Thursday, 30 December 2010

The unlikely villain turned hero


Painting with a broad brush is not always the right thing to do. In the United States, virtually anybody who's in the finance sector has been branded a villain. They of the billion dollar bailouts and the million dollar bonuses. Near the top of the pecking order of rogues, in the public mind, is AIG - the insurance company that had to be bailed out at the peak of the crisis. But consider what's happened to AIG in the last one year and you may change your mind.

AIG's stock has risen 97% in 2010 - the fourth best performer in the S&P index. AIG was a solid company brought down by the antics of one department. But that didn't detract from the soundness of the rest of its business. When confronted with the crisis, it had a number of valuable assets it could sell. Top of the pile was AIA, its Asian subsidiary, which was a jewel. It has disposed of other businesses as well. It brought in a new CEO - Bob Benmosche, a rather colourful personality, out of retirement. Lots of things have been done well.

The US government holds 92% of the company now thanks to its 182 billion bailout. But it can now start to look forward to exiting. If it could realise $30 per share it could break even as the Wall Street Journal says here. If it could sell at $45 it would make a profit of $20 bn. The share price now is $ 58. Of course the government couldn't unload the stock at this price - it would simply crash; but it increasingly looks likely that in a carefully managed divestment spread over time, the US taxpayer might actually make a profit. Bailout should not be a bad word anymore, if you make a profit, but alas in the intellectually challenged shrillness of US politics, such niceties are unlikely to be observed.

A rather interesting subplot is that of the CEO Bob Benmoshe. When appointed he called Congress, a bunch of crazies. Fortune voted him the most tone deaf CEO of 2009. He demanded a private jet and took a holiday weeks after being appointed. But then, just look at AIG's performance. As a shareholder, you have to be delighted. Sadly, he has been diagnosed with cancer recently and in undergoing chemotherapy, but hopes to oversee the government exit from AIG and turn a profit for the shareholder. Recently, he wistfully wondered if somebody would call him and congratulate him , but then he realised the Ayn Rand's famous quote of " Find your Thank Yous from within" was perhaps more appropriate.

Appearances and name tags are deceptive. Convenient buckets of heroes and villains are not always true in the real world. Reality is often far more messy and not reduceable into a pithy soundbite on Fox News or the New York Times. At the moment, AIG, and its Chief, deserve a tipping of the hat. Why is it that you aren't likely to find many Americans who would agree with that ?

12 comments:

  1. Hence the saying, It ain't over until and unless it's really over.
    Seems life is usually like a movie with thick plots, one day villain becomes hero another day and again villain in no time!
    82% by Govt! Could this be considered as socialism???
    BTW Welcome Back!

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  2. A weekday post after ages!! Maybe AIG is getting its act together (for the sake of all US taxpayers, I hope so) but given a $15 price increase in December just based on their restructuring plan, I am a bit skeptical. From what you say if they are selling off their crown jewels, what's in their future? But in the spirit of you previous upbeat post, I shall try to stay hopeful :)

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  3. @Zeno - Yes, its not over until the fat lady sings ! AIGs and such other are the reasons why Obama & Co are labeled as socialists.

    @J - Hoping to get back to being true to the blog's name ! Yes the Dec hike is all speculative and knee jerk. Still, from where it was, AIG has done well. Given the scale of the problem assets had to be sold, but what's left is still attractive. If the American taxpayer can exit without a loss, it must be considered a fantastic achievement.

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  4. our business Guru is back this new year, after how many months ....

    what a great omen to begin the next year.

    hope you hold this resolution on Ramesh

    Happy New Year.

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  5. This was very informative and a big thanks to you for bringing such wonderful pieces on your blog.

    Sometimes, problems look big and bigger problems look even bigger. And a progressive solution may not just please the stakeholders. Mindset perhaps and that too in the midst of all the chaos there at states.

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  6. very very happy new year... wish you continue to shower your business and Super-sunday posts upon all of us!

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  7. @Sandhya - Will try Sandhya ....

    @Vishal - Many thanks. I am humbled by your kind words.

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  8. I am enlightened...thanks!

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  9. Ramesh, well said, as usual.

    On October 20 2008 I constructed a portfolio consisting of key stocks in IT, FMCG, Foods, Transportation, Pharma and sin. As of yesterday it is worth 1.2 times the investment. In the period it lost up to 30% of its value - not more. So yes, concur with the view that while a bail-out of big business may be obnoxious in principle, it does not mean a bad thing in terms of ROI.

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  10. @Striver :)

    @Ravi - Indeed; politicians, especially the US republicans are guilty of a gross distortion of reality when they talk of a bailout. They imply a dole - it was hardly that.

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  11. Reminded me of my travails with its local enterprise Tata-AIG. Trying to get my fire/quake insurance docs after having paid the premium and still living on non-delivered promises. :-)

    When will the government exit and how will they? Looks tricky to me.

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  12. @RamMmm - Tricky indeed. Exit isn't easy at all, but at least the road is paved a little better with lesser potholes.

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