Tavakoli On The AIG Bubble: Irrational Exuberance

Tyler Durden's picture

By Janet Tavakoli of Tavakoli Structured Finance

American International Group Inc.’s equity is currently worth zero, whatever manic depressive Mr. Market may say today.  It is likely to remain zero based on AIG’s own analysis of its future over the next few years.  In fact, its obligations to the U.S. Treasury would trade at a discount today.  The only reason AIG’s stock should trade above zero today is if you believe crony capitalism will fund the birth of an AIG clone—in other words if you believe AIG’s future will be a rigged game.
Today’s Wall Street Journal reported that AIG has changed its timetable for selling assets.  That was to be expected, because if it sold its assets quickly, shareholders would get nothing, and the government would not get paid in full.  It is also AIG’s probable future scenario, albeit the losses may be mitigated.
AIG’s new Chief Executive Robert Benmosche “is willing to wait as long as three years to spin off stakes in two multibillion-dollar foreign units.”  He’s waiting for a “fair” price, and he admits that if he sells to soon (or doesn’t get a “fair” price), there will be losers all around.
Benmosche’s own analysis shows AIG “wouldn’t be able to repay the government even if it sold everything.”  His strategy is loss mitigation, not a return to AIG’s salad days.
Even the U.S. Treasury, not known for its transparency or candor during this crisis, wrote that its AIG investment is highly speculative.

AIG seems disappointed that its Asia focused life insurance unit,  American International Assurance Co. (“AIA”), might only raise more than $5 billion as estimated last spring, especially since AIG valued it at $20-$40 billion in February 2009.  AIG is also disappointed with valuations for American Life Insurance Co (“Alico”).
As Mr. Benmosche pointed out: “If the U.S. government doesn’t continue to support AIG, we will fail. We have no right to use the government funding to make a profit; that is inappropriate.”
If the government’s new policy is to be long-term distressed private equity investors in entities like AIG, then the U.S. Treasury should get a share of the profits. The same goes for some former investment banks—now banks—with which we are long-term business partners.  We support them with cheap funding and low borrowing costs due to our guarantees and ongoing liquidity support.  We should ask for a large share of the profits, if any.  

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Anonymous's picture

The rumor is that the gov't will forgive all of AIG's debt.

mgarrett84's picture

Yea well,  There is tons of fun to have with the premia in its options.  

bonddude's picture

Sounds like the guy knows FAS 157? is being pushed out 3 more years.

Leo Kolivakis's picture

BGI bought 110 million shares last quarter. I wonder if they are pushing this junk up to pump and dump it. AIG has quadrupled in a month, which is ridiculous given that the fundamentals have not drastically improved. All hot money chasing garbage up. Fast in, faster out.

Rex Crotch's picture

Hopefully it tanks soon. I bought some well out of the money lottery ticket puts just in case. I'm sure the government will do all it can to keep the share price relatively high.

Anonymous's picture

In fact I will bet that after waiting 3 more years Benmoshe will find out that the assets are worth even less. That's the deflation story ahead. But in the meanwhile all the multi-million dollar bonuses will have been paid off to the "talent" so taxpayers will end up losing a heck of a lot more.

No More Bubbles's picture

AIG is simply being used as a option scam. The entire purpose of the 20 for 1 reverse split (R/S) was for the sole purpose of using this shell company to scam the options.

Initially, they tanked the stock after the R/S to flush out longs. They then bought very cheap out of the money call options in the strikes all the way up to $70. This happened when the stock was actually under $15.

Now keep in mind that the move it's had seems insane ($13 to $55 in a the last month) but it's really only a move from 75 cents to $2.75 if you strip out the split.

What this scam did was allow them to make astounding profits on the calls.  Open interest on the 40's and 50's is huge and someone bought those (GS?) for a nickel when the stock was under $15.  Today the 50's hit $11 and the 40's hit $17.  These are staggering gains that you couldn't see with a stock trading at $2........

Now they'll likely play the put side if they are done running this ponzi up.....

Food for thought...........

Anonymous's picture

Bubble capital gains tax to pay down bubble national debt?

ghostfaceinvestah's picture

Thanks for the comment, I might look into buying some puts.   What month/strike do you think is most attractive?

No More Bubbles's picture

Well, because it is so speculative and irrational right now, there is no telling what the stock jockeys will do with it.  It could go to to $100 for all I know ($5 pre-R/S). 

