Today’s AIG announcement has generated some surprisingly naive headlines. The company may have announced U.S. bailout exit plan, but that does not make it so. (Citi’s numbers don’t look any better).
Let’s take a closer look at the numbers and separate the facts from fiction:
Total Bailout: $182.3 billion dollars
Amount Still Owed: $132.1 billion (as of June 30, 2010)
Shares Outstanding: ~700 million
Current price: $39.10 (+$1.65)
Market Capitalization: ~$27 billion dollars
Today’s transaction was the converting of Preferred Stock that had a nominal value of $49.1billion — but this was privately held stock that did not trade. Its true value is actually unknown.
For valuation purposes, let’s imagine a hypothetical company that has myriad valuable parts worth about $30 billion dollars. But the company also owes over $130 billion dollars to creditors. We would describe that firm as insolvent, and heading towards bankruptcy.
Yet that is not how people think of AIG. The wisdom of crowds seems to think that the government is going to keep a firm bid under the stock price. This same crowd also thinks share dilution is positive, and ran the stock up almost $5 dollars on the news of another 12% dilution.
Management is selling off pieces of the company to repay the government. How they are going to find another $132 billion in value has not been remotely explained.
Converting Preferred to Common stock does reduce the massive AIG obligations any more than converting a 20 into 2 tens makes you any wealthier . . .
This is little more than a shell game
can’t wait to yell the truth at NBR tonight.Thanks Barry for making this simple to understand.
Yet the idiots on Bloomie TV were practically doing a touchdown dance earlier today and claiming AIG’s Benmosche leading them to the “biggest turnaround in history”. I’m not kidding. Nevermind the BIG assist from Uncle Sam. We’ll just ignore that little footnote, shall we? Ridiculous.
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barry – where did you get your numbers? according to AIG’s release today (http://www.aigcorporate.com/newsroom/2010_September/AIGAnnouncesPlantoRepay30Sept2010.pdf) , AIG says they owe:
1) $20B on the FRBNY credit line 2) $26B in preferreds of AIG/ALICO to the Fed 3) $49B to the Treasury (preferreds)
how did you get $132.1B?
also, note that the implied market cap of AIG is much much larger than $27B. I don’t understand how the stock doesn’t trade down on an announcement of $49B of dilution – that was expected? Fine – then you can do the spreadsheet math and calculate that the implied mkt cap of AIG post conversion is well above $60B (there’s still a little uncertainty as to the actual details)
I just don’t get it. But can you explain your $132.1B number anyway? I’m assuming you’re counting the money we gave them in exchange for the 80% warrants? that must be it – how much was that?… oh – that’s another oddity – the 92.1% gov’t ownership (cited in AIG’s release) doesn’t really jive with the math – it should be even higher! I”ll try to explain that one later after I flesh it out some more.
Yeah, that headlines contradict a pretty bold assertion made a year ago….
http://www.ritholtz.com/blog/2009/08/aig-wont-payback-bailout-s-this-century/
I guess they’ve still got another 89 years to pay it back this century, though…..
My comment at the time:
“Andy T Says: August 20th, 2009 at 8:44 pm Actually, this gentleman (Benmosche) is saying a lot of reasonable things. I mean, heh, if I had just been given a 180bn loan/backstop from Uncle Sam, why be in a hurry to fire sale shit? If you have a 25-40 year time horizon, then they are much better off not selling any of their profitable units. Eventually inflation will take hold in several years. By 20-30 years from now, 180 bones won't seem like such a big hurdle"¦.
In fact, I'll make a sidebet with Barry Ritholtz that neither of us will be able to collect:
AIG, if allowed to continue to operate, will be able to pay back the 180 billion in the next 30 years.
~~~~~~~~~~~~~~~~ Now, I'm just completely ignoring all the moral hazard implications here. Nobody get's a lifeline in AT's libertarian world. Just let it get vaporized. But, if you're going to toss 180bn at the business, you might as well run it the best you can for the long run.”
@KD
Don’t argue with “the Barry”….
He’s smarter than you and he knows it. If you keep this up, you’ll be jeered by the BR Acolytes and tossed out out the door.
actually Andy, this time it definitely wasn’t my intention to argue with Barry – this AIG story is a disgusting shell game designed to fool the American people, and the details are murky even for those who are following it.
like me, for example. I wrote a whole post about it this morning, but I totally forgot that we got that 80% warrant stake for giving AIG a crapton of money…
There’s something really weird about the 92.1% ownership stake being cited by the press… If you take the 80% current stake, then take the $49B conversion, you end up with more than 92%…
To me the whole thing smacks of politics. It’s a “win” to show that AIG is “paying back” the USG right before the Elections…”See, everything is ok!”
IMO, they shouldn’t mess around with any of this at this time–it’s waaaay too early in the recovery process. We crossed the rubicon with the 182-bone backstop. At this point, might as well let them just run the business as well as they can and just sell off assets as good bids step up over time.
The bailout was $182.3b. They paid back $49b.The balance ($131) is what is left.
And I like when people use intelligent arguments to disagree with me. Like Kid D: Good data persuasively presented. It is a valuable contribution to both myself and readers.
The pointless obnoxious stuff (cough cough) that does not add to the discussion is an annoyance to readers.
I try to encourage smart discussion — especially amongst the pros in the crowd.
The silly stuff gets in the way of that.
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"You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete." -Buckminster Fuller
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