We’ve been documenting the resurgence in AIG and the absurd valuation that “Mr. Market” is placing on the stock. Another key cog of that value is their stake in Maiden Lane III. Once the Fed sells these securities to repay the loan the balance will belong to AIG. This could be anywhere from $4-$7 billion which could be used to buy back stock. It is a great time for the Fed to be selling these assets as they have a competitive bidding process.
The volatility in these assets shows why mark to market accounting for insurance companies and banks does not make sense. Why would you ever make a loan if you had to mark it to market every quarter knowing that you are planning on keeping it on the books for maybe 30 years? These securities in question are very opaque, and the way accountants derived market values were by CDS spreads which are extremely illiquid, and where a very small bet can have a significant influence on price. Very little conversation has occurred regarding regulators and the government’s insistence on getting out of so call “toxic assets” at the very worst time in the depths of the financial crisis. In the future a more tempered approach would be helpful in crisis as the whole day trading “mark to market” philosophy was extremely disruptive. If a permanent loss of capital is likely than the asset should be marked down, but a temporary impairment in price due to illiquidity or eternal issues for a financial institution that is a long term holder is not reasonable, as it would stifle the extension of credit when credit is needed most.