Toss AIG from the Dow!

The insurer's financial problems could lead it to downsize dramatically. If that happens, it should be removed from the Dow...along with struggling GM.

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By Paul R. La Monica, editor at large


NEW YORK ( -- Lehman Brothers has filed for bankruptcy. And Wall Street is wondering if battered savings and loan Washington Mutual has enough capital to survive the credit crunch.

But there's yet another troubled financial that dwarfs Lehman (LEH, Fortune 500) and WaMu (WM, Fortune 500)that also is in serious danger.

American International Group (AIG, Fortune 500), the insurance giant, is expected to announce Monday that it will sell its aircraft-leasing arm, International Lease Finance Corp, and possibly its annuities business and auto insurance unit to raise cash.

AIG has lost nearly $18.5 billion in the past three quarters - primarily due to a plunge in the value of credit default swaps tied to subprime mortgages. Credit default swaps are contracts designed to protect bondholders from default.

The company's shares have plummeted nearly 93% this year, including a 64% slide Monday. AIG's stock fell more than 30% Friday due to fears about further losses tied to its real estate exposure. Late Friday, ratings agency Standard & Poor's said it may downgrade the company's debt.

So even if the only thing you know about AIG is that they advertise a lot of on TV - Stockard Channing of "The West Wing" is the sultry voice in their commercials - you should be concerned.

Why AIG matters

A blowup at AIG could have an even bigger impact on the stock market than Lehman, WaMu and even Fannie Mae and Freddie Mac have already had.

That's because AIG is a component of the venerable Dow Jones industrial average.

A further plunge in the value of AIG would threaten to drag the Dow deeper into bear market territory since there is still a long way to go down. AIG, with a current market value of $32.6 billion, is worth nearly five times more than Lehman and WaMu combined.

The firm had $110 billion in annual sales last year and employs 116,000 people, 44,000 more than the combined workforces of Lehman and WaMu.

In addition, AIG is a company that more average consumers deal with than Lehman, since the firm has a massive life insurance business and retirement planning unit.

With this in mind, it might be time for the editors of The Wall Street Journal, who manage the Dow Jones indexes, to start thinking about replacing AIG in the Dow.

Simply put, the collapse in AIG's stock price is forcing the company to consider downsizing. And the argument for adding AIG to the Dow back in 2004 - along with Verizon and Pfizer - was that it was a diversified insurance and asset management company.

If AIG winds up unloading divisions in order to raise cash and avoid a credit ratings downgrade, it will become a much smaller company than it already is.

Now, the editors at the Journal typically do not make rash decisions about removing and adding companies to the industrial average. In addition, it's rare for them to just remove one company at a time.

But as I've argued in several previous columns, I also think that it may be time for General Motors (GM, Fortune 500) to get booted from the Dow.

Time for GM to exit too

Analysts expect GM to lose $10.2 billion this year and another $5.1 billion in 2009, and now has a market value of only $7.4 billion, making it by far the smallest Dow component based on this measure.

Yes, removing GM would be problematic because it is still the largest auto manufacturer in the country, with sales of $182 billion last year. And there's no likely replacement for GM, since the only relatively healthy car companies are foreign-based firms.

Even though Toyota and Honda, for example, have U.S.-listed stocks, the editors at the Journal have steadfastly maintained that the Dow is an index for U.S.-headquartered companies only.

Still, with GM and its fellow Big Three automakers currently begging Congress for $25 billion in loans to help them retool their plants to produce more of the fuel-efficient cars that are now in demand in the wake of high gas prices, does the Dow really need an American car maker anymore?

It's painful and unfortunate to admit this but for the time being, the U.S. auto industry has lost the leadership role in the global market. So it may be time for GM to go and the possible breakup of AIG could be just the catalyst to do it.

So if AIG and GM are both removed from the Dow, who could replace them?

The potential replacements

On the financial services side, regional bank Wells Fargo (WFC, Fortune 500) could make sense. It has a market value of $113 billion and is widely acknowledged as being one of the better-run banks, having largely escaped the worst of the credit crisis.

And in the world of technology, an industry that the U.S. has continued to hold its own, either Apple (AAPL, Fortune 500) or Cisco Systems (CSCO, Fortune 500) could be an intriguing addition.

Apple dominates the consumer electronics market with its iPod and iPhone and is expected to generate $40.4 billion in sales in its next fiscal year - higher than the estimated revenue for Dow components Coca-Cola, Walt Disney and Alcoa.

And Cisco, which makes switches, routers and other computer gear that are a major component of corporate communications and technology networks worldwide, is even a bit bigger than Apple. The company is expected to post annual sales of $43.3 billion in its next fiscal year.

Of course, the Dow is not a mutual fund and should not be managed just because of stock price. But the evaporation in the market values of AIG and GM are the result of a severe deterioration in their actual business.

And shouldn't the Dow be a collection of relatively strong companies not facing the risk of credit ratings downgrades...or even worse?  To top of page

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