I laughed when I started seeing stories about AIG paying back the bailout money it has received. I hope I’m wrong, but the math just does not work out. Also, in a fit of hubris, the AIG CEO stated there is no chance of a government loss on this deal. Conversely, I believe there is little or no chance we will get our money back.
Let’s dig into the number just a bit courtesy of Barry Ritholtz and you can draw your own conclusion:
AIG Repaying Uncle Sam? Not By a Long Shot (The Big Picture, Sept. 30, 2010, Barry Ritholtz)
…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…
I emphasized that last paragraph so let’s review what it means. AIG owes the government more than $132 billion (with a B). The company is valued by the stock market at approximately $27 billion (also with a B). Therefore, it is worth about $105 billion less than what it owes. As Barry pointed out, we normally describe such an entity as insolvent or, put another way, bankrupt.
The government now owns a bit more than 90% of AIG, which makes its stake worth about $25 billion. Is there really no chance that the government won’t get repaid as AIG’s CEO stated? Even if the government could cash out its stake, the payoff would be short a cool $107 billion.
And, does anyone think this company would still be alive if it did not have a government guarantee behind it? How can the Feds sell out?
If you have not seen the coverage on AIG’s absurd claim, here are two pieces that cover this pretty well. I think there should have been much more skepticism, but at least these pieces express a bit of uncertainty on the likelihood that we will get repaid in full by AIG:
AIG CEO sees ‘no chance’ of loss on bailout
American International Group Inc. Chief Executive Robert Benmosche said Thursday that the U.S. government could make a profit from its bailout of the insurance giant.
"My personal view is that there's no chance of a loss," Benmosche said in an interview with MarketWatch.
AIG unveils government exit plan
American International Group Inc. unveiled a plan Thursday to extricate itself from a massive U.S. government bailout that saved the insurer at the height of the financial crisis…
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I may be out in left field, and I do have a healthy dose of doubt that the taxpayer will recoup its “investment” and then some. But since when does market value have to be greater than a company’s liabilities. I would generally think that a host of banks have their consumer deposit liabilities greater than market value and they are hardly insolvent. In a perfect world, doesn’t market value equal assets less liabilities or some such? Where are you factoring in any assets that AIG possesses that may balance out the debt liability to the US? or are you saying that the assets of AIG are roughly equal to its market value? Inquiring minds want to know. LOTW
“The government now owns a bit more than 90% of AIG…”
Another example of when govt decides to get involved in business!
Personally, if I ran AIG I would sell common shares in major amounts at a major discount all the while marketing the company ogressively as do their competitors: Progressive, and GEICO.
Maybe along the way they can also be a warm and fuzzy company like the 21st.com they ruined and dumped into the sucky Farmers Group!
SIGH
Great job not understanding basic finance and acting like you are an expert. You should do some research and understand finance before you spout off a bunch of misinformation. The market cap prior to the conversion INCLUDED the value of the preferred stock. In other words the issuance of the preferred stock lowered the market cap as it was part of the capital structure. Now that the preferred is converted you cannot expect the same market cap as there is not longer any obligation for the preferred. You are an idiot! Now I am not saying that means the government will receove every penny but the $27 billion market cap is a bogus number for comparison.
Thanks for the comments. I thought the comment from GMan was funny. He wrote in essence, You’re an idiot…but probably right about AIG not paying off the debt. We can quibble all day about the market capitalization and so on, but AIG would need real money to pay off its debt. It has no money and it has no ability to raise $100 billion from the stock market or any other source I can see. So, how does it repay the debt?
I suspect the market capitalization of AIG reflects it assets and liabilities pretty well. There are those such as Bruce Berkowitz of Fairholme Fund who seem to think AIG is a great buy. Maybe AIG stock could double from here, so he would be right as an investor, but even if it doubled, it still is doubtful that AIG could pay back the money the government gave it. If AIG had some hidden assets worth $100 billion or more, that would be great. I just don’t see it.
When Kurt Brouwer first laughed at the AIG's paying back plan, I laughed at him too: this person did not understand math. When Kurt Brouwer thought GMan ws funny, I thought Kurt is sooooooooooooooooooo funny too: why it is difficult for you to understand ……
You are a moron! AIG insures the planet and everything on it! Chartis is worth $70B alone. Maybe Goldman and the rest of these crooks should pony up some cash.
Let’s keep it clean folks. Fundmastery Blog commenters have a reputation as being pretty darn civil. I don’t mind being called an idiot or something, but at least come up with a good reason why.
Mark Roberts seems to think I’m a moron because I don’t know that AIG’s insurance business alone is worth $70 billion. In that case, Mark, I assume you are buying the stock like crazy, right? Because the whole company is only priced at $27 billion now. So, all those investors and analysts and insiders are just idiots. And, you have it all figured out. Right.
Hope everyone has a great weekend.
I laugh when I hear they have sold a lot of assets. The best business will be sold AIA, ALICO, and the other life companies, what will be left, ILFC worth next to nothing now and with its founder starting his own company to compete directly against it, The Chartis US and Foregin operatoins that have lost GWP in close to double digits since 2007, have not made operating income in most quarters, have reserve deficiencies that have yet to be recogonized , have expense ratio of close to 40 and who have lost most of thier management save the ineffective Kris Moor. The insurance operations are a time bomb. Next Gem is United Gaurentee the mortgage gaurentee business which lost B’s and then Sun America…Insurance companies in trouble always sell there most valuable assest first the life companies, what s left will not in any way shape or form generate 6-8B. The government owns 92% of this thing, customers will be leaving in droves. Look for the results to post in February of 2011 when AIG comes out with its 4th Quarter.
Kurt Brouwer is a fee-only financial advisor with three decades of experience. He is the chairman and co-founder of Brouwer & Janachowski, LLC. Kurt has written books, articles and hundreds of blog posts on mutual funds, ETFs and other investment topics. E-mail: kurt.brouwer *at* gmail.com.
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