AIG Returns to Positive Territory

NEW YORK ( TheStreet) -- American International Group ( AIG) shares were back in positive territory Wednesday, resuming a recent high-volume rally originally fueled by positive sentiment about the prospect of a restructuring of the government's bailout plan for the troubled company.

The stock rose 2% to finish at $46.71. Volume was more than 67 million shares, well ahead of the issue's three-month daily average of 41.1 million. At their current level, shares are still up roughly 17% from Friday's close at $39.91, although they've been volatile of late, shooting as high as $54.40 on Tuesday, before pulling back to close that session down 5.4% at $45.80.

The trading action this week took its initial cue from optimism about media reports of a possible re-jiggering of the federal bailout of the company. According to Bloomberg, House Oversight Committee Chairman Rep. Edolphus Towns (D., N.Y.) is looking into former AIG Chairman and CEO Hank Greenberg's restructuring proposal, a plan that would slash the government's stake in the insurer from 80% percent to 20% and lower interest rates it pays on certain government loans, among other actions.

Also, a study released by the Government Accountability Office on Monday, while stressing AIG's fate was still largely uncertain and ultimately dependent on the health of the economy, did find signs of stabilization and improvement in its businesses. The study said AIG had managed to bring its outstanding balance of government assistance down to $120.7 billion as of Sept. 2 from the $182 billion tally it built up during the Sept. 2008-April 2009 timeframe, a performance the GAO saw as evidence of progress in its ability to pay back government support.

The selloff on Tuesday, however, came after Jim Cramer wrote on RealMoney that the company should consider a secondary stock offering.

AIG reportedly declined comment on the possibility of a secondary offering, and considering the company's iffy financial footing, it's obvious such a proposal would receive a very cold reception from Wall Street without some indication that plans to modify the structure of the current bailout plan were for real. The speed and degree of Tuesday's pullback is evidence of that.

Such an offering would have to be very large -- and thus very dilutive to existing shareholders -- in order to make a meaningful impact on the balance sheet. Also, the logistics of any stock sale would be difficult to navigate. The U.S. government, in its capacity as majority shareholder, would have to be on board, so there are political ramifications to consider. For instance, institutional investors considering participation would likely demand a deep discount to the market price of the stock, which has soared more than 200% since the company completed a reverse 1-for-20 split in July. That might not go over very well on Main Street.

In addition, as a report from the Wall Street Journal Wednesday points out, AIG's spike in volume of late is due mainly to short-term traders looking to churn the stock. They won't hold a position any longer than it takes to make a quick buck, so retail investors looking to hitch a ride on this latest rally should be cautious.

-- Written by Michael Baron in New York.

More from Stocks

Biotech's Coming Back to Life: Cramer's 'Off the Charts'

Biotech's Coming Back to Life: Cramer's 'Off the Charts'

Video: Here's How Goldman Sachs May Change Under David Solomon

Video: Here's How Goldman Sachs May Change Under David Solomon

J&J Vows to Fight Verdict Linking Baby Powder to Ovarian Cancer

J&J Vows to Fight Verdict Linking Baby Powder to Ovarian Cancer

3 Reasons Why Netflix Bulls Are Getting Their Face Ripped Off After Earnings

3 Reasons Why Netflix Bulls Are Getting Their Face Ripped Off After Earnings

Markets Close Higher After Fed Chair Powell's Capitol Hill Testimony

Markets Close Higher After Fed Chair Powell's Capitol Hill Testimony