As I understand AIG risk, it is primarily related to its ability to retain it's credit rating which is now under watch. Lowering the rating ripples through all AIG business entities and increases costs. AIG appears to be very liquid (2.5 current ratio) which takes the BK logic out for now. The only remedy to credit rating that management has is to raise capital or hope the housing problem goes away. This means either very expensive debt, a diluting stock issue or time for the housing market to stabilize. Either way, bookvalue is reduced. The market appears to be looking for about $19 BV. At this bookvalue and a credit rating comparable to BRKA and CB SP/BV puts AIG's measured stock price between 22 and 28. If the credit agencies see AIG closer to ORI or LEH, then the measured stock price is along the lines of $11 and $7.4. This assumes a lot and the simple comparative analysis shows the level of uncertainty, hence volitility to the stock price. My fear is that AIG will react and sell at huge losses its CDO holdings. This eliminates a chance for the housing market to come back.
I am long AIG and hedging. I don't expect to see a capital gain until after 2011.