AIG’s Equity Value Fixed at $0.001 Per Share.

Robert Benmosche, the recently appointed CEO of American International Group, Inc. (NYSE: AIG), the failed insurance giant, has made headlines in recent weeks by promoting AIG’s potential stock value and showing a certain bravado in remarks about government officials. An editorial from Reuters published September 22nd suggests that Benmosche “seems to act as if he has taken over a financial company that’s simply made one or two bad decisions – not one that nearly brought the global economy to its knees.”

AIG failed in total, and approximately 80% of its ownership was transferred to a US government trust for just half a million dollars, less than one tenth of a penny or approximately $0.001 per share. Its total enterprise value now approaches the highs induced by its accounting scandal and failure to disclose its unregulated sub-prime loss exposure. Thus at any price per share, much less its $46 closing price of yesterday, AIG’s public shareholders are valuing AIG’s 697,437,624 fully diluted shares at unsustainable prices. And as in the past, a lot of the blame falls on AIG’s continued lack of transparency and questionable accounting practices combined with irresponsible stock promotion.

AIG’s mispricing of a trillion dollars of sub-prime mortgages is the single largest cause of the global economic crisis. AIG’s failure marked the largest private sector loss in mankind’s recorded history. Its equity was totally wiped out, multiple times. The question is not what, if anything, AIG’s publicly traded common shares are worth, but whether AIG can service its debts.

Benmosche took over the AIG role in August 2009 after the departure of Edward Liddy, who took the role of CEO following the U.S. government’s bail-out of AIG in the fall of 2008, which totaled $182 billion in commitments and now stands over $120 billion outstanding.

Mr. Liddy received annual compensation of $1 while working as AIG’s CEO, and made remarks to the press that he would try to sell or spin off AIG’s assets quickly in order to repay the government.

By contrast, Mr. Benmosche is receiving an annual salary of $7 million per year from AIG, consisting of $3 million in cash and “stock salary” of $4 million in fully vested common stock. Each year Benmosche is also eligible to receive up to an additional $3.5 million in common stock as an incentive award. Naturally Benmosche has indicated his personal interest in postponing asset sales, and has made remarks indicating he thinks there will be a residual value to the common equity of AIG after the company pays back the government.

Following a 1-for-20 reverse stock split this past June 30th, AIG’s common stock fell to a low of $8.22 in July, and has since rallied to more than $50 per share following Benmosche’s remarks.

Benmosche first made headlines for deciding to go on vacation immediately following his appointment to the AIG CEO post. Benmosche gave press interviews while vacationing at his villa in Dubrovnik, Croatia, in which he first commented that he believed AIG “will be able to pay back the government” and “to do something for our shareholders as well.”

In an interview with Reuters the same week, Benmosche gave a tour of his villa, and spoke of his vineyards in the area. He referred to his compensation as “the bottom end of a competitive range,” and that he was reaching out to former AIG CEO Maurice “Hank” Greenberg for help in managing AIG. Benmosche stated to Reuters, “…he [Greenberg] can help us with the solutions.”

Greenberg was forced to resign from AIG in 2005 amid an accounting scandal. Within days of the news of Benmosche seeking ‘help’ from Greenberg, Reuters published an article stating that AIG and Greenberg had agreed to private arbitration in their unresolved legal disputes.

While Benmosche commented on ‘doing something for our shareholders’ and seeking help from Greenberg, AIG shares went from $24.55 at the close on August 18th to a high of $55.90 on August 28th.

Benmosche again made news on September 1st by saying he regretted negative comments made about New York Attorney General Andrew Cuomo. Benmosche had reportedly told AIG employees that Cuomo “doesn’t deserve to be in government” and that he had acted like a “criminal.” Earlier in the year Cuomo issued subpoenas to obtain information from AIG about bonuses paid to employees in its financial products division, the division that sold credit default swaps linked to subprime mortgage CDOs.

On September 16th news reports appeared that Benmosche told the AIG board he should be allowed personal use of a corporate jet. The board reportedly denied the request.

Of the all the news stories to have significantly impacted AIG’s stock price in recent weeks, the most questionable has been the statement by US Congressman Edolphus Towns discussing the Department of the Treasury and Federal Reserve Bank of New York’s assistance to AIG. Towns is the chairman of the House Oversight and Government Reform Committee.

Towns’ statement was in response to a proposal given by Hank Greenberg, who visited Towns in private. Towns stated, “I’ve directed the committee staff to take a look at Hank Greenberg’s proposal to restructure the debt, because I think it is something to which we should give serious consideration.”

The report of Towns statement appeared on the same day that the U.S. Government Accountability Office (“GAO”) released a report on AIG, “Status of Government Assistance Provided to AIG.” The GAO report states that AIG’s ability to repay the government is “unclear at this time.”

The day before reports of Congressman Towns’ statement on AIG and the release of the GAO report, a report appeared in the New York Times that Congressman Towns was insisting that Bank of America executives could not assert attorney-client privilege in responding to questions from Towns’ committee. The obvious question arising from this is why a Congressman who takes a stern stance against Bank of America executives would issue supportive comments about Greenberg’s self-serving plan that can only cost taxpayers and increase their risk.

Reuters remarked at the oddness of Towns’ statements, and notes that Towns once sat on the board of a subprime mortgage lender called MortgageIT. The writer went on to state, “The time for kowtowing to Greenberg must end. All this is doing is giving false hope to those investors who’ve been snapping up AIG’s shares on the belief the insurer can turn itself around. AIG can’t and it won’t… AIG rightfully deserves to join Bear Stearns and Lehman Brothers on the ash heap of history.”

The Reuters editorial urges “the Obama administration to oversee the dismantling of the failed insurance giant with all due speed.”

What seems to be left out of the press coverage on AIG is the role that the AIG Financial Products (“AIG-FP”) unit played in actually facilitating the subprime mortgage securitization market by selling credit default swaps. An article on Joseph Cassano, the former head of AIG-FP, appeared in Vanity Fair in August. The article states that AIG-FP “was the most receptive dumping ground for new risks created by big Wall Street firms.” The article quotes one trader from AIG Financial Products stating, “I’m convinced that our input into the system led a substantial portion of the increase in housing prices in the U.S. We facilitated a trillion dollars in mortgages. Just Us.”

The credit default swaps sold by AIG-FP allowed for the subprime market, and allowed investment banks to unload risk onto AIG and bankrupted its shareholders.

AIG’s common shareholder equity and its public shareholders’ ownership right to its economic value were wiped out. AIG exists today exclusively as a result of the taxpayer funding provided for the benefit of interests far greater than those of AIG’s management or its day-trading shareholders. The GAO report clearly sets forth the controls imposed by the trust that controls AIG and its agreements with the Department of Treasury and those on the debts approved by the Board of Governors of the Federal Reserve System. These controls include prohibitions against lobbying by AIG or its agents and proxies seeking to improperly benefit from taxpayer property.

Click here to read the Vanity Fair article.

Click here to read Reuters article.