I had some 55 Sept puts on my screen earlier (AIG was 53-54). They were around 8.50, but I couldn't pull the trigger.

When the stock tanked to 48-ish - the puts ran to 13 (10.50 now).  If you have the balls, go for it, but go small to minimize risk.....

This "THING" is in no man's land and there is no tellling how long this "irrational exuberance" can last.  Big gains and big losses can both come VERY fast in this environment.........

Happy trading........

e1even1's picture

looks like the one with the most open interest right now is the Nov2009 1.0000 OI 46,486 expires 20Nov. there's an ask for .07

pure gamble. get 'em while they're hot.

ghostfaceinvestah's picture

Tried to buy some 40 Nov puts today, didn't get hit, will try again Monday.  Sorry I missed the spike up to 55 today.

I figure by Nov this POS will be trading in the teens again.

Anonymous's picture

Sorry, it is rigged game. To save GS, you have to save AIG, therefore, save the entire financial system. GS is the entire system, like it or not.

ghostfaceinvestah's picture

Enough of this fucking bullshit, AIG needs to be dismantled ASAP.  I thought they were bailed out to prevent a collapse, not so we could make a long term distressed investment.

At this point I would rather take a loss and have some of my tax dollars subsidize a sweet deal for the lucky buyer, who obviously was smart enough to not fuck up.  Instead the new fuckface CEO is going to bring in Greenberg?  Are you fucking kidding me?

And where the fuck is Bernanke on all this?  That moron rants on and on about the mistakes the Japanese made, and he is willing to let this fucking zombie institution hang around for years?  WTF is his problem?  That idiot should be in there today with a gun to the head of the CEO, making him sign purchase and sale agreements.

SteveNYC's picture

Great post, with passion!

I too, as a taxpayer, am willing to take a 100% write down of this apalling investment (or should I say disguised bail-out). This is bullshit, it is allowed to go on so the insiders can keep screwing the corpse for whatever it is worth to them.

The taxpayer is simply keeping the carcass afloat so it can be picked clean of any and all sustenance that it brings to these pigs.

ghostfaceinvestah's picture

Thanks, I am SO fucking pissed off about this AIG thing I can barely write.  The whole situation has been a fucking joke from the beginning.  Months before AIG paid 100cents on the dollar to settle their CDS transactions, financial guarantors like MBI and ABK settled the SAME contracts with the SAME counterparties for 35 - 50 cents on the dollars.  These were done in July and Aug, and in Sept AIG pays 100 cents?

But whatever, that fucking scam is over with, and it is a sunk cost now. But enough is fucking enough.  These guys are undercutting their competitors on price in order to compensate for the stink associated with the company, and Benmoshe is getting $7M a year to wind this POS down.

The money we pumped into that company is gone, let's write it off, and give the pieces away to the market.  I could care less if, say, Mutual of Omaha gets a free insurance business.  Good for them, maybe they will keep funding Wild Kingdom with the money they saved.  I could give a fuck.  All I know if Mutual of Omaha stuck to the insurance business and didn't require a bailout, so let's reward companies like that, instead of having the new ass-clown bring back Greenberg.  What a complete and utter fucking joke.

Veteran's picture

well played, sir


The force is strong with this one



pigpen's picture

Ghost, well said and I echo your sentiments to a T.

Gilgamesh's picture

Virtually everything I say lately seems like it should be covered with tinfoil, but it just seems so clear that nothing that has/is/will be done to 'bailout/save' this and that or to 'turn these valuable businesses around' is even close to on the up-and-up.  All are backrooms deals to benefit chosen people with financial stakes still tied up in the companies, in one way or another.  The good, clean businesses get hosed in the process.


You seem to be on the same page, and I hate to keep posting conspiracy lists and names.  This honestly feels like what trying to do business in Russia was like if you weren't one of the connected...

Anonymous's picture

Yes it is very puzzling that Bernanke seems to be making all the same mistakes as Japan did...or at least being a very significant part of the problem.

Anonymous's picture

Mmmm. Your delicious anger shall be the greatest gain I realize this day, methinks.

D.O.D.'s picture

AIG reminds me of USO about this time last year...

crzyhun's picture

Irrational exuberance is putting it mildly.

More like patchuko hop!

