AIG Stock Is Worthless—Isn't It?

[jimmy olsen]

Minsky, what do you think's going on here?

AIG Stock Is Worthless—Isn't It?
The company and the government both say so. So why is it $29 a share?
By Paul Smalera
Posted Monday, January 11, 2010 - 4:23pm

One of the strangest things to come out of Steve Brill's piece on Kenneth Feinberg's role as compensation czar is the bit about AIG's (AIG) stock. Feinberg made stock-based compensation a major plank in his guidelines for the TARP companies whose compensation practices he is in charge of regulating. Paying people in stock rather than cash is supposed to encourage executives to stick around the company and put shareholder interests above personal ones.

So it seemed perverse that AIG argued that stock-based compensation in its case wouldn't work, because AIG stock was essentially worthless. Brill writes that AIG Vice Chairman Anastasia Kelly presented the argument to Feinberg:

    Second, and more important, those top executives at A.I.G. who hadn't received the retention bonuses refused to accept the salarized stock as part of their pay packages. They wanted all cash. A.I.G.'s Kelly told Feinberg that their position was that A.I.G.'s stock—which was trading in the late summer and fall at around $40—was, in a word that Feinberg says he remembers vividly, "worthless." Kelly explained A.I.G.'s position this way: "We wanted compensation for people at A.I.G. that they would see value in."
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Brill goes on to explain that the New York Fed concurred: AIG's stock was worthless. The solution AIG proposed was to pay executives with a special "basket" of stock that reflected the value of only four profitable AIG divisions. These divisions, it was planned, would be spun off or sold. Feinberg agreed to the plan; Brill makes it sound as if more than a gentle push was given for Feinberg to reach this conclusion. (Kelly, by the way, was one of two AIG execs to quit over her compensation, suggesting even this compromise wasn't enough to retain her services.)

Given this, you would think the value of AIG stock would plummet dramatically, but as of today, it's still hovering at about $29 per share. That's despite the company and the government both saying AIG stock is worthless. In August, AIG argued stock-based compensation was something AIG executives would run from, because they, too, knew it was worthless. When Feinberg tried to draw a line in the sand over the issue, the New York Fed told Feinberg they concurred with AIG: Its stock was worthless. In all this time, though, the stock has never gone to zero. (It was coming close, but AIG executed a 1:20 reverse split in July, turning 20 shares of $1.16 stock in one share of $23 stock.) Still, zero times a million is zero. So how can AIG shares be retaining any value? That's the question I was originally trying to answer when I read the report from the Wall Street Journal that says AIG stock payments to executives will be made solely in common shares after all.

So, the company and the New York Fed went to bat against Feinberg to create a special basket of stocks that would be awarded only to AIG executives. Because the stock was "worthless." Then, AIG decided its stock wasn't so bad after all. Its filing reads, "On December 24, 2009, AIG determined to use stock units reflecting the value of AIG's common stock for 2009 stock salary grants, which will be cash-settled on the transferability date required by the Initial Determination Memorandum." Needless to say, AIG didn't bother explaining why. And Feinberg, having ended up winning a battle he thought he'd lost, didn't feel the need to issue any explanatory statements either. But what's clear is AIG specifically went back and asked Feinberg for the option to pay in common stock, rather than from the basket the now-departed Kelly had fought so hard for.

The filing, without saying so, indicates a major shift in CEO Robert Benmosche's plans for the bailed-out company. Now he seems to have no plans to wind down the company at all. Otherwise, there's literally no way in hell AIG executives would accept major parts of their compensation in AIG common stock, because that stock, under CEO Ed Liddy, was supposed to disappear. So people who have been holding the stock at $28 a share, rather than looking like fools, now look like they know something about AIG that the rest of us do not.

What's changed about AIG's plans? The company was originally supposed to unwind its contractual obligations, sell off its valuable assets, and cease to exist in its current form. But Benmosche already stopped IPO plans for Chartis, one of its profitable divisions. It looks like Benmosche has a plan to rid the company of the massive obligations owed by AIG's Financial Products unit and keep the four profitable parts of its business together, after all. What's hardly been noted is that Feinberg provided for a bonus mechanism: If AIG can pay back TARP funds within a year, executives get to sell the first one-third of their stock after holding it for one year, rather than two. Each subsequent third of stock is eligible to be sold a year sooner. There seemed to be no possible way for AIG to repay taxpayers. But, clearly, stranger things have happened this year.

The other possibility that makes any sense is if AIG does end up spinning off its profitable units, it might be able to construct the IPOs in such a way as to grant executives valuable stock in the new companies in exchange for their worthless AIG shares. That would amount to AIG's corpse bailing out shareholders, something that's not supposed to happen under the reorganization plans we know about.
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Whatever is going on, AIG is not only a public company—its 80 percent majority owner remains the U.S, government. If AIG somehow finds a way to stick taxpayers with all its debts and obligations, and spin off the profitable companies for the benefit of its executives, that would be as unprecedented as the scope of the original bailout itself. But it's one of the only plausible explanations for why AIG executives are accepting, even specifically asking for, payment in stock that the government and the company, just a few months ago, publicly declared to be worthless.

