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The shares of American International Group (NYSE: AIG) soared nearly 23% Monday and are rising fast again today on news that shareholders may band together to prevent the Federal Reserve from snapping up an 80% stake in the insurance firm. Apparently, major investors (which could include Bill Miller of Legg Mason) are hoping that the quick sale of assets will raise enough capital to pay off the Fed's $85 billion loan. However, AIG chief Edward Liddy seemed to put the kibosh on this speculation last night in a CNBC interview.
Liddy told the cable news channel he thinks the government's bailout plan is an "excellent idea," and added that he doesn't consider the Fed's intervention as a step toward nationalization. While the CEO believes that the government's loan will be fully repaid, he noted that a shareholder rescue isn't the most likely outcome. Instead, Liddy plans to prepare a list of assets for sale within seven to ten days, in hopes that the divestments will generate enough cash to stave off the feds at the door.
So, what's for sale at AIG? Well, Liddy made it clear that the firm's Asian operations are both "sacrosanct" and "unassailable." The chief executive also emphasized that he wants his company to emerge on the other side of this crisis as a leaner and more resilient version of itself. "It will look a lot like it did prior to 1998-1999, with less reliance on the financial services side," he told CNBC, noting that AIG will instead focus on its core business of property-casualty insurance.
Option traders have responded to the AIG speculation with a surge in optimistic bets. Yesterday, on the International Securities Exchange (ISE), traders bought to open 8,854 calls, compared to 3,449 puts. The stock's single-day call/put ratio on the ISE was 2.57, as bullish contracts easily outpaced their bearish counterparts.
A similar bias was evident on the Chicago Board Options Exchange (CBOE), where traders on Monday bought to open 24,234 calls on AIG. With just 14,753 AIG puts crossing the tape on the CBOE, the stock racked up a call/put ratio of 1.64 on that exchange.
Looking back over the past couple of weeks' worth of option volume on the ISE, AIG has collected a 10-day call/put ratio of 2.06. In other words, twice as many calls have been bought to open than puts during the past 10 days on the ISE. This ratio ranks higher than 96% of other such readings taken during the past year, which suggests that traders on that exchange have rarely shown a greater preference for bullish bets on AIG.
Since sentiment is such an overriding catalyst in the financial market right now, it seems nearly irrelevant to analyze the stock's technicals. However, it's worth noting that AIG has rallied more than 17% today to trade near $5.50, and call volume continues to dominate intraday option activity. The equity's October 5 call has seen more than 7,500 cross the tape in the first hour of trading, while the October 6 call has seen more than 5,700 contracts change hands.
With hopes apparently running high on Wall Street for an AIG rebound, Liddy might want to make sure his capital-raising plan lives up to those lofty expectations -- or the stock could find itself plunging once again as the bullish camp rushes for the exits.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.
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Reader Comments (Page 1 of 1)
9-30-2008 @ 1:10AM
Casey Jones said...
I’m against the $85,000,000,000.00 bailout of AIG.
Instead, I’m in favor of giving $85,000,000,000 to America in a We Deserve It Dividend.
To make the math simple, let’s assume there are 200,000,000 bonafide U.S. Citizens 18+.
Our population is about 301,000,000 +/- counting every man, woman and child. So 200,000,000 might be a fair stab at adults 18 and up..
So divide 200 million adults 18+ into $85 billon that equals $425,000.00.
My plan is to give $425,000 to every person 18+ as a We Deserve It Dividend.
Of course, it would NOT be tax free. So let’s assume a tax rate of 30%.
Every individual 18+ has to pay $127,500.00 in taxes. That sends $25,500,000,000 right back to Uncle Sam.
But it means that every adult 18+ has $297,500.00 in their pocket.
A husband and wife has $595,000.00.
What would you do with $297,500.00 to $595,000.00 in your family?
Pay off your mortgage – housing crisis solved.
Repay college loans – what a great boost to new grads
Put away money for college – it’ll be there
Save in a bank – create money to loan to entrepreneurs.
Buy a new car – create jobs
Invest in the market – capital drives growth
Pay for your parent’s medical insurance – health care improves
Enable Deadbeat Dads to come clean – or else
Remember this is for every adult U S Citizen 18+ including the folks
who lost their jobs at Lehman Brothers and every other company
that is cutting back. And of course, for those serving in our Armed Forces.
If we’re going to re-distribute wealth let’s really do it...instead of trickling out
a puny $1000.00 ( “vote buy” ) economic incentive that is being proposed by one of our candidates for President.
If we’re going to do an $85 billion bailout, let’s bail out every adult U S Citizen 18+!
As for AIG – liquidate it.
Sell off its parts.
Let American General go back to being American General.
Sell off the real estate.
Let the private sector bargain hunters cut it up and clean it up.
Here’s my rationale. We deserve it and AIG doesn’t.
Sure it’s a crazy idea that can “never work.”
But can you imagine the Coast-To-Coast Block Party!
How do you spell Economic Boom?
I trust my fellow adult Americans to know how to use the $85 Billion
We Deserve It Dividend more than I do the geniuses at AIG or in Washington DC .
And remember, The Birk plan only really costs $59.5 Billion because $25.5 Billion is returned
instantly in taxes to Uncle Sam.
Ahhh...I feel so much better getting that off my chest. Kindest personal regards,
Birk
T. J. Birkenmeier, A Creative Guy & Citizen of the Republic
PS: Feel free to pass this along to your pals as it’s either good for a laugh or a tear or a very sobering thought on how to best use $85 Billion!!