Don’t miss Wall Street Journal ($) columnist Holman Jenkins’ Business World piece today. In analyzing the Lord of Regulation’s assault on American International Group, Inc. and its long history of being rewarded by the market for its adroit management of earnings, Mr. Jenkins makes an interesting point about the importance of trust — or, as he dubs it, the “predictability premium” — in AIG’s business, something that was touched on in this earlier post:

That Mr. Greenberg did his accounting as he thought best was no secret to anybody, even before recent revelations. Money Magazine called AIG a “faith stock,” lumping it with other giant, complex money machines such as GE and Citigroup. This newspaper dubbed it one of the economy’s great “black boxes.” Indeed, the whole reason to own AIG in the 1990s was to reap the predictability premium built into its stock price thanks to Mr. Greenberg’s ability to generate uncannily rising earnings from a complex of more than 100 businesses, including not just insurance, but aircraft leasing, commodity trading and much else.
In some ways, this model was already falling out of step with the business mainstream by the 1980s, long before Enron made “transparency” the central virtue of the new corporate value system. But exceptions were granted to AIG and a few others (like GE). Their opacity might have earned them skepticism in the marketplace, but instead they were awarded higher share prices. AIG sold for about 26 times its earnings, compared to 10 or 15 for most insurers.
Let’s dwell on this for a moment: When the market was the arbiter, it unambiguously rewarded Mr. Greenberg and AIG’s shareholders for applying the techniques of earnings management. The market understood that behind the screen lay all the volatility and mishaps that insurance is heir to, but it applauded Mr. Greenberg for using his wiles to create a security (AIG’s stock) that transmuted that volatility into unnaturally smooth reported earnings.
One big albatross for [former AIG chairman and CEO, Maurice “Hank” Greenberg] will be the Enron overhang. By far, the largest factor in AIG’s stock decline is the evaporation of its predictability premium, not the accounting scandal. But that won’t stop trial lawyers, prosecutors or the media from assuming that the distance between AIG’s peak and its ultimate low reflects the damage Mr. Greenberg personally did to investors.

And in closing, Mr. Jenkins notes that it may still be a tad early to be making a play for AIG stock, which is down almost 30% in value from the beginning of the year:

[AIG’s board of directors] no interest in defending any of this, since board members have learned that their personal fates are best served by running up a white flag. Eliot Spitzer, New York’s attorney general, let it be known this week that their compliance had met with his approval.
There’s also a question of whether, in a market where skepticism rather than trust is the rule, it’s possible or sensible to maintain an organization as complex as AIG. Hold onto your seats for the battle over Starr International, a peculiar entity set up years ago and holding much of the incentive wealth of the company’s top executives. We can’t think of a quicker way to destroy the morale of AIG’s remaining leadership, and thus perhaps the company.