Opinion

Felix Salmon

AIG’s positive valuation

By Felix Salmon
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.

Comments
5 comments so far | RSS Comments RSS

This article and the one from the WSJ (http://online.wsj.com/article/SB1000142 4052748704483004575523261932975260.html? mod=WSJ_hps_MIDDLETopStories#articleTabs %3Darticle) do not seem to agree. According to the WSJ and my memory, the government already owns 79.8% of AIG common stock; the conversion will bump that to 92.1%. If that 12.3% of AIG is really worth $62B, that implies the company as a whole is worth over $500B. I find that hard to believe.

Shouldn’t the government keep the $49B of preferred, dividend paying (ha!) shares until it is ready to sell them as common stock? If we want to test the feasibility of recovering the taxpayers investment by selling common stock, use the 79.8% we already own. This strikes me as a huge dilution of the governments position in AIG, and a massive giveaway to the existing private shareholders. And what in the world is the point of the warrants going to the existing private shareholders?

Posted by MattJ | Report as abusive
 

If you’re willing to acknowledge the second view as a possibility, then the first view is immediately false since the stock has option value.

Posted by absinthe | Report as abusive
 

In my opinion the key phrase in this whole article is “[the US govt] certainly won’t be paid back with a level of interest commensurate with the amount of risk involved in the deal.” Given the risk of losing most of its investment in the style of the Irish govt in Anglo Irish Bank, the govt simply breaking-even in nominal terms should not be considered “getting repaid in full”.

http://cautiousbull.wordpress.com/

Posted by spbaines | Report as abusive
 

“the government is taking advantage of the bizarre positive valuation that the stock market is assigning to AIG” – not only that, they’re ENCOURAGING the valuation, trying to prolong it by giving out warrants to AIG shareholders.

Why are AIG shareholders being given ANY additional stake in the company? answer: to try to prolong the shell game so that the gov’t can puke their shares.

remember – giving AIG shareholders warrants doesn’t change the value of AIG, it just increases the value of the public’s holdings relative to the gov’ts.

felix – can you please send me an email – there may be another story here – i want to run some numbers by you.

Posted by KidDynamite | Report as abusive
 

@Felix

First, the government – we the taxpayers – will hold risk first for as long as it takes to dump the stock.

Second, delusional is not about being prescient but about ignoring reality, suspending it. How long can the superior delusional government, the ones who own AIG stock until someone else buys it, suspend reality?

Finally, mark my words, the government will not sell a portion of that stock but use it to quietly with no press release pay off the claims against AIG in settlement of the Crisis One 2002-2005 Ohio litigation. If more plaintiffs make more deals like that, the government will use it again to pay off the Crisis Two settlements that are surely coming. That may actually be the best and highest value use of those shares rather than open market sales, as long as AIG doesn’t need another taxpayer infusion after the debts for prior bad acts are paid by the taxpayer who thinks a return on investment is still coming.

Posted by FrancineMcKenna | Report as abusive
 

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