Another dive for AIG shares as reverse-split move bombs

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American International Group last year bungled its way into a huge federal rescue. Now the insurance giant’s attempt to lure investors back to its stock also looks like a bust.

AIG on July 1 engineered a 1-for-20 reverse split of its depressed shares. The idea behind a reverse split is to take a low-priced stock -- usually one selling for a few dollars or less -- and boost the price by shrinking the number of shares outstanding.

The market value of the stock overall doesn’t change, just the share count: You hand in 20 shares and get one in return. But a $20 share price seems more respectable than, say, a $1 share price.

Problem is, reverse splits historically have been undertaken by lousy companies trying to make themselves look like they’re worthy of investors’ attention. The market generally isn’t fooled.

AIG shares have tumbled a total of 40% in the four sessions since the split. They fell $2.44, or 15.1%, to $13.75 today. It didn’t help that the company today suffered a setback in its attempt to get billions of dollars back from its former chairman.

One big risk with a reverse stock split is that ‘short sellers’ who bet against stocks may regain interest in shorting a troubled company after a reverse split takes the price up from pocket-change levels. That probably isn’t the Wall Street interest that AIG hoped to rekindle with its move.

AIG remains nearly 80% owned by the government. The company is selling off pieces of itself to repay federal bailout loans, but CEO Edward Liddy told shareholders at the annual meeting June 30 that he could offer ‘no assurances’ on how soon the government’s stake in the firm would be reduced.

-- Tom Petruno