AIG (AIG) may resort to a tactic that is as old as the hills. It is considering taking its worst assets and moving them into a new company. This would leave AIG with a relatively good balance sheet. Its subprime investments would no longer plague it.

According to The New York Post, the largest US insurer is working with investment bank JPMorgan Chase to arrange what is known in Wall Street lingo as a "good bank/bad bank."

At first blush, the idea would appear to be the brilliant work of geniuses. It raises the little question of who owns the firm which will get all of the junk. AIG’s shares have fallen from a 52-week high of over $70 to their current price of under $23. The board of the company has gone so far as to replace the company’s CEO with its chairman, Robert Willumstad.

Willumstad does not have clean hands. He was the board chief during most of the time that AIG was getting into its deep trouble. Now, his management team is proposing to "save" the company by a method which may not be practical.

If the sour investment of AIG are moved off its books, they can go one of two places. The first would be a spin-off to public shareholders. It is difficult to see how that would work. If the assets (or liabilities) are so badly impaired that AIG cannot hold them, what value do their have to stockholders?

The other option is to take the troubled capital pool and sell it to private equity. A group of outside investors might be able to hold the investments until they recover some of their value. But, with credit still tightening and the mortgage market getting worse, there may not be a "greater fool" in the marketplace who would be willing to take on the risk that the recovery necessary for the transaction to be profitable will happen anytime soon.

If AIG’s current plan to get itself back on its feet is that best it can muster, the firm will be in trouble for a long time.

Douglas A. McIntyre

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