After my recent coverage of American International Group (NYSE:AIG), I've gotten a number of inquiries about whether I thought the company provided a compelling value at current prices. Not that I'm really able to answer such questions anyway, but I understand the sentiment. There are so few pure values in the market today that a top-line company priced at below-average rates because of uncertainty is obviously going to pique the interest of the value-minded among us.
We may be in the minority, but we are not small in number. We love the companies that are in the process of being mauled by the market.
But my response to these types of questions would be simple: Do you have any idea what AIG looks like today? I sure as heck don't, because each successive day seems to bring another question about whether investors can trust AIG's accounting. Add onto that the uncertainty of what has been a symbiotic relationship between AIG and its formerly executive-managed dominant shareholder, Starr International, which holds 12% of total outstanding stock, and you have the recipe for long-term uncertainty. Value investor Robert Olstein said it best: "It's hard enough trying to figure out what a business will be in five years, and here you don't even know what it was five years ago."
What's known is that the scandal surrounding the finite insurance deal between AIG and Berkshire Hathaway (NYSE:BRKa) (NYSE:BRKb) subsidiary General Re is not likely to shave more than $2 billion off AIG's reported book value. That may seem like a great deal, but it's not a big percentage of AIG. Painful, yes. Fatal, not in a million years. But with further questions about AIG's relationship with captured reinsurers and its probable contentious relationship with Starr International, which sets a big part of AIG executive compensation and is controlled by former-AIG-Chairman-for-Life Hank Greenberg, we cannot say for sure that we're anywhere near done with the hidden mines.
A few years from now, AIG will be a dramatically different company, now that the dominant personality of Greenberg will no longer be calling the shots. Some have said that the absolute worst case for AIG could be that a restatement of earnings over the past several years may be as high as $10 billion, and that the balance sheet isn't likely to be that brutalized, come what may. I agree with this. But there should be no question that hidden problems remain, and they are of unknown size and tenor. The comparisons of AIG with Enron are absolutely absurd (he says, holding his breath). But the potential for further problems should not be discounted. After all, when WorldCom originally started to blow up, the issue seemed contained to a big, painful restatement, and then mushroomed from there.
Uncertainty provides opportunity. But uncertainty should also be recognized for what it is.
Bill Mann holds shares in Berkshire Hathaway. He is the guest analyst for the next four months in the Motley Fool Hidden Gems newsletter. The Motley Fool is investors writing for investors.
