Oppenheimer Fund, 1987

Oppenheimer funds recorded exceptional performance in 1987 despite the October market crash, with the Oppenheimer Ninety-Ten Fund leading as one of the best-performing mutual funds of the year with a return of +94.77% through December 23, 1987. It was 40 years ago. I was impressionable. I was impressed. 1. You can't insure excellent results normally. You can always insure before a catastrophic loss with good results. 2. You can manage "insurance" costs. 3. You can't implement an insurance strategy passively with good results usually.

Options to Reduce Risk

Its obvious that a stock + a Put is less risky then just the stock. Likewise a `call is simply the piece of a stock that can only go up. To emulate a stock portfolio, sell the stock, and buy an exactly equivalent number of calls. You reduced risk of loss.

Call Options

A stock can be decomposed into simple vectors, a scalar, Strike Price, and an expiration date. Call Option: A vector that begins at the strike price, ends at the termnal price, and extends upward until expiration. Put Option: A vector that begins at the strike price, ends at the termnal price, and extends downward until expiration. It's value is -price. Strike Price: A scalar representing the starting price of the options. Stock=Call+Strike(Cash)-Put Often referred to as Put/Call Parity. Most important: Stock+Put=Call+Cash.

And There's More .....

The FRBNY announced more sales on June 18th.

In addition, they announced (finally) that all the Maiden Lane loans (including ML I) had been fully repaid with interest.

It now seems likely that AIG will receive at least their $5 billion principal investment and $600 million interest by early july.

The current pace of sales, if it continues, will work through the remaining securities in a matter of weeks. 

My current guess is that AIG will have $7 billion in cash available for an early July purchase of Treasury shares. 

Additional Maiden Lane III Sales

On 5 June, 2012, the FRBNY announced that they were accepting bids for about $7 billion face value in CDO's.

Combined with the previous announced CDO sales, the cash from this offering should go a long way towards repaying AIG's $5 billion equity position in Maiden Lane III.

This is entirely consistent with my 26 May posting regarding sources of cash.

Below are the remaining holdings:

ILFC - The Basics

AIG has been reporting ILFC as if it were a stand alone entity in anticipation of an IPO.

Financial statements are available on its investor relations web page.

AIG has taken almost $3.5 billion in impairment charges over the last two years (roughly 10% of the book value of the fleet).

Selected Financial Data from 2011 10k:

General observations:

The revenue is reasonably stable.

AIG was too aggressive with respect to depreciation, leading to the impairment charges in 2010 and 2011.

AIG has reduced unsecured debt by almost 50% and total debt by roughly 20%.

There is no compelling reason for AIG to be in this business, and their decision to sell makes sense. The only issues are how soon and how much.

AIG - Sources of Cash

This is not particularly subtle or controversial. The only 'news' is that I am predicting that AIG will recover the principal from the ML III sooner than some may expect.  AIA is fairly certain regarding timing and amount -- the $7 billion based on current market prices.  ILFC is the least certain regarding both amount and timing. All the figures are intended to be conservative with respect to amount.

Strictly from these sources, AIG would be able to buy about a quarter of its shares at $29/share by September 4th of this year using only the $12.6 billion.

My personal guess is that AIG is more likely to buy at least half of the Treasury stake of 1.08 billion shares, with the rest sold in a public offering by early September. This would assume that the financial markets stabilize by then. Under more difficult financial conditions, this process will take longer.

Sources/Assumptions:

1. ML III - See earlier posts.
2. AIA - based on AIG ownership of 18.6%, Market Cap of 300 billion HKD, and an exchange rate of 7.76.
3. ILFC value selected based on book value (7,630,639 @ March 2012)
  @