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Traders Seek Fortune In AIG Stock
American International Group Inc., a symbol of the financial crisis, has morphed into a playground for speculators.
At a traders meeting before the market opened on Monday, Scott Redler, chief strategist at hedge fund T3 Capital Management, noted that AIG's stock hadn't moved much for days and was ripe for a breakout. Whether it headed up or down, he said, the traders should be ready.
AIG shares, trading below $40 at the opening bell, climbed within 15 minutes to $41, then above $42. 'This thing's going to $45,' T3 President Marc Sperling said, watching his six computer monitors. 'It's on every trader's radar screen across the country.'
AIG shares rose 21% for the day, and T3's traders did 'great,' said Mr. Redler. Since Aug. 5, the shares -- deemed highly risky by most analysts -- have more than tripled. 'The stock paid the traders' bills all summer,' Mr. Redler said.
A year after the government sought to avert a market meltdown by rescuing some of the country's biggest financial firms, speculative traders are feasting on these companies' remains. Shares of two government wards, mortgage giants Fannie Mae and Freddie Mac, bounced between about 60 cents and $2 in August. Shares of Lehman Brothers, left to fail by the government and currently in bankruptcy proceedings, rose from five cents to 20 cents in recent weeks.
AIG, arguably, has been the biggest casino of all. In the past seven weeks, its common shares have careened between $13 and $55, surging past $54 on Tuesday before closing at $45.80.
The extraordinary price action is a dramatic display of an unintended consequence of the U.S. bailout of AIG. Last Sept. 16, the government propped up the faltering company by trading $85 billion in loans for an 80% stake in AIG in the form of preferred shares, which don't trade on the market. It allowed the other 20% of the company's equity -- its millions of common shares -- to continue to trade publicly.
Some analysts declared the deeply indebted company's common shares basically dead money. Many buy-and-hold investors bailed out. That has left AIG's common shares -- $6.2 billion worth, as of Tuesday -- trading most actively between short-term traders, who buy and sell based on market momentum and bet against each other in risky options trades. Often they use borrowed funds, amplifying their gains and losses.
Dominating the recent move in AIG stock were professional day traders like those at T3. But Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. also owned AIG shares during the run-up, according to people familiar with the matter. Fund managers including AllianceBernstein LP and Davis Selected Advisers also held the shares during a portion of the run-up, according to fund documents.
Taxpayers aren't profiting, or taking a hit, from the movement in AIG's common stock. That's because the securities the government owns, preferred shares, aren't traded. The government will recoup most of its investment if AIG can repay its debts through asset sales or profits. While a run-up in common shares would typically reflect an increase in expectations of a company's overall value, in this case, AIG has to repay roughly $80 billion before holders of common stock can expect to see their share of profits.
Alex Herrera, head of Soldier Capital LLC, a 26-member day-trading firm in Ramsey, N.J., has been among those buying and selling AIG. A former floor trader on the New York Stock Exchange, Mr. Herrera says he often trades blocks of 100,000 shares, using funds he borrows through the firm to make bets of as much as 15 times the size of his portfolio.
On some days during the past month, AIG trading volume topped 130 million shares -- nearly equaling the total number of existing common shares -- up from less than 10 million a day in early August. Trading by firms such as Soldier Capital is 'one of the reasons you're seeing all this volume,' says Mr. Herrera, 40 years old.
