Economic problems

This on Treasury’s pending sale of AIG stock, from the Washington Post, made me laugh:

The remaining federal commitment consists of the Treasury Department’s majority share of AIG stock. There’s good news on that front, too: On Wednesday, Treasury announced that it plans to sell $6 billion worth of its stake. Cleverly, Treasury sold about half of that amount back to AIG; this gave Treasury an alternative to merely dumping shares on the market and so boosted the price it could command on behalf of taxpayers. Wednesday’s sale reduced the taxpayers’ stake in AIG to $35.8 billion, at the current price of roughly $29 per share.

The implication, of course: AIG is willing to pay more for its stock than the open market. Either the Washington Post is being a bit dim or AIG directors better check their D&O cover.

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2 thoughts on “Economic problems

  1. Hi Jim,

    An alternative reading of what they’re saying, I think, is that if AIG buys half the shares, those half get retired from the outstanding shares — the float.

    If the float is lower, the value of each remaining outstanding share rises. AIG pays the open market price for the shares they acquire, which, in theory, would raise the open market price due to the increased scarcity of shares (all other things being equal),

    So then Treasury sells the remaining shares on the open market based on the goosed stock price.

    But theory ignores the fact that the market makers might temporarily lower the share price in order to be able to absorb open market shares equivalent to about 3% of the value of the company. (Actually, the stock dropped 2% in after-hours trading.)

    And another thing….you get the idea. I think the Post just didn’t want to get into it. Mo’ Money, Mo’ Explanations.

    – Claude

    • Actually, adding the float component complicates this needlessly.

      Correct my first two sentences to this: “…if AIG buys half the shares, those half get retired from the outstanding shares.

      Therefore, the value of each remaining outstanding share rises, after accounting for the $3 billion that is no longer sitting in company cash.”

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