Is AIG Worth a Third More Than on Friday?

Momentum begets momentum! The shares of troubled insurer American International Group (NYSE: AIG  ) have gained about a third since Friday's close -- after having tripled since the end of July! The reason? Rep. Edolphus Towns, the leader of the House Oversight and Government Reform Committee, has rallied behind former CEO Hank Greenberg's proposal to restructure government loans to AIG. Is that reason enough?

Murky endgame
While the "crisis endgame" for most of the large financial institutions that received government support is now clear (see, for example, Goldman Sachs (NYSE: GS  ) , JPMorgan Chase (NYSE: JPM  ) , Bank of America (NYSE: BAC  ) , or American Express (NYSE: AXP  ) ), AIG's exit strategy is quite a bit murkier. In that respect, the insurer joins the ranks of mortgage giants Fannie Mae (NYSE: FNM  ) and Freddie Mac.

Some encouraging signs
Part of incoming CEO Robert Benmosche's turnaround strategy has been to make peace with Greenberg. That is a wise decision. It is better to add Greenberg's clout and company knowledge to achieve a common goal (Greenberg remains one of the largest shareholders), than to work at cross-purposes. Benmosche is also willing to postpone asset sales in order to obtain better prices, another smart move that has Greenberg's support.

Is it worth an extra 30%?
Does Congressman Towns' support merit a 30%-plus uptick in market value? Reducing the interest rate on AIG's government loans and/or extending the maturities would benefit shareholders, but it's not clear at this stage that the measures will find widespread support.

Last week, I explained why AIG is purely a vehicle for speculation at this time, and the magnitude of the price move we are witnessing would appear to confirm it. Nothing wrong with that, but if you choose that route, don't confuse it with investing -- what Mr. Market gives in outsize daily gains, it can take away with equal alacrity.

Believe it or not, AIG's insurance activity is a high-quality business. Morgan Housel has identified three other high-quality companies that are still cheap.

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Alex Dumortier, CFA, has no beneficial interest in any of the companies mentioned in this article. American Express is a Motley Fool Inside Value selection. Try any of our Foolish newsletters today, free for 30 days. Motley Fool has a disclosure policy.


Read/Post Comments (15) | Recommend This Article (33)

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  • Report this Comment On September 22, 2009, at 1:09 PM, davejh23 wrote:

    "Is AIG Worth a Third More Than on Friday?" I'd say the stock is worth the same...$0. Why would you buy a stake in a company that is 80% owned by the gov't? A share of 1/5 of a company that may never pay back it's debts to the gov't is worth $0 to me.

    "AIG is purely a vehicle for speculation at this time..." I'd say buying AIG right now is almost as stupid as buying old GM.

  • Report this Comment On September 22, 2009, at 1:41 PM, aig09 wrote:

    This article is entirely pointless, just because it went up against your prediction? So you are venting your sour grape sentiment. Surprise that a supposedly pro would write like this fool. Sure, AIG is worthy a third more than Friday, as it is now on a firmer ground with a renewed government backing.

  • Report this Comment On September 22, 2009, at 2:58 PM, plange01 wrote:

    the government needs to step in have aig sell its remaining assets repay taxpyers and close for good .the to big to fail is long over for aig

  • Report this Comment On September 22, 2009, at 5:09 PM, barb13l wrote:

    AIG - personally want nothing to do with this company after th way they used the taxpayers money.

  • Report this Comment On September 22, 2009, at 5:10 PM, barb13l wrote:

    Personsally want nothing to do with this company after the way they handled the taxpayers money.

  • Report this Comment On September 22, 2009, at 5:56 PM, mikecart1 wrote:

    $0.00 * 1.33 = $0.00

    Now everyone visit my blog and give me a thumbs up if nothing else, for me stating the fact of AIG.

    :o)

  • Report this Comment On September 22, 2009, at 6:09 PM, Larceny23 wrote:

    I thought the idea of investment was to make money, so by buying at a dollar and selling at fifty was bad?

