Tomorrow, AIG releases its second-quarter results and analysts predict a 99-cent-a-share profit, which would be down from this period last year. Revenue is expected to drop by about a third. Since AIG’s general insurance and domestic life insurance businesses account for about half its revenue, we’ll want to look closely at how those divisions are performing.
Still, overall, the AIG story is positive. Bloomberg reports AIG has reduced the debt it owes on a Federal Reserve credit line by about $3.5 billion over the last three months. One unit, American Life Insurance Co., reported partial results for the second quarter - net income tripled in the six months ended May 31 to $694 million. And AIG is being helped by the stabilization in mortgage assets held in the Maiden Lane entities created in 2008 to remove AIG’s toxic securities.
You can credit a lot of AIG’s recovery to CEO Robert Benmosche, who has finally brought stability and firm leadership. But the big question remains – will AIG be able to pay back taxpayers? AIG is planning to sell Alico to MetLife and put AIA Group up for a public offering. AIG has no choice but to sell its non-core businesses so it can pay down the Fed credit line. But in the long run, that’s only going to make it more difficult to earn revenue and increase profits.
AIG may now be winding down that divestment strategy. AIG previously said it was considering spinning off its property-casualty insurance business, and now reportedly it plans to keep it. I think after AIG gets rid of Alico and completes the AIA IPO, it needs to stand firm, and concentrate on growing its business.
In June, the Congressional Oversight Panel predicted the government will likely remain a significant shareholder through 2012 and said U.S. taxpayers "remain at risk for severe losses." But Fed Chairman Ben Bernanke has told Congress he thinks AIG will repay everything. AIG stock is up about 32% since the beginning of the year and value investors are recommending a buy. If this kind of progress continues, taxpayers could even make some money when the government unloads its 80% ownership.
Showing posts with label bailout. Show all posts
Showing posts with label bailout. Show all posts
Thursday, August 5, 2010
Thursday, June 3, 2010
AIG's Asian Gamble
The collapse of the AIG-Prudential deal could turn out be more promising than the original agreement for the British insurer to buy AIG’s largest Asian life-insurance business, AIA, for $35 billion dollars.
First, it shows that AIG’s board is far more independent than during the Greenberg era. Benmosche battled a highly contentious board over the original Prudential deal until he was able to push it through in March. But this time, he couldn’t get his way. AIG’s board hung tough and refused to accept Prudential’s lower offer. It was reportedly unanimous except for Benmosche.
The big question is why AIG’s board turned down $30 billion, which is more than is being predicted for any IPO. Who knows what went on in that board room, but most interesting reason I have heard is that some directors thought they could eventually sell AIA for a lot more to the Chinese. And already we’re hearing reports that Assicurazioni Generali SpA, Europe’s third-biggest insurer, may be interested in buying parts of AIG’s operations in Asia.
The directors might also prefer to sell off slices of AIA gradually in an IPO, while the business continues to grow. So, over the long haul, they could beat the Prudential price. Since the U.S. government owns nearly 80% of AIG and could have vetoed the board’s refusal to take the lower offer, it suggests they buy this argument.
In fact, Treasury Secretary Timothy Geithner praised the company’s decision to walk away from the Prudential offer. He told reporters yesterday,”A.I.G. is now free to pursue a bunch of other options to help maximize the return, reduce any risk of loss to the taxpayer. They have got a very strong management team, a much stronger board in place, making incredibly impressive progress frankly in restructuring that entity.”
Geithner’s faith in AIG is pretty remarkable, reflecting the turnaround Benmosche has been able to pull off since he took over last August. AIG’s board is betting the company will do even better and Geithner is letting that bet ride. Of course, the taxpayers who provided the stakes don’t have a say. I personally would have bet on Benmosche over his board, but I applaud Geithner for not interfering. We’ll see how well AIG can do with AIA and let’s hope neither taxpayers nor investors come up short.
First, it shows that AIG’s board is far more independent than during the Greenberg era. Benmosche battled a highly contentious board over the original Prudential deal until he was able to push it through in March. But this time, he couldn’t get his way. AIG’s board hung tough and refused to accept Prudential’s lower offer. It was reportedly unanimous except for Benmosche.
The big question is why AIG’s board turned down $30 billion, which is more than is being predicted for any IPO. Who knows what went on in that board room, but most interesting reason I have heard is that some directors thought they could eventually sell AIA for a lot more to the Chinese. And already we’re hearing reports that Assicurazioni Generali SpA, Europe’s third-biggest insurer, may be interested in buying parts of AIG’s operations in Asia.
The directors might also prefer to sell off slices of AIA gradually in an IPO, while the business continues to grow. So, over the long haul, they could beat the Prudential price. Since the U.S. government owns nearly 80% of AIG and could have vetoed the board’s refusal to take the lower offer, it suggests they buy this argument.
In fact, Treasury Secretary Timothy Geithner praised the company’s decision to walk away from the Prudential offer. He told reporters yesterday,”A.I.G. is now free to pursue a bunch of other options to help maximize the return, reduce any risk of loss to the taxpayer. They have got a very strong management team, a much stronger board in place, making incredibly impressive progress frankly in restructuring that entity.”
Geithner’s faith in AIG is pretty remarkable, reflecting the turnaround Benmosche has been able to pull off since he took over last August. AIG’s board is betting the company will do even better and Geithner is letting that bet ride. Of course, the taxpayers who provided the stakes don’t have a say. I personally would have bet on Benmosche over his board, but I applaud Geithner for not interfering. We’ll see how well AIG can do with AIA and let’s hope neither taxpayers nor investors come up short.
