Tuesday, March 3, 2009

Wrong again - on AIG

There is only one piece of AIG that is still highly valuable – which is the core American P&C business (including some auto businesses).  AIG has for instance merged AIG Direct into its fully owned 21st Century – a California Insurance Company.  That business is still a very effective competitor – but their website no longer mentions those three letters (AIG) – I guess to protect the value of that business.

Life companies (ALICO etc) are not anything like as valuable as they were.

I posited in this post that the Feds were taking their interest in direct ownership of the valuable bits of AIG – so that they could let the mothership go.

I was wrong.  The Treasury announcement contains this phrase:

The Revolving Credit Facility will be reduced in exchange for preferred interests in two special purpose vehicles created to hold all of the outstanding common stock of American Life Insurance Company (ALICO) and American International Assurance Company Ltd. (AIA), two life insurance holding company subsidiaries of AIG. AIG will retain control of ALICO and AIA, though the New York Fed will have certain governance rights to protect its interests. The valuation for the New York Fed’s preferred stock interests, which may be up to approximately $26 billion, will be a percentage of the fair market value of ALICO and AIA based on valuations acceptable to the New York Fed.

If the government wanted to protect taxpayers it would take control of the really valuable bits of AIG through this sort of structure.

They are not doing so.  

Taxpayer protection bought to you by Geithner, Obama and Moral Hazard’s other friends.

As for investment theses - I have gone through a few iterations thinking AIG debt might be worth par to my recent view that it might be worth zero to my current view that it is worth whatever Mr Geithner will make available for you.  



Anonymous said...

John, do you think International Lease Finance (ILFC) is valuable?

John Hempton said...

I always thought it was - but less valuable than it looked because its value depended heavily on the AAA rating. Things which make money only because of that sort of rating are worth less than they look.

That said - the main competitor - GE - is also impaired. So maybe it will just make money straight.


Summary: too hard to know.


elartistamadridista said...

Who is the US really bailing out here?
I mean, who are AIG and Citi debt holders? Are they foreign? Are they mainly some powerful gang or is the debt widely distributed? Does anybody have a list?
If I were a US taxpayer I would like to know who am I really saving.
The counterparty risk I get, nobody wants counterparties to get hurt, but the debt holders must begin to face the outcome of their investments.

John Hempton said...

I accidentally deleted two comments and can't get them back. To the people who posted them I am sorry.


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