[alfred russel]

Reverse stock splits. Any time a company hits the rocks and is about to go bankrupt, the stock doesn't go completely to zero--it usually hovers at some very depressed amount. AIG didn't want its stock trading at $0.50 or $1.50 or whatever it would be, so they did a bunch of reverse stock splits so the value of your shares would go up.

Basically if you own 30 shares at $1, and a company does a 30 to 1 reverse split, you will own 1 share at $30.

I would guess that like in many depressed companies the stock value of AIG relates to an option value rather than a regular valuation of the company's equity. For example, if I was to value the equity of a company, I may come up with a negative number, but the owners of the equity (stockholders) know that their investment can't go below zero. And they will be willing to pay a price above zero for the stock because while the most likely future scenarios have the stock price ending at $0, there is a chance the stock will recover. (if I see a 90% chance of a massive bankruptcy and a 10% chance the stock price will go to $5 in the near term, $0.25 may not be a bad price for a share).

[The Minsky Moment]

There is some option value but the current stock price implies a market cap in excess of $3 billion, which seems pretty high.  In order for such a value to be realized, either there would have to be a very sharp increase in value of AIG's remaining assets or the government would have to be very generous to shareholders in the endgame, neither of which seems like a very likely scenario.  The one scenario that could make sense is the one mentioned - that existing AIG shareholders would have some preferential rights in connection with the IPOs of the healthy subs.  But I have seen no indication that is the case.

[Barrister]

I recall something vaguely similar when Air Canada was going through bankruptcy.

The company was bankrupt.  They said so.  The stock price crashed down to almost a penny stock, but then day traders came along and played with the stock, and it actually went up somewhat.

Of course when the company came out of bankruptcy the shareholders were wiped out.

[Admiral Yi]

It could also be a case of no willing buyers so the price gets listed at the last trade.

[Faeelin]

Maybe the stock's owned by auto workers?

[The Minsky Moment]

Yi - trading volume today alone was in excess of 6 million shares, so it isn't a problem of no turnover.

BB - at the current trading price, the market cap is almost $4 billion, so this phenomenon is something more than the usual zombie trading by wannabe penny stock manipulators.

[alfred russel]

Yi - trading volume today alone was in excess of 6 million shares, so it isn't a problem of no turnover.

BB - at the current trading price, the market cap is almost $4 billion, so this phenomenon is something more than the usual zombie trading by wannabe penny stock manipulators.

$4 billion is still tiny considering the size of the operation. It is probably more than you would expect in the usual zombie trading because there is a greater than normal chance that uncle sugar is going to toss a few bones to the equity holders and do what it takes to keep the company out of another bankruptcy/reorganization and onto sound footing.

[Rasputin]

I bought a few thousand shares at 2 dollars a share when it had a previous high of 140 per share. Its a spec play based upon my belief that the statutory subsidiaries are all doing well and very adept at collecting premium investing it and finding reasons not to pay claims. As a result I either wasted a few thousand dollars or will retire on an island somehere in the next decade.

[jimmy olsen]

I bought a few thousand shares at 2 dollars a share when it had a previous high of 140 per share. Its a spec play based upon my belief that the statutory subsidiaries are all doing well and very adept at collecting premium investing it and finding reasons not to pay claims. As a result I either wasted a few thousand dollars or will retire on an island somehere in the next decade.

I'd sell now and make a 15 fold profit then while the gettin's good.

[citizen k]

Yi - trading volume today alone was in excess of 6 million shares, so it isn't a problem of no turnover.

BB - at the current trading price, the market cap is almost $4 billion, so this phenomenon is something more than the usual zombie trading by wannabe penny stock manipulators.

$4 billion is still tiny considering the size of the operation. It is probably more than you would expect in the usual zombie trading because there is a greater than normal chance that uncle sugar is going to toss a few bones to the equity holders and do what it takes to keep the company out of another bankruptcy/reorganization and onto sound footing.

That's why the Wamu case is so interesting.

[Admiral Yi]

I'd sell now and make a 15 fold profit then while the gettin's good.

He bought before the reverse split.  His $2 stock is now trading at $1.16.

[Rasputin]

While I did buy long before the reverse spit, the last I looked my aggregate position is about even. Its an interesting case because the holding company is riddled with debt but most of its subsidiaries are ridiculously profitable and successful. The subs are where the assets are as well and can be sold if needed. I'm gambling for sure but its a calculated gamble.

[Richard Hakluyt]

I'm thinking that a fair few people are gambling a little on this one. It's no worse than putting money on a greyhound 

A "play money" only investment IMO.