Published July 11, 2009

AIG shares tumble 27% on bearish call

Citigroup analyst says value of troubled insurer's equity may fall to zero

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(Washington)

SHARES of American International Group Inc plummeted more than 27 per cent on Thursday after a Citigroup analyst said that the value of the troubled insurer's equity may fall to zero, and investors stepped up their bearish bets.

AIG shares, which have fallen more than 50 per cent since the company's 1-for-20 reverse stock split on July 1, lost US$3.62 or 27.6 per cent to close at US$9.48 on the New York Stock Exchange on Thursday.

Options traders bet overwhelmingly that the stock would fall further, and grew more aggressive through the day. By the close of trading, there were 138,000 put options traded in AIG, almost 11 times normal levels, according to option analytics firm Trade Alert. In early Friday trading, AIG was at US$10.16.

'Some investors are anticipating more financial woes from AIG which will keep the stock heading south. In the options market, traders are speculating that the downward trend will continue, which has resulted in a lot of put buying in the near-term July contracts,' said William Lefkowitz, options strategist at brokerage firm vFinance Investments.

AIG had hoped its reverse stock split would give the shares a boost, but instead it seems to have opened opportunities to short-sellers.

'After the reverse split, the stock is easier to borrow and more people get access to short it when it is trading at a higher price,' said Paul Hickey, co-founder of Bespoke Investment Group.

In another development, AIG is to pay millions of dollars more in executive bonuses, despite a firestorm earlier this year over the issue, and is seeking government blessing to deflect public wrath, The Washington Post said yesterday. The taxpayer bailed-out firm is seeking approval from President Barack Obama's 'compensation czar' Kenneth Feinberg, the Post said.

Mr Feinberg is tasked with overseeing bonuses handed out to top executives at companies that received federal money.

'Anytime we write a cheque to anybody', it is highly scrutinised, an AIG official told the Post. 'We would want to feel comfortable that the government is comfortable with what we are doing.'

Some US$2.4 million in payments are due next week for 40 top executives, the newspaper said, but are not under Mr Feinberg's jurisdiction because they are delayed payments from last year. The firm is seeking political cover, however, following the firestorm that even saw protests outside the homes of some top AIG officers.