AIG: 'Cheer Up, There's No Hope'

(MoneyWatch)  The current woes of American International Group (AIG) are a reminder of that football coach's advice: "Cheer up, 'cause there's no hope." The old coach was telling his boys to play without fear of losing, because they weren't going to win anyway.

That's the position the world's largest insurer finds itself in right now. Leaks in the press say AIG will announce a $60 billion fourth quarter loss on Monday, which probably means the actual figure will be even bigger. Federal officials are trying to decide whether to (a) convert the government's 80 percent stake in the company from preferred to common (b) take stakes in its operations (c) break the company into three or four pieces (d) pump additional money into the insurer or (e) all of the above.

Whatever the decision, the Feds and AIG Chief Executive Edward Liddy are looking down a very dark hole. Liddy's plan to keep the property casualty unit intact is probably now a lost cause. Its share price is hovering at about half a buck. So what's to be cheerful about?

First, AIG has enormous assets, built up over four decades of Hank Greenberg's leadership as CEO. It was the largest U.S. underwriter of commercial and industrial insurance, a leading U.S. life insurer, has assets such as ALICO, which has a major presence in Japan, and AIG is the only insurer licensed to operate independently in China.

These assets have to be worth more than the whole, which right now is trading at $1.5 billion, less than the $11 billion offer that MetLife recently made for ALICO, according to The New York Times.
The fact that AIG can't make these deals work is partly due to the full-blown market panic, partly to federally imposed rules requiring cash rather than equity in any sale, and often to the fact that vulture buyers are waiting for AIG's carcass to bloat and tenderize even further.

But the Feds can't, and won't, allow that to happen. First, because the bankruptcy of AIG would send catastrophic shock waves through the insurance sector, an area of the economy, and AIG, that has held up relatively well. If AIG couldn't pay its claims, the rest of the U.S. industry would have to pick up the slack. And the fragile, state-run insurance system would be overwhelmed.
Second, government officials know that what was worth $1 trillion a year ago is not worth zero now. New York Insurance Commissioner Eric Dinallo, who regulates many of AIG's insurance companies, has already said that while he doesn't mind AIG's assets being sold, he doesn't want to see them at "fire sale" prices.
So is AIG still "too big to fail?" Clearly, yes, and also too valuable. So whatever the Feds decide by Monday, it will probably mean yet another addition in some form to the $150 billion bailout AIG has already gotten. Its stock moved up a bit today, as investors realized it too.

So maybe there is hope.