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Citigroup: AIG Equity May Be Worth Zero

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While recent news reports have tried to put a cheery face on the AIG bailout as asset sales are moving forward haltingly, the end game appears no better than it did some months ago, at least according to Citigroup. Note that the amount authorized for bailout is $180 billion,”only” $134 billion has been committed to date. The Citigroup analyst suggests the taxpayer may just get out whole on the loans, but one has to wonder whether he is merely steering clear of voicing an opinion on the debt, since that is not his beat anyhow. Regardless, this report raises doubts about full recovery of the funds, much the less any supposed upside.

From Reuters (hat tip reader Joe C):

American International Group Inc, the insurer rescued by a series of federal bailouts, may have zero equity value due to the risk of more credit default swap losses and the disposal of key assets at low valuations, Citigroup said.

Shares of the company fell 22 percent to $10.22 in early trade Thursday on the New York Stock Exchange. The shares have lost more than 90 percent of their value in the last year.

Potential markdowns in AIG Financial Product unit’s regulatory CDS portfolio may result in collateral calls that would again put pressure on AIG’s liquidity, Citigroup analyst Joshua Shanker said.

Yves here, If I am not mistaken, those “regulatory CDS” are the infamous $300 billion provided to allow European banks to lower required regulatory capital, and if so, the article puts a lower value on it, suggesting writedowns have already occured. Some readers have said those were used to hedge AAA rated structured paper, like CDOs (eek). I am not sure of how this trade worked (Basel II arcana, needless to say) but I believe unhedged AAA was treated as needing only 20% as much equity as riskier credits (A or BBB equivalent?). UBS was big in this practice, and the CDS may have been the reason the bank was able to carry only 1% equity against assets.

Any readers who know details, please elaborate or correct. If you prefer, you can e-mail me at yves@naekdcapitalism.com and I will amend the post as needed. Back to Reuters:
“Such collateral calls could also pressure rating agencies to lower their credit ratings for the company, leading to a similar

cycle to the one that the company experienced prior to the massive government intervention in the third quarter,” Shanker wrote in a research note.

Last month, AIG revised its 2008 annual report to add a new risk factor that shows it may recognize valuation losses on a CDS portfolio if credit markets continue to deteriorate.

At issue is a super senior CDS portfolio held by AIG Financial Products with a notional value of $192.6 billion as of March 31, 2009….

The analyst said while AIG may be able to repay U.S. investment and some debt with core asset sales, the remaining businesses may be those that generate lower return on equity, handicapped by a high debt burden.

In June, the federal government agreed to accept $25 billion of preferred stock in two AIG businesses as partial repayment of debt.

AIG had said the agreement positions its two businesses — American International Assurance Co Ltd (AIA) and American Life Insurance Co (Alico) — for initial public offerings, depending on market conditions.

Shanker said it expects AIG to carve out its commercial property and casualty business in the form of an initial public offering in 2010.

The analyst, however, said there is high probability that selling off all operations just to cover debt will leave the holding company with little or no equity.

AIG had already agreed to sell a 98 percent stake in its Russian consumer finance business to Banque PSA Finance SA, a unit of France’s Peugeot SA (Paris:PEUP.PA – News), and is selling its credit card business in Taiwan to Far Eastern International Bank.

AIG’s bid to sell its Taiwan insurance unit, Nan Shan LIfe, attracted bids from global investors Carlyle and Primus, among others and could fetch more than $2 billion.

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9 comments

  1. Doc Holiday

    I knew this almost 2 years ago and this will be the same thing I know two years from now. Why doesn't AIG know this?

  2. Hugh

    This is something I wrote on this on March 16, 2009.

    AIG 10-K
    http://idea.sec.gov/Archives/edgar/data/5272/000095012309003734/y74794e10vk.htm

    On page 263, it shows that AIGFP as of December 31, 2008 had $1.515 trillion in derivatives with $305 billion in CDSs outstanding. 2/3 of them were for 2 or more years. 57% were in the 2-5 year range.

