Our best idea remains AIG common (35% of the Fund) with a reported book value of $57 per share. There are few occasions when systemically important franchises sell for half of book value and are profitable. This is one of those times. AIG warrants held by the Fund (another 3% of the Fund) provide the right to 21+ million shares at $45, or maybe more shares at lower strike prices for the next 34 quarters if dividends above $0.675 per trailing 12-month period are paid.
Here we have likely the best mutual fund manager of the past 20 years putting 35% of his fund into one investment. Either he has completely lost his faculties or he knows this is one of the greatest investment opportunities he has ever encountered. His career is on the line with this investment.
At roughly $34 per share today investors can still buy into AIG at a price that Berkowitz thinks is an opportunity of a lifetime. If there is one stock worth spending some time on, given the conviction that Berkowitz has, it has to be AIG.
AIG’s CEO was recently on CNBC and gave a fairly detailed update. Here are the main points:
- Government has fully exited its position in AIG.
- In total, AIG has repaid the government $205 billion.
- The more than $6 billion in proceeds from the recent sale of AIA is cash that will stay with AIG and is not required to pay back TARP.
- The focus going forward for AIG will be to make sure to retain the capital strength and liquidity that will enable the company to withstand any stress.
- AIG will not start paying a dividend or buying back shares until everyone (regulators, rating agencies and AIG) are 100% confident that the company has sufficient liquidity to handle any imaginable stress.
- People need to believe in the guarantee being provided by AIG.
- To try and offset the impact of low interest rates, AIG is doing more direct lending which is enabling the company to pick up 50 to 75 basis points on its investments.