By Colin Barr
January 20, 2011

AIG has had some strange days, but today may take the cake. 

Shares in the big insurer traded around $44 Thursday. That’s way down from Wednesday’s close of $51.02. Yet the quote services correctly show AIG (aig) shares up 3%. What gives?

The answer is that until this morning, AIG shares were trading attached to a right to receive part of a warrant to buy additional AIG shares. That right came about when the New York-based company restructured the terms of its government bailout for the 58th time.

Under that agreement, outlined in September and completed last week, AIG agreed to give nongovernment shareholders 75 million 10-year warrants to buy AIG shares at $45 each.

Because taxpayers own 92% of this sucker, even a relatively small number of warrants ends up having a good-sized impact on each nongovernmentally owned share.

In the event, each proud owner of 100 AIG shares ends up getting a little more than 53 warrants, for instance.

The warrant distribution took place Wednesday afternoon, so AIG stock is now trading ex-dividend – that is to say, without the warrants attached. The stock exchanges regularly subtract the value of any dividend payment from the share price the day the payment is recorded, so there is no surprise there — except perhaps for the size of the AIG dividend.

Assigning a value to the AIG warrants is easy too. They closed at $15.50 yesterday and each AIG share was carrying the right to receive 0.534 warrant.

Multiplying the warrant value by the number of warrants tied to each share, we find the value of the warrant to each AIG share was $8.28. This accounts for the gap between Wednesday’s closing price in AIG stock and the much lower, adjusted price that today’s trading is being compared with.

What may be harder to figure is the recent trading in AIG, which had run up sharply in the past few months before pulling back hard over the past two weeks  (see chart, right). AIG shares traded as high as $62.87 on Jan. 7 before pulling back to Wednesday’s $51 and change, ahead of the dividend payment.

Just for the record, the government needs the price to stay above $30 as it sells its stock to recoup bailout costs. 

The stock’s rise early Thursday suggests that some sellers of AIG stock over the past week may have done so too cheaply, says Linus Wilson, who teaches finance at the University of Louisiana at Lafayette.

The warrants rose too Thursday, adding $1 to $16.50 after trading as high as $23.50 earlier this month.

“It looks like some people didn’t really understand what was going on with the warrants,” Wilson said. But then, that’s nothing new.

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