AIG's Futile Reverse Split To Nowhere (AIG)

American International Group Inc. (NYSE: AIG) is under pressure.  This morning is the effective date of a 1 for 20 reverse split.  Our closing bell price was $1.16 yesterday, and that would imply a $23.30 share price this morning.  Just one problem.  The “20-factor” is not even close as the very early trading indications are down by almost one-third and trading around the $15.00 handle in early trading.

As part of the annual meeting, holders approved that reverse split.  This was something we did not have firm on the calendar for today as an effective or ex-split date, and that may be at least some of the confusion in trading this morning as traders and investors lighten into the event.  Shareholders also elected 11 board members and six of these are newcomers.  This drop follows reports that it could face billions more in losses of credit default swaps on an unrealized basis if credit conditions in Europe deteriorate further.

Many traders short sell reverse stock splits.  The logic is usually that they suddenly have no margin issues with a higher price, and suddenly they get to short more of a troubled company.  We are considering that there are possibly some trade reporting errors for the drop to be this severe.  But unfortunately that price looks real in early trading indications around 7:30 AM EST.  After all, this is AIG.  Or what is left of it.

UPDATED AT 7:40 AM EST: We are already seeing new trade indications closer to $19.00.  We have yet to find out if those early trades at and under $15.00 were trade reporting errors.

Jon C. Ogg

July 1, 2009