Bad day for AIG -- unless you’re a shareholder
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On a day when American International Group faced the public’s wrath over retention-bonus payments to employees, the insurance giant’s shareholders were treated to a 66% surge in the stock price.
Huh?
The company’s shares rocketed 33 cents to 83 cents on the New York Stock Exchange, reaching their highest level since Feb. 13.
This was not, however, a case of no-bad-deed-goes-unrewarded. Rather, the stock got a boost from rumors that the government might try to squeeze ‘short sellers’ in AIG, Citigroup and other bailed-out financial giants in which taxpayers hold a significant stake -- an 80% stake, in AIG’s case.
Traders pointed to a report on the Briefing.com website early today, which said the government might demand physical delivery of the shares it now owns in AIG and other rescued entities.
That would in effect take those shares out of the marketplace, potentially making it harder for short sellers either to borrow them or to find stock to close out their bearish bets.
In a short sale, a trader borrows stock (often from a brokerage’s inventory) and sells it, expecting the market price to slide. If the bet is correct the trader can buy new shares later at a lower price to repay the loaned stock, and pocket the difference between the sale price and the repurchase price.
But when too many short sellers scramble at the same time to buy shares to close out their trades, the result can be a ‘short squeeze’ that drives up the share price.
At the end of February there were a record 156 million shares of AIG sold short and not yet replaced, according to NYSE data. That was up from 136 million at the end of last year.
Trading volume in AIG rocketed to 286 million shares today. That heavy trading, and the jump in the price, indicated that some short sellers were rushing to terminate their positions, traders said. . . .
Citigroup also was a big winner today: Its shares surged 55 cents, or 31%, to $2.33, on a day when most bank stocks fell. As part of the bank’s latest bailout agreement with the Treasury, the government soon may own as much as 36% of Citi’s common equity.
Among other financial wards of Uncle Sam, Fannie Mae gained 12 cents, or 28%, to 54 cents. Freddie Mac added 9 cents, or 21%, to 51 cents.
The rumor clearly frightened some short sellers. Still, I’m not sure how the government would make a short squeeze work, if what it owns in these companies are preferred shares convertible into common.
A Federal Reserve spokeswoman said she had no comment on the rumor. A Treasury official, speaking on background, said he knew of no such move afoot.
Obviously, these stocks are for traders only, because there is no way for anyone to know what non-government shareholders’ stakes will ultimately be worth -- if anything.
-- Tom Petruno