Friday, April 30, 2010
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.
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.
Thursday, February 11, 2010
Did Goldman’s Greed or Government Ineptitude Doom A.I.G.?
For those of us who have been wondering just how Goldman Sachs managed to bully AIG into paying billions for losses in the mortgage market that hadn’t yet occurred, The New York Times has given us a gripping behind-the-scenes look.
The Feb. 6th article shows just how aggressive Goldman’s demands were in 2007 and 2008 to cover potential losses in mortgage securities. But AIG wasn’t a complete pushover. It argued that the securities it insured were worth more than Goldman estimated, and even asked Goldman to return one and a half billion dollars. AIG never would have become a global insurance giant without building a reputation for being very tough on paying out claims, but this time Goldman Sachs gained the upper hand.
The Times article seems to support the recent contention by former AIG CEO Hank Greenberg in the Wall Street Journal that Goldman Sachs was a major contributor to AIG’s fall. At the height of the housing bubble, Goldman Sachs created derivatives backed by subprime mortgages, in effect, betting the market would collapse. AIG took that bet by insuring Goldman against its losses. When the bubble burst, Goldman demanded AIG payments as the value of those securities dropped just 4 percent, even though their underlying payment streams remained intact.
But Goldman Sachs is not the only villain. Government missteps also contributed to the collapse of AIG. The government pushed AIG to pay Goldman Sachs and other banks in full immediately, but if it had just guaranteed those funds, AIG might not have needed a bailout or a much smaller one. Those hundreds of billions of dollars in derivatives AIG wrote are actually worth something now. The government bailout resulted in AIG making $14 billion in payments to Goldman and billions more to other banks.
Today, an astounding 79.9 percent of AIG is owned by the government. No other U.S. company had to turn over so much of its organization. Look at Citibank: it was deeply troubled too, but the government owns much less (36 percent.) Treasury Secretary Henry Paulson has to be faulted for this decision. To the outsider, it looks like he began to regret letting Lehman Brothers go bankrupt and thus saved AIG, but at a huge price to the stockholders. And then to make matters worse, he put Edward Liddy in charge of AIG, and he was just in over his head. His only experience was running Allstate, a domestic auto insurance company
AIG has received $180 billion in taxpayer money, paid off Goldman Sachs 100 cents on the dollar, and now Goldman is making record profits. AIG has started to rebound a bit, but can it ever recover from being “nationalized,” as Greenberg has put it? Yes, AIG made a tremendous mistake by getting into the business of insuring something it couldn’t cover, but did it have to pay by giving up its independence? The Times says the SEC is now looking into whether Goldman’s demands for AIG payments “improperly distressed the mortgage market.” That should prove interesting, but perhaps the federal government should be contemplating how its actions nearly ruined what was once one of the world’s most successful companies.
The Feb. 6th article shows just how aggressive Goldman’s demands were in 2007 and 2008 to cover potential losses in mortgage securities. But AIG wasn’t a complete pushover. It argued that the securities it insured were worth more than Goldman estimated, and even asked Goldman to return one and a half billion dollars. AIG never would have become a global insurance giant without building a reputation for being very tough on paying out claims, but this time Goldman Sachs gained the upper hand.
The Times article seems to support the recent contention by former AIG CEO Hank Greenberg in the Wall Street Journal that Goldman Sachs was a major contributor to AIG’s fall. At the height of the housing bubble, Goldman Sachs created derivatives backed by subprime mortgages, in effect, betting the market would collapse. AIG took that bet by insuring Goldman against its losses. When the bubble burst, Goldman demanded AIG payments as the value of those securities dropped just 4 percent, even though their underlying payment streams remained intact.
But Goldman Sachs is not the only villain. Government missteps also contributed to the collapse of AIG. The government pushed AIG to pay Goldman Sachs and other banks in full immediately, but if it had just guaranteed those funds, AIG might not have needed a bailout or a much smaller one. Those hundreds of billions of dollars in derivatives AIG wrote are actually worth something now. The government bailout resulted in AIG making $14 billion in payments to Goldman and billions more to other banks.
Today, an astounding 79.9 percent of AIG is owned by the government. No other U.S. company had to turn over so much of its organization. Look at Citibank: it was deeply troubled too, but the government owns much less (36 percent.) Treasury Secretary Henry Paulson has to be faulted for this decision. To the outsider, it looks like he began to regret letting Lehman Brothers go bankrupt and thus saved AIG, but at a huge price to the stockholders. And then to make matters worse, he put Edward Liddy in charge of AIG, and he was just in over his head. His only experience was running Allstate, a domestic auto insurance company
AIG has received $180 billion in taxpayer money, paid off Goldman Sachs 100 cents on the dollar, and now Goldman is making record profits. AIG has started to rebound a bit, but can it ever recover from being “nationalized,” as Greenberg has put it? Yes, AIG made a tremendous mistake by getting into the business of insuring something it couldn’t cover, but did it have to pay by giving up its independence? The Times says the SEC is now looking into whether Goldman’s demands for AIG payments “improperly distressed the mortgage market.” That should prove interesting, but perhaps the federal government should be contemplating how its actions nearly ruined what was once one of the world’s most successful companies.
Subscribe to:
Posts (Atom)
+(2).jpg)