AIG Stock May Have Zero Value After U.S. Repaid, Citigroup Says

By Erik Holm and Hugh Son
Bloomberg News
July 9, 2009


July 9 (Bloomberg) -- American International Group Inc., the insurer bailed out four times by the government, will likely have no value left for private shareholders after repaying the U.S., Citigroup Inc. said.

"Our valuation includes a 70 percent chance that the equity at AIG is zero," said Joshua Shanker, an analyst at Citigroup, in a note to investors late yesterday cutting his price target on the New York-based insurer by more than half.

Outgoing Chief Executive Officer Edward Liddy is under pressure from lawmakers to sell assets to help repay the $182.5 billion rescue package that was required to prop up the insurer after losses on credit-default swaps tied to U.S. home loans. The company said last week that other derivatives, backing about $193 billion in assets for European banks, could have a "material adverse effect" on AIG's results.

"The company has not been forthcoming about the sequence of events that would result in a loss" on the European contracts, Shanker said. "Even a proportionally small loss could be significant."

Liddy said last month at the firm's annual meeting that the insurer has an "excellent chance" of repaying the government. Liddy's remarks echo comments he made to Congress in May when he said the company can pay back a government credit line and $40 billion stock investment within five years. The insurer may need more time if markets worsen, he said then. Christina Pretto, a spokeswoman for AIG, had no comment yesterday.

Liddy has announced deals to raise about $6.7 billion in asset sales since the first rescue in September and said he may hold public offerings for stakes in AIG units after the company struggled to sell the businesses in their entirety. Liddy, appointed to run the company after AIG agreed to turn over a stake of almost 80 percent to the U.S., said in May he plans to step down once a successor is found.

Motivation 'Compromised'

"The CEO's motivation and ability to lead may be compromised by his preparations to transition the company's top seat to another," Shanker said.

AIG dropped 65 cents, or 4.7 percent, to $13.10 yesterday in New York Stock Exchange composite trading, and has declined 44 percent since the firm implemented a 1-for-20 reverse stock split after the close of trading June 30.

AIG split the stock after the company plunged more than 95 percent in the past two years, saying that a higher price may attract institutional investors who don't typically buy shares trading for less than $5.

"We believe investors have come in on the short side in anticipation of future financial woes," Shanker said, lowering his price target to $14 from $36. He said the company has a 20 percent chance of continuing to operate as a scaled-back commercial insurer, a 5 percent chance of restructuring its government agreement again, and a 5 percent chance of restructuring its capital position using divestitures.

Short Selling

Short selling is when hedge funds and other investors borrow shares and then sell them betting their price will fall. If it does, they buy the shares back at the cheaper price, return them to the lender of the shares and keep the difference.

AIG was cut to "sell" by Standard & Poor's equity analyst Catherine Seifert yesterday on the prospect that more investors will bet against the shares. The split "may ease the mechanics of shorting AIG shares," Seifert said. She previously rated the shares "hold."

The government's rescue includes a $60 billion credit line, $52.5 billion to buy mortgage-linked assets owned or insured by the company, and an investment of as much as $70 billion. AIG plans to reduce its debt under the credit line by $25 billion by handing over stakes in two non-U.S. life insurance units, the insurer said last month. AIG has tapped about $40 billion from the line.

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