Tavakoli On The AIG Bubble: Irrational Exuberance
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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