AIG Shares Appear Cheaper After Maiden Lane III Sale

AIG Shares Appear Cheaper After Maiden Lane III Sale
By American International GroupSVG version by JBarta ( [Public domain], via Wikimedia Commons

AIG Shares Appear Cheaper After Maiden Lane III Sale

Credit Suisse Group AG (NYSE:CS) bought four of six complex mortgage-debt securities up for auction by the Federal Reserve Bank of New York, according to the New York Fed’s website. The assets, which have a total face value of $4.2 billion, were taken on during the 2008 bailout of American International Group, Inc. (NYSE:AIG).

The sales of the collateralized debt obligations raise the total face amount sold from the portfolio known as Maiden Lane III to about $23.4 billion this year. Credit Suisse bought nearly $3.5 billion of the CDOs, while Royal Bank of Scotland Group plc (LON:RBS) (NYSE:RBS) RBS Securities and Morgan Stanley (NYSE:MS) each bought one other CDO. The sales have become barometers for demand of residential- and commercial-mortgage securities. The underlying bonds are the type of nonguaranteed securities that have fluctuated in value since 2008 as the vagaries of the real-estate recovery make them difficult to assess and as they’ve been especially sensitive to economic events that have roiled financial markets.

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But the mortgage bonds have held up better than other risky debt in recent weeks, in part as the housing market shows signs of bottoming and many funds have raised money to buy the securities that offer high yields, analysts said. The loan made by the New York Fed to fund the Maiden Lane III portfolio already has been paid off after multiple sales. Loans similar to crisis-era Maiden Lane portfolios have also been repaid.

The fair value of ML III was $12B as of last Wednesday after the last round of sales meaning the current & pending sales will materially reduce the remaining balance. There has been some discussion in the blogsphere claiming that the “complexity” of many of these securities would hamper additional sales. Clearly that is not the case as demand has stayed high as each offering had 8-9 bidders.

I have said for months now and still maintain that both the Fed and Treasury want to have this wrapped up (including liquidation (or near liquidation) of Treasuries common stock stake in AIG) well before the elections. The goal would be to not allow it to become an election issue and in fact allow for a victory lap for both agencies, an exit at a taxpayer profit.

The rate of current offerings assures at least the Fed will be out withing weeks and with the $$AIG will see from these sales (~7B) they can take at current prices >20% of the Treasuries stake off the market, taking their ownership down to ~42% of the outstanding shares (I am assuming future ML sales for values near current and an AIG stock price that stay ~ near current levels) from today’s 60%. I also expect AIG to use 100% of the funds from ML sales to repurchase shares direct from the Treasury.

What seems to be being lost by the general investing public is the scope of the cap shrink AIG is undergoing as the Treasury stake is liquidated. There seems to be an assumption the Treasury is dumping extra shares onto the market when the reality is that each Treasury sale, because AIG is such a large buyer actually shrinks the share count. Excluding the ~$7B they will get from the ILFC IPO (that will be used t repurchase shares), AIG will repurchase ~$15B worth of shares alone this year, all from the Treasury. With a sold BV of $57/shares they are buying them now at 60% of book meaning each share they buy is the equivalent of buying $1 worth of assets for $.60. A fantastic return for shareholder funds.

By: valueplays

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Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.

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