Covering financial stocks on a day like today is sort of like watching the Chinese ping pong championship.  It’s all action, happens faster than most can see, and no one really knows who the winner is.  Now, the latest rumors have the Oracle of Omaha, Warren Buffett, and his company Berkshire Hathaway (NYSE: BRK/A, BRK/B), looking at doing a deal to save American International Group (NYSE: AIG). There are things to consider. 

The State of New York is letting AIG access about $20 billion fromunits that is essentially a bridge loan to itself.  AIG is alsolikely to sell off businesses including annuities, autos, and aircraft leasing foranother $10 billion.  That meansthat there is still about $10 billion that needsto be infused into the company for that full $40 billion.Warren Buffett can do a deal if he wants to, but the question is whathe will get versus what he’ll be risking.  These financial giants haveblack holes all over their balance sheets.  It also is starting to feellike even in 2009 we’ll be getting announcements about assetwrite-downs.  If the economy continues sliding then, that is almostassured.

In a sense, this use of the $20 billion is like borrowing against your own 401/k or I.R.A. to make mortgage and credit card payments.  The difference here is thatthere may be no way for AIG to get that money from asset sales nor from future income over the next 60 days after it does this.  Shrinking themselves, though, is not going make them stronger.

Warren Buffett may want this company.  He’d definitely like to have atleast some of the operations.  He’d be getting a huge business overseasin Asia where he wants to expand.  He’d get property and casualty,workers’ compensation, and more.  Again, it boils down to just whatsort of risk he’s willing to take.  Very few Monopoly players win bymortgaging their cheap properties when they still have to go throughthe last quarter of the board.

AIG is still down over 50% at $5.76, but it has traded under $4.00 at the worst part before the New York plan was announced.   This situation is a very fluid one. By the time this posts, there may likely another game-changing development.  Stay tuned….If you can stomach it.

Jon C. Ogg
September 15, 2008

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