Stanton Champion

The AIG bailout is another example of what I’ve started calling a Meltdown Put.  Their capacity for shredding the global financial markets has earned their shareholders $2 a share instead of $0 because of the government bailout.

What makes this bailout so interesting is the government taking 80% ownership of AIG in exchange for extending their $85 loan.  Essentially the shareholders are almost wiped out, but not quite.  Plus their shares could still recover their value at some point in the future.

I think that AIG recovering to their former state is unlikely.  The government will most likely begin splitting AIG into pieces that it can sell to raise needed funding.  This is probably a good thing because AIG’s present size makes it far too dangerous to the global financial markets.  Plus, AIG is not out of the woods yet, and even with government support they could still collapse.  However, if they manage to recover, the government stands to actually make money on this deal.  It’s not often that actually happens.

AIG has always been an interesting company.  Their AAA debt rating has long been a point of pride for them, but it’s now incredibly clear that this was probably inappropriately high.  (In fact, the whole debt rating business has been problematic and deserves some of the blame for the current failures.)  They’ve also faced some strange troubles in the past when their former CEO Maurice R. Greenberg was ousted for fraud concerns in 2005.  Even still, he held a 12% ownership stake in AIG along with his company C.V. Starr (after today, not anymore!).

This was a clever move by the government and probably the correct one.  Only time will tell, but I can’t think of any other steps that would have been more appropriate given the circumstances.