Investors got a chance this week to weigh in on the government's odds of recouping the full $182 billion bailout of American International Group Inc.
The response so far: Don't count on it.
AIG shares skidded as much as 7 percent Wednesday, a day after the U.S. government sold a chunk of its stake in AIG. The stock recovered some of its losses, closing down 4 percent to $28.28. But it still trails the $28.73 average price the government needs to break even on the bailout.
By offering 200 million shares at $29 each, experts say, the government misread the market's appetite for AIG. After Wednesday's price swoon, they say, it might have to delay future offerings of AIG stock.
And taxpayers might have to give up on breaking even.
"Treasury clearly wants to get out, and at some point I think exiting is more important than hitting a target price," said Clifford Gallant, an analyst at KBW Inc.
AIG received the biggest bailout during the financial crisis because it couldn't meet its financial obligations to the world's biggest banks. AIG sold the banks insurance-like contracts to cover losses on mortgage bonds. Once the housing bubble burst and the bonds lost value, AIG couldn't pay up. If AIG failed, officials said, the banks would follow.
Since then, government and AIG officials have been working to settle AIG's obligations, sell business units and repay its bailout money.
Reducing the government's control over AIG should help the company, Gallant said, by freeing management to determine compensation and other matters without regard to taxpayer interests. But Gallant said that wasn't enough to sway investors concerned about whether AIG can grow and generate earnings.
As more shares are created and traded publicly, Gallant said, "we have a better sense of what the market really thinks, because it's not dominated by a small number of investors."
As of Wednesday, investors' assessments of AIG were mostly negative, said Scott Sweet, senior managing partner of IPOBoutique.com.
"People are selling because they don't trust it, and they feel it's going lower," Sweet said. "This is going to make it exceptionally difficult to unload more shares as quickly as the government had in mind."
Treasury officials say the deal was priced and sized appropriately. They say short-term price swings will not determine whether the government can recoup its money. Treasury can't launch another offering until September.
So why did investors pump $8.7 billion into AIG shares Tuesday night, then dump the shares Wednesday morning?
Some never intended to hold the shares beyond Wednesday, Sweet said. He said the banks that handled the deal never determined whether "these were buyers rather than renters."
The price would rise, these unlucky renters assumed, because of additional demand from investors who didn't receive any of the 300 million shares sold Tuesday night. There was no such demand, Sweet said, because most investors who had wanted shares were able to buy some of the 300 million.
But generating stock profits isn't a goal of underwriters, said John Fitzgibbon, who tracks stock offerings at IPOScoop.com. He said the banks did their job — raising money for the company and the government.
"This is the object of investment banking — to raise money for a company, not to enrich the flippers," Fitzgibbon said. "The aftermarket is another story completely, and that's up to the traders."
In this case, Fitzgibbon said, the size of the offering and the price wiped out any remaining demand for AIG. That made the stock vulnerable to declines.
Still, at Wednesday's closing price of $28.28, AIG is a bargain compared with its competitors, said Catherine Seifert, an insurance analyst with Standard & Poor's equity research. She concedes that the government's now-77 percent ownership adds uncertainty — about how many shares will be sold, for example, and when. Still, Seifert has upgraded the stock to a "buy." She foresees the shares rising to $36 over the next 12 months.
The stock is more likely to spike or swoon because relatively fewer shares are being traded. Because only 23 percent of AIG's shares are trading after Tuesday's offering, each trade at a higher or lower price has an outsize impact, Seifert noted.
Tracking the same details, Gallant takes a negative view of the stock. He sees the price falling to $23 within 12 months. At that level, taxpayers would lose about $8 billion on the 1.4 billion AIG shares Treasury still owns.
But Gallant said that's a small loss compared with the potential disaster if the government had refused to bail out AIG at the peak of the financial crisis in 2008.
"The U.S. government did stabilize the financial system by saving AIG, and if they have losses in the single-digit billions, that will be cheap," he said.
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