The Other Shoe Drops for AIG
The world’s largest insurer by assets American International Group ( AIG) is down more than 11% in early market trading. The catalyst was AIG’s acknowledgement of a “material weakness” in their accounting for collateralized debt obligations. AIG had been advised by PriceWaterhouseCooper LLC, its independent auditor, that internal controls on these investment vehicles needed to be revised as early as December 31, 2007. Essentially, there was not enough information to accurately value these vehicles, so AIG management had latitude in using estimates that are now under question. AIG is not prepared to put a number on the losses in its credit default swaps portfolio, but investors seem to be preparing for the worst.
Credit default swaps are insurance against defaulted loans, and it seemed unlikely that AIG would be able to completely avoid the widespread credit crisis. Concerns about the housing slump have sent AIG shares into a slide accounting for a loss of about a third of the market value over the last year. Up until now, AIG had looked pretty clean in relation to the credit weakness, but with the amount of exposure to risky financial derivatives it has been like waiting for the other shoe to drop.
This revaluation of their derivative portfolio will be an ongoing process that could last at least few weeks, but the damage has seemingly been done for now. AIG will survive this credit crisis and with the stock selling at ridiculously cheap valuation levels, it could be an excellent buy in the near future. For example, under normal circumstances AIG should be valued at about $112 by our methodology, which should tell you something about how seriously the market is taking the credit crisis. Until the extent of “internal weakness” can be accounted for it is just too uncertain to buy right away. However, there is a good chance that the “bottom” for AIG will happen sooner rather than later, and those with a long term time frame will be pleased getting a quality Dow stock at such low levels. To be sure, our valuation methodology shows AIG as a very attractive long term buy, but there is such a concern about short term downward action that its powerful enough give us pause. As with any ratings methodology, valuation must be weighed against real world conditions that sometimes are not reflected in the math.
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(Zero Hedge, 6/21/09)
Goldman Sachs’s Viniar ‘Mystified’ by Interest in AIG
(Your Financial Future, 4/19/09)
admin @ February 11, 2008
