Thursday, 29. September 2011
The Valuable Lesson from AIG Episode: It’s up to us to do our Homework
Even if you don’t own stock personally, here’s a stock you own indirectly. You and I and our children own about three-fourths of the equity in American International Group, one of the largest insurance firms in the world.
Given your slice of 1.9 billion common shares trading at $23 per share, don’t you feel richer already?
Trouble is, we had to pay money to buy the stock. We bought it when we injected billions of dollars into the company during the recent financial crisis. We received this position after standing behind AIG’s commitments to other large financial firms, making good on promises AIG couldn’t live up to on its own.
Putting aside the asserted merits of that bailout as a means to forestall broader financial calamity, how is our investment doing?
Not so well.
AIG’s stock has fallen significantly over the past year. The S&P 500 is currently flat with year-ago levels, while AIG’s common stock is down 40% over the same time frame, nearly twice the rate of decline of insurance company averages.
At current prices, AIG’s common stock has fallen about 25% below the price the Government Accountability Office has estimated the U.S. government needs to receive to recoup its investment. And that estimate itself misses the broader consequences of the financial crisis that AIG and its counterparties imposed on the rest of us, as we’ve endured worst recession since the Great Depression.
Coming up with the right total is a matter of debate, but we now appear to be about $10 billion in the hole just on the common stock.
It didn’t look like that about a year ago. In early November 2010, the U.S. Treasury estimated the total losses to the taxpayer from the AIG bailout at $5 billion. After that report was issued, the Special Inspector General for the TARP program, Neil Barofsky, questioned the assumptions behind the Treasury’s estimate. The Treasury took AIG’s then-current stock price as an assumption in its estimate, when Barofsky and others asserted that this price should have been discounted as a measure of its future value, in light of its volatility.
Since that argument, AIG’s common stock has fallen nearly by half. In hindsight, and simply as a matter of common sense, it looks like Barofsky had a point. And AIG’s stock is now trading about half of the company’s book value, which may reflect market concern about the valuations of AIG’s assets and liabilities, its growth prospects, or both.
Either way, we are still at risk on this.
Our AIG investment could have an upside, and it could have a downside. There are a lot of people honestly trying to right the ship, but they face a difficult task.
That may be putting things too nicely, in light of what happened. The episode has certainly taught us a lesson about our financial markets and the quality of their regulation.
Oops, I may have overstated things. The AIG episode has offered us a valuable lesson. It’s up to us to do our homework, and to learn that lesson.
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