Options Action

Reverse Splits for Everyone!

You got to hand it to Uncle Sam - if anything, he sure knows how to rig stocks.

Case in point AIG .

Couple months back, the government announced a 1:20 reverse stock split. Usually, such moves are the kiss of death for stocks. But in this case, it actually worked, and the stock has made a massive move up.

As of this morning, there are about 120 million shares of AIG out there, of which the government owns 80%. That leaves about 24 million shares for the rest of us. Of that 24 million, Hank Greenberg's Starr owns about 14 million of those shares, leaving about 10 million for the short sellers. With nearly 24 million shares short, the stock continues to get squeezed higher, even if some don't like calling the recent action a "short squeeze."

"A really-bad short squeeze? Please. The stock IS borrowable, granted at negative rates." said Mike Khouw, in between leisurely chomps of his sausage egg and, of course, cheese sandwich while at his perch atop Cantor's Equity Derivatives Desk.

"A real short squeeze is when the shorts face buy-ins, where they cannot borrow the shares, as happened in Volkswagen, and the stock cannot be shorted at all. In that case, most of the longs were controlled by a group that wouldn’t lend, Khouw added.

Mike may have a point, but today's action in AIG got me thinking: Will the success of AIG stock prompt the Government to call for reverse split its bailout brethren Freddie Mac and Fannie Mac?

Why not? The move has driven the shorts out of the stock, which is what the government has been trying to do all along. Why would Fannie and Freddie be any different?

"That is definitely what the market is banking on," said Paul Miller, analyst over FBR Capital Markets. "But the probability is a lot lower. Fannie and Freddie have a long way to go to get out from getting out from the government. AIG is a functional company outside of one division"

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