Can The US Dump AIG?

The media is full of stories about American International Group’s (NYSE: AIG) plan to bring the Treasury’s ownership in the company below 50%. The trustees of the firm and several federal agencies would need to vote in favor of the program. No matter what those votes are, the success of any change in ownership still depends on AIG management which has not proved adroit at running the company’s operations.

As was true with Citigroup (NYSE: C), the government, or rather the taxpayers, would need to covert their holdings in AIG into common stock which could be sold on the open market.

AIG management has tried to increase the company’s cash balance through several transactions. The most notable of these was a planned sale of its AIA  Asian unit to Prudential plc for $35. 5 billion. Prudential could not raise the capital needed to complete the transaction on what its board considered reasonable terms. The AIG board refused to take less money. AIA may be taken public, but its value is uncertain.

AIG recently sold a majority of its consumer lending division to Fortress Investment Group and booked a $1.9 billion loss on the transaction. AIG also sold its health insurance unit to MetLife for $15.5 billion, but only $6.8 billion was in cash. The equity portion is at risk based on the future action of MetLife shares.

None of these transactions has done much to lighten AIG’s obligation’s to American taxpayers.

The real challenge to AIG’s plan to bring down the Treasury’s holdings is the price of AIG’s shares and the willingness of  shareholders to face substantial dilution. Those shareholders may decide to abandon their positions, which could bring down the value of the AIG stock sharply from its current $37 price.

The AIG plan to reduce the Treasury’s holdings is not likely to work, given how poorly the company’s management has done with past transactions.

Douglas A. McIntyre