American International Group, Inc. (NYSE: AIG) has run into a snag on its giant secondary offering.  The troubled insurance giant that nearly took down the financial system before being bailed out is reportedly going to have to delay the massive share sale.  We had a tentative time frame set for mid-March, but now it may be late-April or even out into May.

Bloomberg and CNBC have both covered the issue citing the delay without a formal statement from AIG.  It is expected that the share sale will be between $10 billion and $30 billion. Our own discussions have us under the belief that the sale will be more than $20 billion.  What the reality is will depend upon market conditions.

The U.S. Treasury is to be virtually the entire seller in the offering.  At issue is a very long process required to educate investors on the road show about just what AIG really is today.  There have been unit sales, reorganizations, and on and on.  Educating investors is obviously not going to be an easy task.  Whether Robert Benmosche is well respected and admired or not, new investors paying off the government for a stake obviously will not just accept an explanation of “Here are our units, and here is the P&L… Here is what the P&L would look like if we didn’t have to pay off the taxpayers.”

Here is what investors need to consider.  This delay is NOT a good delay.  The implication is that the company may still be far too complex with far too many derivatives.  The bad news is that over-the-counter derivatives are going to be present here for as long as those contracts are legal.  The business is just that big.

It is hard to imagine Robert Benmosche just pawning off many more units just to pay Uncle Sam.  He does not want to break off the profitable side of the business just to get positive press coverage for paying back the government.  Remember, he was the after-the-past savior rather than the cause.

Today is a possible blow.  It might not mean that there are real snags in the offering, but now there is another 30 to 45 days of implied market risk.  This also sets the stage for a slightly lower share offering.  We had no illusion that AIG would get The Treasury out of its offices in one giant sweep.  That would be impossible.  What is now likely is that the sale and divesting process could take longer to achieve.  That puts the sale conditional upon just that much more market risks.

JON C. OGG

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