AIG: The Mark-to-Lehman Market

Ooh now this is ugly. AIG shares are down 26% today to their lowest level in over 15 years; the firm's credit default swaps are wider than Lehman's. AIG was never known as much of a mortgage shop, but it's undoubtedly the insurer's mortgage exposure which is dragging it down -- that, and the same self-reinforcing downward spiral that can hit any leveraged financial institution in this market.

Note that AIG is not trading at zero, in the way that Lehman and WaMu are: its market capitalization is still a substantial $35 billion or so. But the credit markets are certainly far from reassured that there's any value in the equity.

The worst sign of all for AIG? According to Bloomberg, the much-anticipated turnaround plan, which was meant to be unveiled by CEO Robert Willumstad on September 25, might be brought up to an earlier date -- just like Lehman's earnings. And we saw how much good that did.

I see very little chance that Willumstad's plan will placate the market, which now smells blood. I think the best chance for AIG now is that Lehman gets bought at a non-peppercorn price: if LEH is worth something, then AIG might be too. But if Lehman's bondholders end up being forced to take a haircut, then the prospects for AIG could be grim indeed.

Essentially, AIG bondholders and shareholders are marking their assets to Lehman, even as Lehman is trading on a worst-case scenario basis. Is there any particular reason why AIG should suffer the same crisis of confidence which is currently besetting Lehman? Maybe not -- but this market isn't rational, and AIG is just as opaque as Lehman. Right now, that's a really bad thing -- and frankly I'm surprised that Goldman isn't down more, too.

If you own shares right now in any company where you don't really understand how it makes its money, and if that company is highly leveraged, then you'd better have an iron stomach. Your shares can -- and quite possibly will -- go all the way to zero.