  • Report this Comment On September 22, 2009, at 6:53 PM, deadlysaber wrote:

    Who is the average investor's worst enemy? It seems like a growing crowd of people would yell "AIG!" Some in that crowd might answer with some other names and a string of profanities, by which they mean "The politicians who enabled AIG!"

    But neither answer is correct. The average investor's worst enemy never has been (nor ever will be) found on Wall Street. That enemy doesn't lurk in some boardroom. It's not a "missed opportunity" or "unforeseen event," either.

    If you're an investor and you really want to meet your own worst enemy, simply go stand in front of a mirror and look straight ahead.

    Too few investors understand this. Fewer still can grasp how they are their own worst enemy. "Self-inflicted wound" is a fitting analogy, but if you need a more scientific phrase, the best one is "cognitive bias."

    Put simply, cognitive biases are errors in perception -- certain beliefs or emotions that literally alter our perception and memory. For example: Suppose that two people take a test, and that it takes a high level of competence to earn a good test score. One person earns that good score, while the other does not.

    When asked to estimate their test scores, who do you think typically underestimates their performance - the competent or the incompetent individual?

    Competent people will underestimate their scores - and, alas, incompetent individuals will consistently overestimate theirs. This is what two psychologists from Cornell University showed in an article titled, "Unskilled and Unaware of It."

    --------------------------

    Money without intelligence is like a car without a road.

    http://www.intelligentinvestingtips.com

  • Report this Comment On September 23, 2009, at 2:36 AM, thisislabor wrote:

    so it's not like a "30%" gain... it's more like it just improved it's shares by 30cents. and since it's worth so little already 30 cents looks like alot?

    oh, I guess it's my measuring stick that is off.

  • Report this Comment On September 23, 2009, at 3:05 AM, thisislabor wrote:

    I guess if you can get a congrassman to approve the restructuring of your government based debt all the better for you. but to me that looks like a leveraging move.

    what does actually strike me as a morally wise decision and exercisement of responsibility is the move to make peace with Greenberg by the CEO. If he is willing to do that - get over his pride - then that might mean that he might not just be screwing around with trying to squeeze profit margin out of the loans and be trying to actually do something positive for the company.

    However, I'll give it the benefit of my doubt... ie, I don't think it's likely though. Possible, but not likely.

    Restructure the loans to lower interest rates, pay off the lower rate loans now with higher priced assets. Eh, doesn't actually sound that bad of a business decision. might justify the 30% increase.

  • Report this Comment On September 23, 2009, at 3:33 AM, automaticaev wrote:

    because it used to be 900$ people buy it duh dont need 3 paragraphs.

  • Report this Comment On September 23, 2009, at 12:13 PM, ABKrall wrote:

    Hundreds of AIG insured are still waiting to get back into homes they lost to last November's wild fires in the Oakridge community of Sylmar, CA. Only after efforts by CARe, Councilman Richard Alarcon, Insurance Commisioner Steve Poizner and community advocates, did AIG agree to honor the terms of the park resident's contracts to the tune of an additional $45 million. AIG continues to delay and deny home replacement estimates, keeping the majority of the park's homeowners in doubt about their future.

    Why they are a highly rated insurance company is beyond me.

    As far as investing goes - it seems like a lot of people are driven by emotion and greed rather than logic. Investing in a company like AIG would be illogical for many reasons.

  • Report this Comment On September 23, 2009, at 12:17 PM, mikecart1 wrote:

    Larceny23:

    "I thought the idea of investment was to make money, so by buying at a dollar and selling at fifty was bad? "

    No just your math and/or stock market knowledge.

  • Report this Comment On September 23, 2009, at 12:25 PM, ozzfan1317 wrote:

    Were glad you sold your shares when you did. This company is dead in the water. If you have made a profit congratulations take it while you still can.

  • Report this Comment On September 23, 2009, at 12:45 PM, stonebusted wrote:

    Hit and run. How do you plan this type event. I was trying to short around 13 but could not borrow the stock. Soeone was watching over me.

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