AIG to Pay Investors "Large Settlement"
AIG, the once mighty titan of the insurance industry, has agreed to pay $725M to investors in settlement. Ohio Attorney General, Richard Cordray, noted that along with previous settlements, investors will get back more than one billion dollars. Cordray was quoted in the article as saying:
"The serious misconduct by AIG more than deserves today's large settlement."
I'm sure that most people reading this blog will view it as a large settlement, since $1 billion is a lot of money. Well, it is unless you're Bill Gates and happen to be reading this blog (and give me a jingle if you are Bill). But is it really that much money, even to the rest of us?
Framing a billion bucks
I looked at AIG's 2007 annual report. The report proudly said "American International Group (AIG), a world leader in insurance and financial services, is the leading international insurance organization, with operations in more than 130 countries and jurisdictions."
The report noted that AIG closed the year with a total value (market capitalization) of over $147 billion. Today, AIG's market capitalization is a bit under $5 billion. And, of course, it wouldn't be worth a penny if we taxpayers hadn't come to the rescue with a $182 billion bailout. But let's give them the benefit of the doubt and say they only lost $142 billion of shareholder value.
Framing it that way, investors got back $1 billion of the $142 billion AIG's management lost for shareholders. That equates to a little over $0.70 for every hundred dollars lost by investors. And that's using a best case scenario where none of the billion dollars goes to the trial attorneys who reached that settlement.
It gets worse
It might seem like the analysis above shows that shareholders are recovering 0.7% of their losses but that's actually not the case. The vast majority of the billion bucks will be paid by the company, which means that we tax payers and the current shareholders of AIG are footing the bill. The people who profited from this may not be paying a dime.
Further, AIG contributed to a global financial collapse that cost shareholders trillions of dollars. Sure, they weren't alone, but by their own statement, they were "the leading international insurance company." So comparing the billion dollar settlement to the trillions of dollars they helped evaporate from investors globally, rounds out to a zero percent recovery for investors.
So what's the point?
The attorney general provides no reference to the investor losses when he states that a billion dollars is large and what AIG deserved. Getting taxpayers and current shareholders to pony up less than one percent of what other investors lost is not justice and should provide no comfort for investors.
As investors, you need to be prudent and invest globally in thousands of companies rather than in one company that claimed it was the global leader. Don't allow yourself to be lulled into a false sense of security by nice looking annual reports. Don't count on any regulator to watch out for investors. And finally, always remember that any settlement received from an investment gone sour, is not going to be large when framed against what was actually lost.
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