Perhaps even more stunning was Friday's plunge in the shares of the once-invincible AIG. Investors fear that the big insurer will be forced to raise capital -- as much as much as $20 billion -- to offset losses on its mortgage derivatives exposure and its holdings of so-called Alt-A and sub-prime mortgages.
When investors sense financial weakness now, stocks get punished so badly that raising equity capital becomes difficult or impossible -- and costly and extraordinarily dilutive to existing holders.
It's tempting to say that AIG is a bargain, even if it's forced to raise equity with a dilutive sale of common stock. Its book value at the end of June was $29 a share. This effectively discounts over $40 billion of after-tax write-downs. Yields on AIG credit-default swaps surged Friday to eight percentage points. Reflecting this, an exchange-traded issue of AIG subordinated debt (AVF) was yielding 14% Friday. That's not a misprint.
The Bottom Line:
Lehman could end up in someone else's hands before U.S. trading opens on Monday morning. Stronger AIG and Merrill Lynch look like the victims of panic selling.
Merrill also looks attractive, with its stock at a fraction of its $22 a share book value. Merrill has taken its medicine by selling mortgage assets and raising capital. The value of its stake in BlackRock Financial is $11 billion, and its retail brokerage network is conservatively worth $20 billion. Their combined value i s more than Merrill's current market value of $26 billion, meaning investors are paying nothing for the rest of the firm.
These calculations indicate that AIG and Merrill shares are cheap, but investors made similar calculations with Lehman and have seen its shares collapse. AIG and Merrill are stronger than Lehman, suggesting that the panic selling of both Friday may have marked a bottom.
yeah, that's just great..the bottom is finally here...
how many times has that been said before in the last year, by Barrons and other supposedly knowledgeable publications?
subprimes have been crammed through the system, but are folks really aware of the commercial loans, auto loans and credit card portfolios that have just started to go bad?
if monday is a bottom it will be in the form of a dead cat bounce before things go even lower...
am especially worried that Cramer says the July 15 low for financials will hold...as a market timer that guy is wrong more often than he is right
Cramer is a professional hedge fund manager for Goldman and then for himself. So that how these hedges are! Nutty is simply put it mildly! I love his analysis and crazy recommenations! It funny! Cannot believe he could have a hedge fund!
panic selling. There will be re-rating of the stock up on Monday.
1) Company cannot lose cash/capital to withdrawals
2) Operates in 130 countries and has a substantial asset base , some of which can be disposed of should permanent capital be required
3) I believe that the Fed window will be opened to AIG for borrowing
4) Shorts were crushed on Thursday. The same thing will happen on Monday on the way up
5) Its a month after last cc. Things have not deteriorated to the extent of a 40% drop ! In fact there has been encoraging news on the real estate front
I believe this is a run on AIG. They have some weakness - weakness that they themeselves have admitted to. LEH's inability to sell itself or to draw external investors caused people to believe that AIG might be in the same boat. I suspect some short sellers are involved also. Also, the complete disregard by the Fed for FNM's and FRE's preferred stock holders has contributed, as well as Hurricane Ike. There are several good reasons to be bearish on AIG in the short term.
Now the collective "market" has been convinced that AIG's common stock is going to lose value, perhaps all it's value, and therefore has sold a large percentage of shares this week. A look at the weekly chart is pretty amazing the amount of volume last week.
As a result of the stock price decline some people are saying there must be something that is not public. They point out that AIG's books are opaque (like any one individual is going to be able to comprehend the financials of a company that does business in 130 countries).
Now S&P is piling on - threatening a downgrade -- which essentially is saying there is more doubt that AIG will be able to cover it's obligations.
So, in my opinion what AIG needs to do is to completely eliminate any need to go to the debt markets or raise capital. They simply need to raise cash to ride out the storm. They need to sell assets that have good value and build up cash.
They believe that the mortgage insurance obligations that they have taken reserves for will not turn into actually write-offs of the same magnitude. I agree with this, based on my study of past housing credit crunches. Unfortunately, there are a lot of "experts" on this topic and they see a doomsday scenario where the contangion spreads to all types of credit. AIG is an insurance company. They have some credit obligations around home mortgages. They need to raise cash to cover those obligations and continue to make money on their insurance businesses. It's as simple as that.
In the end they will sell off some assets that would have made them some good money. But, if they are right about their mortgage obligation write-downs, they will come out of this crisis with lots of cash. Cash that they can put to work again to replace what they had to sell during the crunch.
Now, unlike LEH and MER and other investment banks, AIG has assets that can be sold. These are non-financial assets and they produce good returns. This is why AIG is reluctant to go down this path. They are going to have to sell good investments. It's a tough call for a board - because they are supposed to have the shareholders interest in mind. Hang on to your good businesses or raise cash for a rainy day that may never come?
It's hard to argue that a good number of shareholders are telling them to raise cash - unless those sellers are actually short sellers with no investment interest in the company. But, if good solid investment shareholders are selling their shares then the board has it's answer.
Raising cash is the thing to do - whether the board and CEO believe they will need it or not.
thanks for the post.
I believe that the stock price will recover on Monday. Longs were spooked into selling and shorts will start to cover. With tangible assets and valuable stand-alone assets which could be sold, AIG is no i-bank. The lesson that this should teach management is that they should respond to stock sell-offs asap. WM's management responded quickly and the the stock price recovered from $1.75 to $3.
stupid hedgies and funds are selling first and asking questions later.
another retarded wall street pattern that the herd follows.
they r the ones to sell last and the ones to buy last after it rips back up