The Government’s Latest AIG Acquisition

On Friday, AIG sold preferred stock and issued warrants to the Treasury Department in exchange for $29.84 billion.

No worries (well, no new worries) this is not new money! Today’s news simply marks the funding of additional assistance that was originally announced last month.

Photo by eflon, courtesy of flickr

According to MarketWatch, the details were included in a regulatory filing that AIG submitted to the SEC today.

So what exactly did the government acquire?

Preferred stock is typically less risky than common stock since the dividends are fixed. The predictable cash flows usually keep preferred stock prices from fluctuating as much.

Dividends on preferred stock are paid before any dividends are paid to common stockholders.

Warrants are similar to call options, in that their value is linked to the underlying stock.

A warrant gives its holder the right to buy shares at a set price within a set time frame. The higher the stock price rises, the more valuable the warrant becomes. 

Unlike call options, warrants are issued by a corporation. They are often referred to as “deal sweeteners” since corporations usually attach them to other securities in order to make a deal look more attractive.

Shares of AIG (Ticker: AIG) are trading 17 percent lower.