securities will wreak, the stock continues to plow upward. The chief reasons cited for its recent run-up include:

  • Confidence that former MetLife (NYSE: MET  ) CEO Robert Benmosche can use his expertise to turn the company around.
  • Short-sellers being squeezed out of their positions as AIG continues its upward trend.
  • A vague comment from Benmosche that the company will be able to pay back the government and that he "hope[s] we will be able to do something for our shareholders as well." At this point I should note that Benmosche has only been the CEO of AIG for mere weeks, and has been on vacation for most of that time. Not that I'm trying to take a cheap shot at him for the vacation (OK, maybe just a little), but it's pretty clear he has little knowledge of the complexities inherent in AIG repaying the government, or the status of its complicated balance sheet. Effectively, all this means his words should carry little to no value.

But here's the really absurd part
However, I don’t want to deconstruct the horrid financials underlying AIG's business -- I'll let resident financials expert Morgan Housel do that. What I am more upset about is another reason being tossed around for AIG's recent upward trend: a possible reconciliation with former CEO Hank Greenberg. 

Most reports on Greenberg will breezily introduce him as having built AIG into the indomitable insurance giant it was earlier in the decade. Yet, as much as Greenberg has worked PR channels to define himself as a steady force within the company during his tenure, a man who worked to keep risk exposure down, I don't buy it.

In a Washington Post series detailing the company's downfall, Greenberg said he kept its financial products division, which was the one writing the destructive credit default swaps, under tight control. In fact, he went so far as to say his research shows the company had only written $7 billion in swaps on subprime CDOs (collateralized debt obligations) during his tenure.

However, reality begs to differ with Hank Greenberg. According to statements from risk-monger Joe Cassano's lawyer, AIG exited the mortgage underwriting business in late 2005, mere months after Greenberg's departure. While Cassano's lawyer might not be the ideal source for reliable information on who's to blame for AIG's collapse, company spokesman Nicholas Ashooh endorsed his statement by saying, "About half [of the swaps on subprime CDOs] had been issued before Greenberg's ouster."

While Greenberg deserves some credit for building AIG over his long tenure, the facts speak for themselves, and his final legacy is one of failure: He enabled the division that sunk the company. As a central figure in its collapse, why is there any reason to cheer his coming back?

Final thoughts
As much as Fools debate the merits of run-ups in Bank of America (NYSE: BAC  ) and other financial stocks like Wells Fargo (NYSE: WFC  ) and Goldman Sachs (NYSE: GS  ) , AIG is in a speculative league of its own. For example, while Bank of America took out $45 billion in government funds, it hasn't had to shed core businesses, or take in as much dilutive government funding as AIG. 

Ultimately, AIG has a lot in common with majority government-owned buddy Citigroup (NYSE: C  ) . They're both practically impossible to value and face huge dilutive aspects. Yet, while both stocks have been trading manically in recent weeks, the events causing AIG's price bumps are too bizarre and insignificant to take seriously. Would Citigroup suddenly shoot up in price if its equally blameworthy former CEO, Chuck Prince, came back?

Could the stock still be a screaming buy? Well, I suppose stranger things have happened, but there have been almost zero material changes in the company to justify its recent surge. If investors are so hungry for any shred of good news from AIG that they'll wildly bid up shares on the return of a fallen CEO, then I fear for those jumping into this game of musical chairs. AIG's riding a wave of general optimism and risk-hungry investors looking to earn back losses in a hurry, but I fear for the investor left holding the bag when it becomes clear there’s nothing but hot air in this stock's sails.

Care to disagree? Have at it in the comments box below.

Eric Bleeker owns a position in Citigroup, but regrets that decision. The Motley Fool’s disclosure policy is passing on investing in AIG in favor of putting it all down on Red 7.

Read/Post Comments (14) | Recommend This Article (41)

Comments from our Foolish Readers

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  • Report this Comment On September 01, 2009, at 7:26 PM, rlm3156 wrote:

    AIG is still very volatile, dropping to 36 bucks even and another -3.64% after hours today .It is not a stock for the conservative investor.Risky but with a 52 week high of 493.60, one can only hope for a turn around.which was short lived after Robert Benmosche was named CEO.AIG rose 173.97% in the last month alone.U make the choice.

  • Report this Comment On September 01, 2009, at 9:48 PM, lewellen180 wrote:

    Seems to me that, right now, AIG might be a great stock for a trader looking for a bigger fool....

    As for me, my oven mitts aren't thick enough for a potato this hot.

    I'm a fairly risk-tolerant investor, so long as I understand those risks. Since the risks I do know about are large, and it's extremely possible there are serious risks I don't know about, this puppy stays out of my portfolio as a direct holding.

