AIG's Largest Private Shareholder Remains Optimistic On Stock

11th Jun 2010 16:06

By Erik Holm and Serena Ng NEW YORK (Dow Jones)--Bruce Berkowitz, the investor whose fund is the largest private shareholder in American International Group Inc. (AIG), would be happy to buy more of the rescued company's stock, especially if it's AIG that sells it to him. Some stock pickers have questioned whether the insurer's common stock has any value, given the size of AIG's rescue. But Berkowitz, named the fund manager of the decade by Morningstar earlier this year, is convinced the government can eventually sell off its stake in AIG and exit the company, leaving shareholders with a valuable investment. Berkowitz expects his Fairholme Fund (FAIRX) to retain its 25.5 million AIG shares for the next decade, and he's already factored in the possibility of being diluted by additional stock sales. Even with a secondary stock offering, he believes his investment is a sound one. A successful offering from AIG would mean it was growing stronger, he said. It also would move the insurer closer to repaying the only investor owning more than Berkowitz's fund does: the U.S. government. Fairholme amassed its roughly $900 million stake in AIG's common stock early this year, well after the government rescue, which became necessary in 2008 after wrong-way bets on the U.S. housing market. Investors who bought AIG shares before its rescue have endured five chief executives in five years, an end to the dividend, a 98% decline in the stock price, and the rescue itself, which, while saving their investment from going to zero, gave ownership of nearly 80% of the company to the U.S. Fairholme owns about one-fifth of the remainder. While others have remained skeptical of AIG's ability to fully repay the government, Berkowitz, who was a teenage bookie long before he was an investment manager, said he believes AIG is making all the right moves to repay the government. AIG owes taxpayers $101 billion and expects to use proceeds from asset sales to repay about $52 billion to the Federal Reserve Bank of New York. Another $49 billion is owed to the Treasury, which holds preferred shares in AIG. Company and government officials are trying to work out a plan under which those shares could be converted into new stock that could be sold to investors over the next few years, helping AIG raise money to repay taxpayers. The company to emerge if successful, Berkowitz said, will include Chartis, its existing property-casualty operation; SunAmerica, its U.S. life-insurance and retirement-services business; and perhaps a few other pieces, like its consumer-lending and plane-leasing arms. But the plan hit a snag this month when the pending sale of AIG's largest foreign life unit, AIA, to rival insurer Prudential PLC (PUK, PRU.LN, K6S.SG, 2378.HK) was called off when Prudential's shareholders balked at the deal price. AIG's board refused to lower the price. Berkowitz said he's glad AIG "stuck to their guns" and that it can get value for the unit through other means. Fairholme also owns some of AIG's bonds and over 20% of a hybrid-securities issue convertible to stock. The fund also reported large stakes in other financials at the first quarter's end, including Citigroup Inc. (C), Bank of America Corp. (BAC) and CIT Group Inc. (CIT). Not everyone shares Berkowitz's optimism about AIG. A report from a watchdog panel reviewing the rescue said this week that taxpayers "remain at risk for severe losses." The bipartisan Congressional Oversight Panel concluded the U.S. would "remain a significant shareholder in AIG through 2012" and it is unclear if taxpayers "will ever be repaid in full." Given the structure of AIG's obligations to the government, a failure to repay it would likely mean equity investors like Berkowitz would be left holding worthless shares. Cliff Gallant, an analyst with KBW, said AIG's common stock is "grossly overvalued" and slashed his price target to $6 a share in April because of the insurer's obligations to the government. Gallant's price target is significantly below where AIG was recently trading: $34.82. But AIG Chief Executive Robert Benmosche said in a May hearing before the oversight panel he was confident taxpayers would get their money back, "plus a profit." The Treasury's chief restructuring officer, Jim Millstein, testified that same day that he was encouraged by AIG's progress in improving its financial condition and that "the prospects for the recovery" on his department's investments have improved. -By Erik Holm and Serena Ng; 212-416-2892; [email protected] (END) Dow Jones Newswires June 11, 2010 11:06 ET (15:06 GMT)