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AIG (AIG)
AIG Possibly Nationalized?
AIG, the insurance giant that received massive federal bailouts in November, is probably looking to restructure its $150 billion rescue package again. This second round of restructuring would reduce the company's financial burdens and give US taxpayers more ownership of the company. If this occurs, it will be announced on Monday when AIG is scheduled to post their Q4 results. Analysts are expecting this to happen due to a possible net loss to exceed $60 billion, a figure that some say would force the company into Chapter 11 bankruptcy. If that occurs, then the government's bailout efforts will have been for naught. However, it is possible the government would be willing to provide more bailout funds to the company to prevent this from happening. At this point though, is it even possible for the company to continue to survive?
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Probably yes, but most signs are saying that this is not likely or will be extremely difficult to pull off. The firm has already prepped lawyers at Weil, Gotshal & Manges LLP for a possible bankruptcy for one. Though there are no plans to file for Chapter 11 protection, the action of prepping lawyers for the worst in and of itself is an ominous sign. And it makes sense as to why the company is preparing too. The potential $60 billion loss would be the greatest loss ever reported in US corporate history. It would likely result in downgrades to the firm's credit rating resulting in catastrophic consequences. For example, they would be forced to pay billions of dollars to trading partners, and possibly lose access to the federal commercial paper program. They would also be forced to raise collateral that they do not have. The only other loss in US corporate history akin to this would be when Time Warner (TWX: Charts, News, Offers) posted a $54.2 billion loss due to its acquisition of AOL.
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However, bankruptcy is a farfetched resort, and there are many plans in place to prevent this from occurring. Among them, there is talk about the government shifting from being a creditor to an owner-- where preferred stock will convert into common stock. This is similar to what Citigroup (C: Charts, News, Offers) was proposing just yesterday. If this does occur, it would be a push towards nationalization as AIG is already 80 percent owned by the government. This would also signal a change of heart from the government's initial position back in September. At that time, AIG needed to sell some of its assets at fire-sale prices in order to meet obligations imposed by the bailout funds. Few buyers emerged due to the fact that other firms were having problems of their own. Moving forward, the government may give more to the troubled company, but we will not know for sure until Monday at the very latest. This can almost be expected to occur, due to the government's previous stance that AIG was too big to fail. However, this could go either way because the government did not want to own more than 80 percent of the company in the first place. Therefore, the already sticky situation is proving more difficult to deal with.
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Whatever the case may be, it seems that now is definitely not the time to be involved with the company's stock. Investors could short the shares, but the payoff will probably not be worth the risk. Consider this: if some kind of agreement can be reached between now and next week, shares of the company could go up. By how much? Well, that would depend on the specific arrangement made with the government. And no matter how unlikely bankruptcy may be, it cannot be ruled out. On the other hand, if the government increases their stake to 100 percent, investors' existing shares will be meaningless. Nothing is dependent on fundamentals right now, while everything is dependent on how events play out. This is dangerous because it has become unpredictable. Even for day-traders, this stock may be one to avoid for at least another week or until the government's moves are made public.
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