AIG Shares Fall After U.S. Says it Plans $18B Sale (Personal WriteUp)

Article Summary

Today (September 10, 2012), share prices of American multinational insurance corporation AIG (American International Group) fell after the United States Treasury Department announced that it would sell $18B worth of the company in a public auction. At the peak of the late financial crisis in 2008 and 2009, The Treasury Department and the Federal Reserve offered an $182B lifeline in stimulate packages for an 80 percent equity stake, high interest on loans, and levels of management and control of the company. With two previous smaller auctions already made, the government will now make its biggest sell-down of the company reducing their 53 percent equity to merely 20 percent, loosing full control of the company.  With the two previous auctions, on both cases, the shares faced a drastic decline in share prices after the announcement, making it no surprise to face a drop in share prices again with its biggest auction yet. Closing at $33.30 (-2.03%), the company’s future remains undetermined.

Relation to Course

Post Hoc Fallacy:

The post hoc fallacy underlines the assumption that if event B happens after event A, event B must have been caused by event A. This fallacy may be argued as the entire intention of the article itself. The article is blaming the United States’ Government plan on selling their 33 percent equity of AIG, as the sole reason for its fall in share prices late Monday. This may also be argued as a Fallacy of Single Causation, but in fact it was the wording used in the title that may lead some to believe and debate it as a Post Hoc Fallacy. It states “AIG shares fall after U.S. says it plans $18B sale”, it is in fact the term “after” that one may draw such conclusions from. The term after highlights a time frame of events, casting blame on event A for event B simply because event A occurred first. For this reason, some may conclude that the entire article’s message may be viewed as a Post Hoc fallacy.

Fallacy of Single Causation

The fallacy of single causation is the assumption that a single factor or person caused a particular event to occur. This fallacy may arguably be present in the following passage from the article: “The Treasury Department’s two earlier, but much smaller, stock sales in May 2011 and March 2012 were priced at $29, while AIG shares were trading at levels below $32 before the announcement”. Though one may argue it as a post hoc fallacy due to the event timing it prescribes, it may also be argued as a fallacy of single causation as it blames such an event (announcement) as the only factor that led to the fall in the share prices, when in fact there could have been many other contributing factors. Through such reasoning one may argue the passage as a fallacy of single causation as it blames one event for the outcome, when in fact there may have been several other contributing factors.

Economic Relations

In the article, many economic relations have been demonstrated, the biggest of all being the news vs. share prices. In this article, the late news portrayed a vital role. It was announced that the United States Government would sell 33 percent of its equity in AIG (from 53 percent to 20 percent); immediately following, share prices of AIG dropped, and is expected to continue its fall in the days to come. Therefore an economic relationship can be modeled as the latest news regarding the economy/industry/company vs. share prices of a company. Though the news may not have a measurable quantitative value to model a direct or inverse relationship specifically; it however has a qualitative value. Depending on the news released regarding the company, the company’s share prices will fluctuate from there. If good news is announced such as a stimulate package to fund economic growth for the company, it is then obvious that there will be a boost in the share prices. In contrast, if negative news immerses such as a recent fraud or scam pending investigation in the company, then the prices of the shares will fall. In a nutshell, if the news regarding the company is positive, then the share prices will increase, but if the news pertains a negative value, then the shares prices of the company will fall. This models a direct relationship between the two, as the two variables fluctuate together in unison in the same direction. In such a model, the news will determine the fluctuation of the share prices, making the news the independent variable, and the share prices as the dependent variable.

Macro Issue

The economic situation portrayed in the article would fall under the macroeconomic subheading in economics. Macroeconomics is defined as “a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes national, regional, and global economies” (Wikipedia). Macroeconomics deals with issues such as but not limited to the following: national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance. In summary, it is a branch of economics dealing with large economic units as a whole, and their impact on the economy. In contrast, microeconomics deals with the behavior of individuals that are the quantitative living collective of the economy, and their financial decision making.

The topic discussed in this article is a macroeconomic issue, as it regards to large finance institutions such as the United States Treasury Department, the Federal Reserve, and the American International Group. These are large financial institutions that play vital roles in the management and ongoing cycle of the greater economy. This topic is in regards to national income, unemployment, inflation, savings, international trade, and international finance, making such a topic a macroeconomic issue as it deals with the greater economic issues, in contrast to smaller financial units such as consumers (microeconomics).

Positive Statements

In most case scenarios, investment and finance articles, generally articles relating to the business world, are completely indulged in positive statements, as they are full with facts to support their claims.  Business articles generally either highlight current or past events in the economy, or make future economic forecasts based on past economic statistics. Making them in most cases either descriptive or conditional positive statements.

Consisting of a vast majority of positive statements, two examples are the following:

“The Treasury Department and Federal Reserve extended a combined $182 billion lifeline to AIG at the peak of the financial crisis.”

This is a descriptive positive statement. A descriptive positive statement portrays things as they are in the present or have been in the past. It is simply statistics and conclusions that have been verified. This is a prime example of such a statement as it stated that the Treasury Department and Federal Reserve extended AIG a $182B package. It is a true fact that has occurred without an opinionated perspective, making the statement a positive descriptive statement.

 

“AIG itself will buy back $5 billion of its shares in the upcoming stock sale, with the rest going to the broader public. AIG will use $3 billion worth of cash and short-term securities, and $2 billion in proceeds from the sale of its stake in Asian life insurer AIA Group to buy back stock from the government”

 

This is a conditional positive statement. A conditional positive statement makes future forecasts through careful analysis of economic behavior. Meaning it predicts the future using current conditions and past events. This statement states that, in the upcoming stock sale, AIG will buy back $5B of its shares, in $3B worth of cash and $2B in proceeds from the sale of its stake in Asian life insurer AIA Group. This event has not occurred yet, but AIG has made this statement, on the current conditions it is facing today. It is not fact yet, but such a forecast is highly probable in occurring. Therefore, this is a conditional positive statement, as it is a factual statement forecasting future economic behaviors/activities based on current conditions. It is not a descriptive statement as it has yet not occurred, but if everything proceeds as planned; such a forecast will soon become a fact.

 

However, usually conditional statements fall under the form ‘if X occurs, then Y will follow”. Though not in that direct wording, the AIG regarded statement mentioned above, can still be considered as conditional, as the first condition that must be met for their statement to hold of true value. For if and only if, the government auctions its equity in the company, then will AIG be able to purchase it back. It can therefore be worded in the sense ‘If the government auctions 33 percent of its AIG equity in shares at a value of $18B, then AIG will buy $5B of it back, consisting the use of 3 billion worth of cash and short-term securities, and $2 billion in proceeds from the sale of its stake in Asian life insurer AIA Group”   

 

Comments

I have chosen this article because of my personal connection with AIG. My father was greatly interested in this company near the 2008 Stock Market crash. When the market was near its fall, my father believed that this company was going to fall. In those days each stock was valued at nearly $1000 a share. My father was interested in short-selling this company however, plans changed and he didn’t end up short-selling the company. This was a great mistake as each share dropped to nearly $30. After hearing this, I developed a large interest into the stock market, as it was shares such as AIG and Bank of America that interested me into the investment world. After doing further research into the subject matter at that time I found that the Treasury Department and the Federal Reserve offered an $182B lifeline in stimulate packages for an 80 percent equity stake, high interest on loans, and levels of management and control of the company. After doing great research into the company, I became very interested in it. And when I stumbled upon this article, it was of a great concern to me, and so I decided to do my assignment on it due to my personal connection with the company.