  • Report this Comment On September 02, 2009, at 1:09 AM, emptygestures wrote:

    I was tempted to get into AIG prior to the recent sell off today, I had Citigroup and knew this was coming. I fully anticipated that if stocks were going to get hit today that AIG would be first in line and sure enough of it was and hit hard. I whole-heartedly believe with both companies, the government's investment in these companies will make them flourish.... because government manipulation of the market is not simply a myth... After the September fall look for the rise and that AIG upward trend will continue... But, in agreement with rlm3156, definitely not a stock for the conservative investor or the squeemish.

  • Report this Comment On September 02, 2009, at 2:42 AM, Windsurfing1 wrote:

    Let us look at the facts. The company’s financials talk a clear language: The firm is bankrupt. The value of AIG shares can be derived from betting on the negotiations of a new CEO and the Obama administration. There is some “historic” data to be found for such a valuation: General Motors. Feel free to calculate AIG’s Net Present Value based on these records.

  • Report this Comment On September 02, 2009, at 3:10 PM, Netteligent09 wrote:

    AIG is in transformation and will be ready at beginning of 2010.

    New AIG management team will face challenges directly. But everything is after the facts. It took 8 years to bring America down to its knees. You can't produce a baby in one month by getting nine women pregnant.

    When AIG recovers, win-win situations, we will enjoy benefits for years to come. Money is already on a table. If we are going through Hell, keeps going. Government determines to do whatever it takes to turn them around.

    New CEO is on board. Old and new teams and Board of Directors with final structure will finalize before the end of 2009. Americans are always strive for excellence and integrity: strives for means that when we do make a mistake, whether it is one of omission or commission, we acknowledge it, learn from it and constantly improve our systems and our discipline so that we reduce the number of errors.

    Even now, I continue to believe that short-term market are poison and do not expect a quick turn around. A young US government made an excellent strategic moves. America is in transformation and strengthen its position for 2010 and beyond.

  • Report this Comment On September 02, 2009, at 8:06 PM, CCDD wrote:

    Zombie bank and GSE stocks being bought/cross-traded by large primary dealers awash in cash from freshly monetized Treasury bills and agency MBS debt bought by the Federal Reserve...? Who knows. But this way bank officers and large investors win (along with USG, who owns most/all of companies like AIG, C, FRE, FNM).

    Take a moment to check the NY Fed's schedule of Open Market Operations (on its website, historical data available to 2005) -- and compare it to large price movements in these stocks.

    Then take a look at zerohedge dot com for additional details.

  • Report this Comment On September 03, 2009, at 8:03 AM, michiganalbanian wrote:

    I spent a small amount of money two weeks ago and bought C, FNM and AIG...I know it is against every rule I have learned in the B school but if the USG is betting on billions...I'll take my chances with $10K.

    I do agree with the fundamentals of the article, the risk but also the [opportunity] - high.

  • Report this Comment On September 03, 2009, at 9:22 AM, beauble wrote:

    Regarding Netteligent09's comments.

    What are you trying to say? Sounds like a lot of buzz phrases mixed together that are not coherent.

  • Report this Comment On September 03, 2009, at 1:02 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 03, 2009, at 3:16 PM, lookswholaughing wrote:

    aig will come back but small investors will be the last to know so I'm holding what i have

    ceo has the right frame of mind buy me or not i will get my price no fire sale!!!

  • Report this Comment On September 04, 2009, at 12:09 AM, 2humble2fool wrote:

    Hint to Fool Writers: If you're going to write an article saying you don't have the time or ability to analyze the business your about to write about, then maybe you should reconsider writing the article at all. Another article that does nothing but lob incinerary insults against a company and its former leadership from a high horse. Why does the Fool continue to allow such poor journalism on this site? It disolves any credibility they may have. If you don't have the time or ability to properly analyze the business you are going to write about, then you have no business writing on a financial website.

  • Report this Comment On September 05, 2009, at 11:10 AM, bigsmitty52 wrote:

    I am glad to see someone questioning the advisability of bringing Greenberg back. Too many of these former/still there execs are denying any role in the collapse of their companies. Thanks Eric for raising the issue.

  • Report this Comment On September 09, 2009, at 9:54 PM, jfrankh57 wrote:

    Why is it that a stock that once was worth $400+ should be worth that once again after all the rot found in its foundation? Yeah, AIG can become a valued asset again, but I see that it needs time and to get rid of the toxic liabilities that still rack it, added to the extra payouts due to Uncle Sam. Yeah, if you like to speculate, AIG can make you a lot of money in the short run, but it can also cost you your shorts!

  • Report this Comment On September 12, 2009, at 8:01 PM, amfc wrote:

    AIG is futuristic stock. It's a company too big to fail, so Uncle Sam invested in it. If Uncle Sam likes throws its weight behind AIG, then waits, I will do likewise. Investing involves getting the old and new news and making use of the news. I stll think AIG stock is great buy at this time. Short term gain investors may not benefit much. Look for long term profits in AIG investments.

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