The more and more I learn about AIG, the more I feel that it will be dissolved once the government feels that the financial markets will not crater without AIG paying out on its obligations.  I could be way off base, but that is what this game is all about.  I owned shares @ around $2 per share but don’t any longer.  I dumped them at $1.45 and feel there is much more down side than upside in AIG stock.

The US gov’t has subsidized AIG to the tune of $180 billion.  That is a staggering figure that won’t soon be paid back.  There will be little paybacks in unique forms such as the stakes the the US Gov’t will have in a couple of foreign unit IPO’s.  The company is selling assets like mad but will likely be hard pressed to come up with the entire $180b.  We will continue to see these moves to sell off subsidiaries and pay back the gov’t with the proceeds.

My hunch is that it isn’t all about paying the gov back with the proceeds.  There is another big issue looming that has been brought to light today.  No surprise to many, I am sure.  Reade about the looming CDS issues facing AIG:

AIG says swaps exposure could lead to more lossesAP(Tue 9:13am)

At this point, I would run from AIG shares.

AIG

A wise investor once said that the time to buy is when everyone else is selling.  Well, who is doing the buying of assets right now?  Blackrock is one of them BLK.  The chart on Blackrock is pretty impressive.  If you feel we are at a bottom for markets, assets, companies, Blackrock could end up a huge winner 3-5 years down the road.  I just picked up a small number of shares.  I gave up on some AIG shares at a loss to pick up the BLK shares.  Sounds like a fair trade to me.  I don’t see how AIG is going to make it through this mess.  Might as well wipe out the common and fold them into the new bank oversight agency.

Keep an eye on Blackrock.  This will be one to watch for many years to come.  A well capitalized entity, picking up assets at a discount, at or near the bottom will be a winner.  The key is the pricing.  They are buying assets that can support themselves.  When they are spun off in the future, expect huge returns for BLK.

Blackrock

The line quoted below from Sen Richard Shelby describes my feeling on AIG.  The exposure is enormous.  The risk is large.  It almost feels like they are paying out claims, avoiding failure and hoping the entire system (housing, banking, etc.) is propped up to stop the hemmorrhaging.

AIG was essentially the insurer of choice for financial instruments.  They were packaged and sold, packaged again and resold and then once they landed somewhere, they were insured against default by AIG.  With those defaults occuring, AIG has had to pay up.  Without them paying up, more institutions would fall and increase the velocity of the claims.  This would make the collapse of Bear Stearns and Lehman look orderly and efficient!

“You haven’t got all your hands around this bear, so to speak, and it’s still hemorrhaging money,” Shelby said. “How are you gong to back out of this?”

via Dow Jones NewsPlus – Geithner: No Power To Reduce Value Of AIG Counterparty Claims .

AIG has a huge hole to dig out of.

A bet on AIG is a bet that they can keep their largest shareholder happy.  Who is that, some might ask?  It is we, us, you, me, the U.S.  Get it?  I have issues with the government’s involvement in private companies.  They don’t have a clue how to run them!!

By government, I mean politicians.  Most politicians are narcisists who love the spotlight and the big picture story that they get to tell.  Give them a hot issue and they are all over it.  That might explain part of the reason that the politicians were holding hearings regarding steroids, with Mark McGuire and Rafael Paliero, rather than getting into greater depth with the potential risk that Fannie and Freddie might expose everyone to.

To date, AIG has been given cash, loan guarantees, etc.  of $180 billion.

The US is currently holding a 79% equity stake in AIG.  AIG is selling off assets to pare its debt and raise cash.  The auto insurance unit ended up with 21st Century Insurance and their Tokyo office builing is in the hands of Nippon.  NY headquarters anyone?

AIG needs to Dig!

The AIG Financial Products unit (AIG FP) created this mess that the taxpayers are now involved with.  Thanks Hank Greenburg!   Mr. Greenburg sat in front of congress and claimed that these weren’t things that he put in place, but the AIG FP unit that he created brought this company to its knees.  The CDS exposure that this unit took on was staggering in scale.  The unit exposed the company to more than $60 billion in risk.  The sales people that brought in the deals, made loads of cash without a long term view of the exposure that the bankers (FP guys) were exposing the company to.

To pay back the entire amount provided by the government and get themselves out from under the risk that they took on, they will have to hit on all cylinders.

This story will be going on for years.

AIG had two alternatives right?

1. GO Bankrupt

2. Get bailed out

In scenario #1, if AIG goes bankrupt, then bonuses probably cannot be paid. They have no money and creditors are lining up to get pennies on the dollar. There isn’t any money to pay “valuable employee” a bonus…contract or no contract. So all of these guys who got paid bonuses are looking for new jobs without the benefit of getting a bonus.

In scenario #2, AIG gets bailed out by the government so everybody gets paid?? But they would have gone bankrupt! There are no bonuses if they go bankrupt because there is no money. But bailout funds mean somehow these employees are entitled to their bonuses.

I really, like most Americans, cannot believe how this has been handled. At the end of the day, whomever handed out the money should really be in a tough spot. There should have been a really easy way to attach strings to the money given AIG. “You can have this bailout money if it goes to shoring up the balance sheet” or something else. Some many govenment officials are acting tough when they handed the money to AIG with no strings attached.

So frustrating and such a waste of taxpayer money.