Is AIG Stabilizing?

According to the WSJ, which has an article entitled "AIG is Showing Signs of Stabilizing," AIG is stabilizing. Certainly yesterday's extraordinary leap in its stock price (21%) would indicate that the fortunes have finally turned for the insurance giant that was mostly responsible for wrecking our economy and is now being propped up by government support. And yet, the Government Accountability Office's report released yesterday, didn't seem to say much of anything. "AIG's recovery will depend not only of the long-term health of the company but also on market conditions and other factors." Obviously, but has the company showed any real improvement?

AIG's insurance operations are showing signs of improvement. The $26 billion gap between withdrawals and deposits in the life and retirement-services unit has shrunk to $3 billion in the second quarter. The GAO also noted that the cost of purchasing protection against default on AIG's unsecured debt has fallen. Um, yeah. I suppose the premiums on my CDS would fall too if I had the government's unconditional financial support. I think that indicator is meaningless. In other super bullish signs, AIG also reported pretax operating income of $1.3 billion, compared with an $8.8 billion loss in the year-earlier quarter. Also fairly insignificant in light of the $100 billion in losses the company took last year. The GAO concluded that the recent improvement in AIG's financial condition is mostly attributable to government support. Perhaps the understatement of the year.

Meanwhile in bitter ex-CEO land, Hank Greenberg presented a proposal to the Chairman of the House oversight committee that would include cutting the government's stake in AIG to about 20% from 80%. The proposal also calls for cutting the interest rates that AIG is paying on its government loans and extending loan terms so that AIG wouldn't be forced into a fire sale to pay off the debt. No word yet on whether Mr. Greenberg's proposal is expected to fly. The market seems to think it will, given the recent leniency the government has shown towards our financial institutions (please see Bank of America's paltry $425 million fee to weasel out of the government's guaranteeing of $118 billion in assets.)

If we let AIG off the hook this easily, then the market really should rally back to 14,000 in a day. Since we STILL don't have a plan in place to liquidate systemically important financial institutions if they go bankrupt, we can assume that the government is just going to prop up our financial sector forever and companies should just keep piling on the risk, without any regard for how they plan to manage the downside. AIG lost over $100 billion dollars and wiped out all of its shareholders equity because it single-handedly decided it could manage the risk of insuring every single crappy MBS structured in the past few years. Why they deserve a second chance on more lenient terms from the government is beyond me. Unwind the company, sell its assets, and pay back the government loan. It's the only right thing to do.