Thursday, May 14, 2009
(Cont'd from above)...

Jim (cont'd):   

Now, I have to tell you, right here, right now… if we had the good old electric chair in Cramerica, I call it Sparky… this one would be a prime candidate for some lethal shock therapy… but we have gotten away from capital punishment… even for those companies like AIG, which are a serial punisher of your capital… as AIG tumbled from its peak of $72.97 of May 11th, 2007, all the way down to its low of .33 cents back on March 6th of this year… that was right… that made horse sense… what I find puzzling is that AIG has now bounced back to $1.84, it was up huge today… that is a gigantic recovery off of its .33 cents bottom… it is up a whopping 17% year to date… AIG… this is a rally that is taking place on enormous volume… indicating that there is a lot of unhealthy interest in this stock… even though the US Government owns 78% of this company… the amount of trading that goes on in this stock is unbelievable… the average so far 105 million shares of the AIG are traded every day… I say buy the New York Stock Exchange off of that, do not buy AIG (AIG).

If you are one of the people who is buying this stock… shame on you… I understand though what you are thinking… you feel like that you couldn’t possibly lose all that much money in a stock that sells for less than $2, and has the backing of the Feds… you be wrong, you could still lose everything… you feel that everything that could go wrong has gone wrong, so it could not possibly get worse… that is a dangerous attitude… it can always get worse… and that is the story of AIG… maybe you think of this stock as a lottery ticket… but if that is your attitude, you should just go down to the nearest convenience store and pick some numbers, because I think you will have much better odds… I play 754 and 518, both of them have come up numerous times… they are definitely more bankable and have a lower PE than AIG.

Perhaps you are under the impression that outside of the financial products division, that sold all of those credit default swaps… AIG is a solid company, with great assets that it can sell and in order to pay back the government and ultimately get back on its feet… and all of its problem are in that one rogue part of the company… but the way that I see it, it could not be farther from the truth… thanks to a terrific analysis, a proprietary stress test done by TheStreet.com ratings department, a division of TheStreet.com, where I am chairman, we believe that AIG is in even worse shape than you might think… in an extended recession 8 of its subsidiaries would need to somehow raise just another $6.8b, on top of everything else the company has already taken from you, just to make it thru.

AIG is not a good company that was taken down by a few bad apples… its insurance business, which used to be seen as among the best in the industry, seems to be deteriorating… the amount of funds available for policy holders at AIG life and health insurers subsidiaries, what is known as their capital and surplus, have fallen by 28% from 2006 to 2008... asset values are down 14%, that stinks compared to its competitors… over the same period of time the insurance industries combined capital and surplus have increased by 1.6%… the asset value is down just 2.2%… AIG’s life and health insurance businesses are now among the worst in group… the company has been losing money all over the place… not just because of the idiotic credit default swaps that it wrote.

During 2008, AIG’s life, health, property, and casualty insurances businesses together lost $7.9b in capital… a 15% decline… and anyone who was excited about the companies first quarter where it lost a mere $4.4b, is kidding yourselves… that is bad performance even by the lowest imaginable standard… especially when you consider how much money the government has injected into the company… and all the opportunities it had already to write down assets, back in 2008... those asset sales that AIG is relying on to pay back the government… (laughs), excuse me… as I see it they are going way to slowly… and the funding that AIG is receiving is barely enough to pay the interest on AIG’s debt, let alone produce a significant return on investment.

At the same time, AIG’s businesses are all becoming less valuable… which discourages bidders from offering to pay more than book value for the companies assets… how about this, International Lease Finance, the companies much flaunted aircraft leasing business, it was supposed to be terrific right… AIG will probably end up getting less than $5b for it… even though its book value, what the business would be worth if all of its assets were liquidated, was worth about $7.5b last year… on top of all of that, AIG has the fifth largest long book of any insurer, at $17b… that is for mortgages… not mortgage securities, mortgages… so if you think that commercial real estate turns out to be as bad as everyone is constantly talking about, then AIG is going to get hit with another wave of multi-billion dollar losses… and these are supposed to be the healthy parts of the company.

The financial products division still has $1.5 trillion of counter party exposure at the end of the first quarter, oh down from a peak of $2.7 trillion… but it is still enormous if AIG ends up having to pay up even a fraction of these contracts… yesterday, when AIG Wall of Shamer, CEO Ed Liddy, nice guy, fabulous guy, this is nothing personal, right… nothing personal, it is just business… when he told Congress that he could not guarantee that his company would not have to return to the Federal trough, or that taxpayers would not get all of their money back… he was not kidding… why buy this stock now when even the CEO says that it could take 5 years for AIG to pay the government back… and that is pretty optimistic given how clueless Liddy is about the business… once again, nothing personal, he is a great man… so if there are any complaints, I have stipulated greatness.

We all know that it would be bankrupt and its stock eliminated if the government were not so petrified that letting AIG go would trigger a huge number of obligations that we do not even know about… and this is amazing… this truly astonishing company might not know about them either… believe me the pot at the end of this rainbow is more of the chamber than the gold variety.

Here is the bottom line…

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