    Of the ~$305 billion in CDSs as you point out $234 billion is in the form of regulatory relief CDSs written primarily for European banks. These allowed the banks to make more and riskier investments. They could dip more deeply into their reserves than the regulations normally allowed and AIG guaranteed to make up whatever they needed to bring their reserves to what they needed to be according to the European regulators.
    Given all the losses that European banks have experienced I would think that there could be significant losses in these.

    About those potential losses it has this to say on page 268:

    "Given the level of uncertainty in estimating both the number of counterparties who may elect to exercise their right to terminate and the payment that may be triggered in connection with any such exercise, AIG is unable to reasonably estimate the aggregate amount that it would be required to pay under the super senior credit default swaps in the event of any credit rating downgrade below AIG’s current ratings.

    Due to long-term maturities of the CDS in the arbitrage portfolio, AIG is unable to make reasonable estimates of the periods during which any payments would be made. However, the net notional amount represents the maximum exposure to loss on the super senior credit default swap portfolio. "

    It says much the same about collateral calls, i.e. it doesn’t know.

    As for the rest of it, $883 billion are in interest rate swaps. There are also $194 billion in currency swaps and $132 billion in various options. But the 10-K says that AIG has both sides of all these, so it’s covered.

    So very short version. AIG has $305 billion in CDSs. 2/3 of these are for 2 or more years and 3/4 of them at least could experience real losses.

  3. Doc Holiday

    This is really stupid for one worthless pile of trash like Citi to be suggesting that the other pile of trash previously thought to be AIG is also worthless. The funny part, is that Citi is being bailed out by taxpayers who are paying the salary of some retarded clown, who thinks this is some sort of original dogshit analysis — pathetic! That is The American Dream, to be paid for doing nothing and to have zero accountability and then have idiots like me write crap like this; what a great cycle; maybe I should invest in one of these burning wrecks and claim that I'm insane, and then get bailed out by Obama. I feel so special …no, ….I feel pretty (stupid):

    See me here: I Feel Pretty
    http://www.youtube.com/watch?v=W9sE55QzXlo&feature=related

  4. Doc Holiday

    "Our valuation includes a 70 percent chance that the equity at AIG is zero," Joshua Shanker of Citigroup wrote in a note to investors. He cites the continuing risks posed by the company's exotic derivative contracts, called credit-default swaps, and its sale of assets at low prices. AIG's stock plummeted by more than 25 percent yesterday.

    >Maybe Shanker mixed up this report on Citi and this is really just a leak about Citi going under along with AIG?

  5. bob

    How is this news? Equity worth nothing?

    They didn't have enough cash to continue operations, let alone begin to make their debt whole. That leaves what as equity?

    For those who may be less familiar with things, the gov't had to invent equity in AIG, and then invent some more. If they own more than 80% of AIG, then it has to come onto the books of the Govt.

    The fairy tale of AIG equity is much more about politics, and federal budgets.

    They can't just give money to AIG, that would be unfair. They can buy some worthless stock from them.

    Tim-We want preferred stock, not that common stock crap.

    GS-Ok, you drive a hard bargin Timmy, here it is, bend over.

    How long till Citi turns this sharp knife of the truth on itself?

  6. attempter

    Regardless of this, it hasn't stopped the criminals at AIG from trying again to give themselves bonuses – $2.4 billion in taxpayer money.

    http://www.nytimes.com/2009/07/10/business/10insure.html?ref=business

    They just can't help themselves, can they? This is as clear-cut an example of an objectively criminal culture as you're going to see.

    And who knows – given how the people seem to have regressed from open outrage to their more normal apathy, perhaps AIG will get away with it this time.

  7. Anonymous

    Before a company can sell a division, it needs to go through the process of extracting it from its existing operations. Organizations with highly leveraged HR, technology, etc will need to spend the time and money just to bring a business to the point where it is salable.

    Here’s a good glimpse into what this looks like: http://www.beaconintegration.com/resources/merger-blog/2009/04/divestiture-and-business-carve-out-technology-considerations/

    Often this can take a up to a year or more to complete for large, complex divisions. And, it’s not uncommon for this to cause substantial delay before the selling company gets its cash. So, an investor needs to be weary about a cash starved company selling off divisions to raise capital, often, it will come too late.

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