Will a U.S. Government Selloff of AIG Shares Help Investors?

During my 12 years as an executive at AIG, my salary was never great, but all of us knew that our stock holdings would make up for that many times over. We were destined to become millionaires if we hadn’t already. Well, we all know how that turned out.

Just yesterday, Bloomberg reported that the SEC is looking into whether AIG’s former general counsel deemed the stock worthless when negotiating executives’ compensation. She reportedly told the U.S. pay czar in January that employees preferred cash to common stock. I can certainly understand that sentiment.

Still, that “worthless” stock is now up about 34% for the year. And the market reacted favorably to last week’s Bloomberg report that the government is considering a two-year plan to dispose of its’ nearly 80% stake in the company. I’ve been holding on to my shares, despite the doubts of my investment advisor, and all of us who have stuck it out this long have to be wondering what a government exit will mean. The sale of stock by the government won’t change the number of shares outstanding, so mathematically, there would be no impact on earnings per share. But AIG would be able to operate independently again.

John Frankola of Vista Investment Management has been watching AIG stock closely. He says, “From a transactional perspective, the U.S. government’s sale shouldn’t change the value of AIG. However, since most investors perceive the government’s ownership and influence as negative, there is a possibility that AIG will be viewed in a more favorable light, which could move the stock price higher.”

For me, the biggest issue has always been why the government had to take 80% of the company to begin with. Former CEO Hank Greenberg has argued repeatedly if the government would bring its share down to 30% or so, AIG could attract investment from sovereign wealth funds and others.

Frankola agrees that in hindsight, the government’s decision to take 80% ownership in AIG was a disaster for shareholders, especially compared to other deals struck later. He says, “It’s easy to make an argument that the stock would be much higher today if the government took a less punitive ownership interest, the satisfaction of claims against AIG (like those of Goldman Sachs) were settled at a discount to face value, and they waited for a recovery in prices before forcing management to unload assets.”

Frankola offers a negative overall assessment of AIG: “In my opinion, for long-term investors who lost the majority of their investment in AIG, there is little hope for a significant recovery. Even if AIG returned to its previous peak earnings level, long-time shareholders would likely experience a stock recovery to just 20% of their previous value, due to the 80% dilution resulting from shares issued to the U.S. Considering the recently announced sales of two of AIG’s best businesses (which means less earnings potential going forward) and the sale of stock by Greenberg in the mid-30s (unquestionably the person who knows AIG best), the current price likely provides a good exit point for long-suffering investors.”

Even so, I prefer to remain one of those stubborn AIGers who still believe in the dream and that there will be a greater recovery. I’d like to hear what you think.