How much is AIG worth?

by John Quiggin on September 15, 2008

Now that Lehman Bros and Merrill Lynch are gone, attention is turning to insurance company AIG. When the first big failure, that of Bear Stearns was coming up, the initial offer of $2 a share suggested that the company was worth less than the building it operated it (the deal was subsequently sweetened, courtesy of the US taxpayer[1]). Looking at AIG, this WSJ story says that, as of last quarter, assets exceeded liabilities by $78 billion, a number that has almost certainly declined since then, given that the $1 trillion asset book includes lots of toxic sludge. But the story also notes that the company’s aircraft leasing subsidiary (where did they get this?) owns planes worth more than $50 billion. So, it looks clear that, apart from the planes, AIG is worth little, nothing or (most likely) a large negative value.

Update Commenters object, correctly, that it isn’t legit to value the planes without taking account of the associated debt. However, after today’s debacles, it doesn’t matter too much. AIG is toast, the only question being whether the Fed will treat it as another Bear or another Lehman. Next cabs off the rank appear to be Washington Mutual and Wachovia, taking the FDIC with them. I even saw GE mentioned somewhere, but it seems too soon for that.

[1] Despite the tough talk and the refusal to bail out Lehman, the Fed has given yet further ground to the banks this time around, agreeing to lend public money against subprime trash.

{ 25 comments }

1

Adrian 09.15.08 at 1:47 pm

Story doesn’t tell us, but presumably the planes are debt-financed to some extent. If so you can’t just subtract the $50bn.

2

Michael Mouse 09.15.08 at 2:21 pm

I take your main point entirely – that AIG’s liabilities almost certainly exceed its assets.

But I don’t quite understand why you pick out the aircraft (apart from it being an asset quantified towards the end of the WSJ article). Why pick on that? If you pick off any of their major assets, their balance sheet will look worse than it in fact is – for instance, taking another asset priced in the article, one could equally say that “apart from the stake in Blackstone (previously thought to be worth $700m), AIG is clearly worth a large negative value”. Why pick on the planes?

3

Michael Mouse 09.15.08 at 2:24 pm

(Doh – my point would have been clearer and stronger if I hadn’t confused $700m with $700bn in my head, although not my post. Good job I don’t work in finance.)

4

KAS 09.15.08 at 2:31 pm

This hit’s home as my company 401K is with ML and all of our liability as well as our workmans comp. is through AIG. Ouch!

KAS

5

Zamfir 09.15.08 at 3:56 pm

I know little about finance, but I do know about aircraft. ILFC, the aircraft leasing company, is the single biggest buyer of aircraft in the world, so big that Airbus and Boeing change their designs according to ILFC’s desires. This is going to affect the aircraft industry one way or another.

In general, aircraft are perfect mortgage objects, because the strict maintenance rules makes them easy to value, and of course because they can be moved to any place in the world at low cost. So under normal conditions ILFC could borrow money very easily. But AIG’s trouble might throw a spanner in that business model.

6

HH 09.15.08 at 4:18 pm

There seems to be a race on among these deeply corrupt firms to bulk up to a size that is “too big to fail.” BofA has accomplished this by swallowing both Countrywide and Merrill. It may be too late for AIG.

We are witnessing the failure of desperate ad-hoc measures to solve a systemic problem. But who could have foreseen these difficulties, aside from the handful of honest academics and specialists who accurately predicted them? None of the careerists who were paid to look the other way warned us. Why shouldn’t we all be surprised?

7

John Emerson 09.15.08 at 4:55 pm

McCain has plans for your retirement money. He wants to invest it with Merrill Lynch or with Lehman Brothers, but he can’t seem to find them right now. If you run into those guys, will you have them get in touch with him?

8

christian h. 09.15.08 at 5:48 pm

I think Zamfir’s post explains why AIG would own an aircraft leasing company. Same reason they own mortgage-backed securities: it’s a perfectly safe investment… untl it isn’t.

9

c.l. ball 09.15.08 at 6:17 pm

So, it looks clear that, apart from the planes, AIG is worth little, nothing or (most likely) a large negative value.

Which would explain the crisis over its credit-rating.

AIG insured CDS on CDOs backed by MBSs thought up by some MBAs, but now that those are DOA, AIG is SOL.

10

Maurice Meilleur 09.15.08 at 6:43 pm

#8: OMG, ROTFLMAO!

John E.’s point is a good one. If I were an ad consultant for Obama’s campaign, I’d think his team could get a lot of mileage out of this news, tying McCain’s privatization plans to their likely outcomes. It’s a good thing that our brothers and sisters in the news media who cover the events of the day are of a mind to talk only about issues of substance, important to the lives and, er, fortunes of real … um … oh, never mind.

11

Maurice Meilleur 09.15.08 at 6:46 pm

Um, that should be ‘#9′. I thought I typed ‘9’. Preview?

