AIG’s positive valuation

September 30, 2010

Back in January, the bien-pensant received opinion was that AIG’s stock was worthless, and that the market was delusional in valuing the company at $26 billion. (See, for example, Jonathan Weil, Paul Smalera, and me.) The company’s debts to the US government were just too large, we all said, for there to be anything left over for shareholders.

Does anybody still think that way? The government has now announced that AIG has a plan to repay taxpayers in full, by converting Treasury’s debt to equity and then selling off those shares in a series of stock sales.

Here’s one way of looking at it: there was nothing wrong with the analysis we were doing in January. There was no chance of AIG paying back the government then, and there’s no chance of AIG paying back the government now. But so long as the stock market remains delusional, then people wanting to own AIG’s stock can pay back the government instead. Essentially, the government is taking advantage of the bizarre positive valuation that the stock market is assigning to AIG, and saying that so long as there are people out there willing to think that way, it’s happy to let them take as much AIG risk as they want.

Here’s another way of looking at it: the world has changed over the past nine months, and there’s now significantly more value in AIG than there was in January. The people valuing AIG’s stock at $26 billion weren’t delusional, they were just prescient. And now even the government can see that value. After all, AIG is an insurance company, and insurance companies have enormous amounts of money in the stock and bond markets, and the stock and bond markets have risen a lot this year.

Given the choice, I’d be more inclined towards the first view than the second. But maybe we can split the difference with a third view. A large part of the value of any financial-services company is based in trust. Consider the idea that the value of a company is equal to the last price at which a share was traded, multiplied by the number of shares outstanding. Or the idea that deposits at a bank are “cash”, available to depositors on demand.

Back in January, AIG stock was a crazy speculative bet. But it has now held its value for long enough that it’s reasonable to consider it a genuine store of value — one which the government can actually monetize in a series of stock offerings.

I’m not convinced that the US will ultimately get paid back all the money it lent to AIG — and it certainly won’t be paid back with a level of interest commensurate with the amount of risk involved in the deal. It’s one thing to look at the value of the small number of AIG shares in free circulation; it’s something else entirely to assume that the government will be able to sell tens of billions of dollars’ worth of its own shares at anything like the same level. But it’s certainly worth a try. So long as the stock market continues to place a significant positive value on the company, it would be foolish of the government not to.


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