Vince Farrell of Scotsman Capital-Verbatim

From: vince farrell [mailto:vfarrell@scotcap.com]
Sent: Monday, February 11, 2008 10:43 PM
To: 'James D. Brown'
Subject:

Let me try to boil down the news on AIG to something close to English. Since I own AIG, I'm more than interested. I'm taking my info from reports issued late Monday by Smith Barney and also Fox Pitt. The complexity of the issues is mind boggling and take all of this lightly as it is a moving target. AIG has a huge book of complicated and esoteric securities and derivatives. The news today revolves around credit default swaps which is a form of insurance, but let's not get bogged down. As I understand things, AIG will hold most to all of this stuff to maturity, and since it's the Super Senior segments (sounds like "double secret probation" from Animal House) they feel the instruments are dollar good. The auditors and the rules demand they be marked to market, and nobody knows what the market is.Sounds like a problem, but it's an accounting issue, not an economic issue. If mark to markets are on the downside now, they could well be on the upside tomorrow. Fox Pitt estimates AIG will earn $6.50 in 2008, having taken the mark down hit in 2007, where earnings will still be $4.30. The stock closed Monday around $45. AIG trades very close to book value which I think is an all time low value. The mark will hit book, but keep in mind, every $3 billion in loss is equal to about $1 in book value.I think the market overreacted, but understandably so perhaps with the constant drumbeat of bad news from financial companies.

The numbers are one story but the psychological hit is another. AIG has been saying they were cool on all the subprime/CDO/CMO issues. Maybe they are and this is a "technical" dispute, but it ain't supposed to happen to a sophisticated player like AIG. Founded in the early part of the 20th Century by C.V Starr in Shanghai, AIG operates in over 150 countries and has been known for its mastery of the complex. This is a hell of a hit to their reputation, and it's tough to say what the discount should be for that. If $6.50 for 2008 is anywhere near correct, the stock at 7x is an opportunity is my guess.