May 22, 2009

Liddy Intends to Step Down

As it is now common knowledge, AIG (NYSE: AIG) has been considered by the US government as being the only company that was not involved in the banking business, but was big enough to affect the global financial system due to the seize of its credit default swaps portfolio. It thus acquired the critically recognized expression of being too big to fail in November 2008, at the moment the whole financial world got scrambled. At that precise moment, the US government was forced to bail out AIG, providing it the staggering rescue amount of $185 billion. That is an amount larger than any single bank received to better manage the financial crisis. In exchange for the 80% ownership stake that the government got at that time, the Obama administration appointed Edward Liddy as the chairman and CEO of the troubled firm.

Liddy used to be the chairman of the insurance company Allstate and served on the board of Goldman Sachs. He has been a seasoned leader for insurance and financial companies and was definitely the right person to occupy such a critical position in the leadership of AIG. His announcement about his pending resignation after the end of the restructuring at AIG was quite surprising. It is happening sooner than expected, but it is fully understandable for two reasons. First, due to all the scandalous events surrounding former AIG executives, Edward Liddy got a total compensation of... $0. That includes his salary, stock options and warrants. His only financial solace came from about $500000 of tax advantages from a government who wanted to make sure Liddy did not end up paying to work as chairman and CEO of AIG, which would have been pretty embarrassing for the treasury department. A second reason that would justify a resignation is that Liddy was actually in retirement at the time he was asked to step up to the plate.

However, the task he faces seems to be a lot more impressive than expected. In his opinion, AIG will be able to reimburse the US government after about 3 to 5 years. From a value perspective, that makes AIG a company that has nothing interesting to offer to investors. Also the fact that AIG might be reverse-splitting their stock is only a short term solution to keep the stock from being unlisted from the NYSE as soon as they reinstate their tough guidelines.

From all that information, I would lead to assume that AIG is currently fairly valued by the market. Even after they managed to showcase $20 billion of revenues in their filing for Q1 2009, they are still a long way from their profitability of previous years. There is also a lot of uncertainty about AGI’s earning power. According to Liddy, the company still has to be spitted; which would respond to the US government’s need to have very few companies “too big to fail” under their oversight. In the meantime, for a value investor, AIG seems to be a company to pass over, at least for the next 3 years, or when they start to be profitable again.

Disclosure: The author has no position in AIG.

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