AN0NYM0US's picture

SEC's Shapiro interview coming up at 3pm eastern on the FoxBusiness channel - She's focused on hedgies and  wants to hire ex Traders instead of Lawyers the way IT companies hire former hackers ...  (and for you CNBSrs Liz Claman now lives at Fox) - FoxBusiness streams live at


Leo Kolivakis's picture

I hope Shapiro does hire ex-traders and guys like Harry Markopolos who can detect bullshit from a mile away. The SEC has way too many lawyers and not enough bullshit detectors.

As far as the options scam, why are you certain it is GS behind it and not BGI (Barclay's Global Investors)? If this type of manipulation is going on, how easy is it to catch them? Isn't it easy to see if GS or BGI bought options a few months ago?

george's picture

I think that the gains in the horrible 4 is due to the sole fact that the government owns the majority of common stock. For instance, the gov't own 80% AIG shares(Correct me if I'm wrong). This leaves about 26 million shares that are being traded currently with currently quadruple this amount being traded daily. The simple fact that there aren't enough tradeable shares to meet demand is contributing to the run up. IMO, the horrible 4 will run some more! 


I don't know why the government doesn't quietly start selling into the strength to correct this. 

Anonymous's picture

the entire focus of this administration is to save the poor and save the system. they don't give a furk about people in the middle. I don't think they really want to save AIG. The only reason to save AIG is because GS was in dire need of saving. you cannot have a former CEO of GS sitting there watching his company to go down. As for SEC, they are just bunch of puppies doing what they are told by those in the banks.

JohnKing's picture

AIG 120. "Obama shepherds investments wisely". Thats the next headlie. It is a gov't. rigged game, not a peep from any regulator on why a bankrupt company goes to $50.00 a share, and there never will be. Obama needs to be a hero and the only sure thing he has is the rigged financial appartus. He will play it for all it's worth and the enablers go along for the ride, laughing at him (and us) and getting more corruptly rich.

No More Bubbles's picture

It's NOT a $50 stock.  It's $2.50.  The 20 for 1 Reverse split has everyones head spinning about this exaggerated appearing move.  FNM & FRE and countless other pieces of trash (VG the other day) have had equally outsized moves.

See my post above (a few down from the top) which explains that this whole thing was a well engineered option ponzi scheme scam.  It was easy to do with the float reduced 95% and 80% of this shell company "owned" by the US Gov't.  The call writers are actually running the stock up in a self fullfilling prophecy.......

Note:  Have a look at Lehman stock (LEHMQ) today. Another worthless shell which traded 73 million shares closing up 200%.  If they did a 100 for 1 R/S and made it optionable, they could do the same thing they did with AIG.

One wonders, why are completely worthless pieces of garbage running?  Is this signalling the start of something -- or the end?

Anonymous's picture

who is pulling the strings on aig? management? treasury?
all of the above?

ghostfaceinvestah's picture

Pretty easy explanation - the Fed is flooding the financial system with free cash, look at excess reserve levels.  Now that the legitimate companies have been run to beyond reasonable levels, the market turns to pure crap.

People might not believe it, but at 1000, the S&P is in bubble territory, and it could climb higher as the Fed is still printing more cash - $500B in the next 4 months for MBS alone.

Altan311's picture

Anyone else getting ready for the 3:30 ramp up? Strength been building in the dollar for the last couple hours, can't wait till thyey sacrifice the lamb so to say.

walküre's picture

Why is China tanking ?

Can they not do a better job at manipulating the Shanghai Casino?

Oh, I forgot. They can't and the Chinese are nervous about their own catastrophic economic outlook and the fact that all hope and change rides on a Chinese donkey.

Wow. CSI is more reflective of typical investor behaviour in this climate than any other market. Of course they're saying the CSI is not to be taken too serious.

Go figure.

Anonymous's picture

Now wouldn't it be amazing if a sharp, straight shooter like Janet was a regulator....then maybe we'd get some integrity back into the markets..

walküre's picture

You're thinking Janet Reno?

She'd have the FBI surrounding Wall Street with tanks in no time.

LOL gotta laugh at that visual.

Anonymous's picture

LOL me too.

deadhead's picture

Thanks for posting this TD.  Well written piece Ms. Tavakoli in case you stop by.  Your insights are always appreciated by this writer. Thank you.

Careless Whisper's picture

Wait three years to sell assets? Oh, of course, that would be after the 2012 election.

Anonymous's picture

"if you believe AIG’s future will be a rigged game." I had been thinking the whole thing was completely insane but when put that way it sounds like a great bet. Always go long government stupidity.

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