AIG Drops Plan to Sells Derivatives Portfolio, Thinks Market Will Rally Forever

In the latest bold announcement from the government supported insurance behemoth that still thinks and acts like a private company, AIG has decided to hold on to its derivatives portfolio. According to the FT account of the company's reasoning: "The decision underlines the management's confidence in AIG's future." Or alternatively, the decision underlines the management's lack of ability to find a buyer of its toxic wares at prices that it likes. Apparently AIG's crack CEO Robert Benmosche believes that holding on to $300 to $500 billion of the derivatives portfolio would "reduce the need for fire sales and enable AIG to reap the benefits of rallying credit markets." You see, Mr. Benmosche looked into his crystal ball and foresaw that credit markets plan to rally forever. If AIG sells the portfolio now, AFTER an already powerful credit market rally in 2009, just think of all of the upside AIG is going to miss out on. After all, who needs to think about risk-reward when you can predict the future?

What's funny, in a sort of depressing way, is that AIG is still moving forward with its plans to sell off any business line that it can actually get a bid for, such as the Asian life insurance unit for which Metlife is a potential buyer. Yet it doesn't seem to want to part ways with the crap that has no bid, or rather a bid that it doesn't like. Since the company takes a massive charge every time it actually sells a unit, it's not going to pay back the government any time soon. Furthermore, after the functioning units are sold, the government will be left with a burnt out hull of company that is really just a bunch of illiquid crap with very suspicious marks that the next CEO is waiting to "rally back" to non-fire sale prices.

This is precisely why I hate the term "fire-sale" prices. According to the FT article, "AIG recorded billions of dollars in paper profits on its derivatives in the third quarter of 2009." Either it is just marking up positions to prices that don't exist in the market, which is really bad, or it just wants to continue to ride the coming rally, which is even worse. In other words, either there are accounting irregularities at the firm, or Mr. Benmosche's plan relies on gambling on an uncertain future instead of just taking his chips off the table and admitting that AIG will never pay the government back. Pretty ridiculous any way you slice it.