By Hugh Son and Erik Holm
Sept. 17 (Bloomberg) -- American International Group Inc. lost 44 percent of its remaining value in early trading after investors learned that the U.S. rescue will curb the insurer's dividends and wipe out most of their stake.
AIG fell $1.66 to $2.09 as of 9:17 a.m. in New York. The U.S. plan to save the New York-based company, the nation's largest insurer by assets, may give the government an 80 percent stake in return for an $85 billion loan, and dividends may be halted to common and preferred stockholders. They're already reeling from a 94 percent drop in the common shares this year.
The ``punitive'' interest rate on the two-year loan ``makes it extremely clear that this is not a subsidy extended to keep the company afloat but rather a stranglehold that makes AIG unviable while ensuring that its obligations will be met,'' said Marco Annunziata, an analyst at UniCredit SpA, in a note to clients. ``This is to all extents and purposes a controlled bankruptcy.''
AIG unraveled as the worst housing crisis since the Great Depression led to more than $18 billion of losses in the past year. A meltdown could have cost the financial industry $180 billion, according to RBC Capital Markets, because AIG provided insurance on more than $441 billion of fixed-income investments held by the world's biggest institutions, including $57.8 billion in securities tied to subprime mortgages.
The U.S. reversed its opposition to a bailout of AIG, after private efforts collapsed and the Federal Reserve concluded that ``a disorderly failure of AIG could add to already significant levels of financial market fragility,'' according to a Fed statement late yesterday.
``It's an enormous relief,'' said David Havens, credit analyst for UBS AG in Stamford, Connecticut. ``Nobody really knows what it would have meant if they would have been allowed to fail, but there was an enormous amount of systemic risk. The problem was, nobody really knew how bad it could have been.''
To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Erik Holm in New York at eholm2@bloomberg.net.
Last Updated: September 17, 2008 09:25 EDT
Summary:
AIG is at the downfall part of it’s business. The company couldn’t keep operating and its stock value dropped from $3.75 to $2.09 in September 17. This company created another depression period for the US citizens other than the one in 1920s. The US government is trying to save this New-York based company by lending them $85 billion loan. And in return they wanted 80% of the government’s profits. They also halted the dividends to the shareholders.
Comment of this news:
The sad thing with business is that almost everybody is saving themselves when they meet troubles, even the government. AIG is in a low condition right now that they couldn’t get enough money to keep operation. The government lend them $85 billion for rescue. But in return they wanted an 80% stake. The business also halted the dividends that were supposed to be given to the shareholders. In my personal opinion that is extremely unfair. They are the one who invested in the business and operates it. In other word, without them the business couldn’t even get started. But at the end they can not get what they were supposed to be getting. The government didn’t finance, operate or invest in the business, but at the end they get most of its profits.
Reflection:
Business is all about risks and smart brains. Doing a great business depends on decision making, and it is the most important issue in managing and running a business. For example the Management and Board of Directors have to decide how many shares does the company want to have? How much dollars per share? And for an insuring organization, what amount of money should they give to different levels of accidents? How much money should they collect from the selling of insurances in order to make the business profitable? These decisions could lead the business into a huge success, a non-profitable company, or such a disaster. I think AIG didn’t have a great effort today is because the wrong decision making which started by it’s biggest shareholder "Hank" Greenberg. It is said in newspaper that “he built AIG into a global behemoth during his four-decade tenure, in part by expanding into complex lines of business and insuring risk that few would dare to touch.” This wrong decision made the company went down-hill.
