Having seen David Faber on CNBC say that the "private" market solution to AIG is definitively dead, we now look on at a potential government bailout of the insurance and investment behemoth.
I've handicapped the odds of a government intervention as 60%. So, that means 40% odds of an outright bankruptcy and likely zero recovery for shareholders. Within the 60 points of government intervention, I'd put 50 of them on a Fannie/Freddie type bailout, which means that equity holders get diluted into oblivian and sub-debt holders are at substantial risk. In fact, I'd suspect that the Fed loan would be super-senior to everything accept policy holders and thus everything in the capital structure would get crammed down and the profit motive of the institution will be questioned (a scenario where equity is diluted 80% but the company is worth less than if it remained private). The other 10 points of odds I'd place on a non-dilutive loan that effectively lets AIG continue to prosper and does not kill the current equity holders. In that scenario, AIG may be worth well over $20/share. So, if I probability weight the outcomes:
40% x $0 +
50% * $4 +
10% * $25 =
$4.50/share of probable value.
I'd demand a fair margin of safety to that given the risk of immediate and total loss. I'd buy at less than $1/share, hold below $2.25 and not want to be involved above that. [MY VIEWS SHOULD NOT BE CONSTRUED AS INVESTMENT RECOMMENDATIONS, JUST BACK OF THE ENVELOPE ANALYSIS]