Uncle Sam is selling 300 million shares of insurer AIG (NYSE: AIG ) today, part of the 92% stake it inherited as a part of its $182 billion bailout. Perhaps less publicized is the fact that the company itself is taking this opportunity to issue 100 million new shares. What is the impact on the two constituencies that have an interest in AIG (if you're a taxpayer, you're included)?
It appears that the government will break even or turn a small profit on today's sale of 200 million shares. Uncle Sam's breakeven price is $28.73 and the shares are pricing today with an expected price range of $29 to $30.The government left quite a bit of money on the table if one considers that the shares peaked at more than twice that in January.
However, let's put things in their proper perspective: One shouldn't evaluate the U.S. Treasury on the same basis as a hedge fund manager. The aim of the government's bailout was to keep the insurer alive and avoid widespread contagion throughout the financial system (remember, this was a short time after Lehman's failure -- the global economy and financial markets had enough trouble swallowing that pill).
Breaking even or turning a profit on this sale -- as it has done on the Troubled Asset Relief Program -- is a happy development, but it was not the goal of the exercise. In purely financial terms, AIG's bailout is one of the least successful to date, certainly much less so than that of Citigroup (NYSE: C ) , Bank of America (NYSE: BAC ) , or General Motors (NYSE: GM ) . On the other hand, given the magnitude of the initial problem, I think it's fair to say it has been surprisingly successful (so far).
The government's sale is simply a transfer of ownership into private hands. On that basis, there is no immediate impact in terms of the shares' intrinsic value. However, it should serve to remind shareholders that there remains an enormous overhang of shares the government will need to sell down over time (even after today's sale, the government's stake will be roughly 75%). That could limit the potential upside in the shares until that process is completed. Assuming you are a long-term shareholder, this needn't be a problem -- value will ultimately be driven by fundamentals, not liquidity.
AIG's 100 million share sale is new issuance -- it dilutes current shareholders by 5.5% -- so investors need to assess this action in the broader context of AIG's long-term turnaround plan. Nearly three years on, there remains significant uncertainty concerning AIG's reserves and how profitable the company can be. As far as I'm concerned, AIG shares are a speculation, not an investment.
AIG was "too big to fail." At the other end of the scale, you have "Too Small to Fail: 2 Small Caps the Government Won't Let Go Broke."