Bankruptcy

Initial Thoughts on AIG

By Stephen Lubben

This part of today's AIG deal confuses me:

To offset the dilution of A.I.G.?s current common shareholders, the company said it would issue up to 75 million warrants, which would allow those non-government shareholders to buy more common stock in the future, for $45 a share.

First off, this only "offsets the dilution" for those shareholders willing to sink more money into AIG. If you are cash constrained or don't think AIG is a good investment any more, maybe you can sell the warrants.  Even that will have some cost, especially for small shareholders.

??But what is the value of these warrants anyway? Initially they'll have some option value, but they will only "offset the
dilution" if AIG's share price goes above 45. As shown, the shares are currently trading at about 39 or 40. In the coming months (or years) Treasury hopes to sell 92% of AIG's shares. And AIG will become a much smaller company, by selling off pieces of itself to pay off the government. And I suspect AIG wont' be making money the same way it did before, at least not without some government objections.

So there will be a huge seller in the market and the company will shrink, but the share price is going to go $6 higher. Count me skeptical.

But maybe the warrants will have a very, very long expiration date. And there is bound to some inflation in the future . . . 

Full post as published by Credit Slips on September 30, 2010 (boomark / email).