AIG Rallies for Now, but Future Remains Unclear

WOW…it turns out whoever was covering all those shorts in AIG was right to have done so.

The company’s second quarter earnings(and they were earnings) were well above most investors expectations and have sparked another huge rally in the shares .

AIG’s share price has now advanced more than 100% during the week. While it was a short squeeze that contributed the bulk of that move, today’s upward tide is due to a belief that AIG has found some stability in its business.

That may well turn out to be the case, but it remains far from clear. Most of AIG’s unexpected profits came from gains in the value of assets that it had previously written down in value. Those increases may not occur again. The company’s insurance business remains “challenged”, according to outgoing CEO Edward Liddy.

It is still difficult to understand what AIG will look like and what its earnings power will be if and when the day comes that it removes its many fiscal lifelines from the U.S. Treasury and Federal Reserve. While it is recording interest expense for its loan from the Fed (it’s booking the expense, but not actually paying the interest) AIG is not paying dividends at all on the $41.6 billion of Series E preferred Stock it has from the TARP program. That is something that any normally functioning company would be doing. But AIG is still not close to normal function.

For now though, it’s been a great week for AIG shareholders and I’m sure they’ll take it.

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