12

Ed 09.15.08 at 7:07 pm

I second that John E. made an excellent point. Remember the social security privatization that was proposed in 2005? Where do you think the money was going to be invested to produce higher returns than in the social security system? The Democrats really should be hanging this around any of the their opponents who argued for the scheme.

13

David in NY 09.15.08 at 7:32 pm

Hubert Humphrey damn near pulled the ’68 election out by talking about social security in the last 10 days. I like Emerson and others can’t figure out why Obama hasn’t learned a thing from this, and other things like it (he seems barely to have considered the fate of a guy named Dukakis).

14

Markup 09.15.08 at 7:37 pm

Perhaps a new tact from those darn regulator types [Dems] would be to put that the first order of biz will be to round up the top ten on the most wanted list – ie those who received a performance bonus over 20% of base pay and had their company become more or less worthless within a year and who did not under their own initiative resign and return bonus or more. To Leavenworth they go as Nat security dangers which should be hard for the Rep’s to argue with seeing how a war for Nat [economic] interest can be waged. At least this way we do not violate the Geneva Conventions… perhaps. Following them will be NCAA div. 1 football coaches; those who get paid more than 3x median income per game and lose or have a [lax] sub 50% graduation rate. These folks will be treated like common drug dealers and have all assets [including offshore and Fla] seized and perhaps put in the SS ‘lock box’. Obviously while incarcerated they will be allowed to eat cake, so long as it contains meal worms or some other protein source. Alternately instead of insects they would be allowed to go cannibal on each other, after all it is a dog eat dog world.

A review of the whole of the leased equip scheme[s] is long over due; while ‘innovative’ and ‘efficient,’ they really just amount to a pass the buck shell game / tax dodge.

15

a 09.15.08 at 7:58 pm

Adrian’s #1 comment is correct. AIG’s aircraft leasing business is valued at 7 to 14 billion, not 50 billion.

16

Markup 09.15.08 at 9:56 pm

”How much is AIG worth?”

One quote I ‘liked’ was, “… it’s worth [what could have been] health care reform,” referring to the larger folly being played out. Now they’ll be right when saying it’ll cost too much [of course that will still be short term thinking].

17

tinbox 09.16.08 at 2:19 am

It will be difficult for Sen. Obama to highlight Social Security because he ran with the GOP talking points to bash Sen. Clinton (last November’s debate). Obama believes there is a significant problem in SocSec that should be addressed with higher payrolls taxes on the (>250K/yr) wealthy. Is that a big vote-getter?

18

Shelby 09.16.08 at 5:18 am

Before those looking to tie any of this debacle to politicians of any particular tribe get too far into the tying, they should make sure those of the other tribe aren’t equally culpable. From what I’ve read to date, that isn’t the case.

19

nick s 09.16.08 at 8:06 am

A question: what are the odds of AIG being worth more than Manchester Utd, the team it agreed to pay $100m over four years to sponsor?

20

Rofe 09.16.08 at 10:56 am

One reason that Obama isn’t making major political hay out of the situation may be the fact that – despite the pure Schadenfreude of seeing loads of those Masters of the Universe types getting their comeuppance – this financial crisis has only been getting worse for the past 12-16 months and plain old folks are getting very worried.

Pointing out with glee, “See, I told you so !” has limited traction in this environment and perches precariously over significant blowback risk.

Not to mention the fact that if Obama wins, he’s the one who’s going to be dealing with the aftershocks for some time to come.

Cheers,

21

Zamfir 09.16.08 at 2:23 pm

On John Quiggin’ update: I would say there is a reason to ention their aircraft business, and any other businesses they have that are operating fine.

It is important to see how the losses compare to the total size of the business parts that caused them, and how one part of the company can make such losses that the rest is dragged down with it.

The mention of GE is interesting, by the way. GE owns GECAS, the second largest aircraft leasing company…

22

stuart 09.16.08 at 4:02 pm

It is important to see how the losses compare to the total size of the business parts that caused them, and how one part of the company can make such losses that the rest is dragged down with it.

Of course normally one part of a business failing wouldn’t be too bad – the other, still successful, parts can usually be spun off and sold as a worst case scenario. With the credit crunch it is going to be much harder to find a buyer for any such division, and so the price you would expect them to fetch will be proportionately less as well.

23

nnyhav 09.17.08 at 1:16 am

24

peter ramus 09.17.08 at 4:14 am

A couple of questions:

The Fed is taking an 80% share in AIG for $85 billion. As long as they’re throwing money at the problem, why didn’t they just take over the whole operation?

Is buying up insurance companies covered by some obscure “other duties as assigned” clause of the Fed’s legal mandate?

Thanks.

25

Brian 09.18.08 at 6:38 pm

If AIG was the largest North American insurer by assets, and is worth 106 .25 B to the US government (which bought .8 for 85 B), then the government could nationalize American health insurance companies for less than that.

Comments on this entry are closed.