Aug. 31 (Bloomberg) -- The company that almost shattered the world financial system with its reckless sale of credit default swaps has suddenly become a stock market darling. Go figure.

Shares of American International Group Inc. have more than quintupled in the past two months. The stock closed last week at $50.23, up from $9.48 on July 9 and up 53 percent for the week.

Can Robert Benmosche, who was named AIG’s fifth chief executive officer in four years on Aug. 3, be that good? Hardly.

AIG is still the company that failed to make good on swaps that insured investors against defaults on securities tied to subprime mortgages and had to be rescued by the U.S. government to the tune of $182.5 billion.

This is still the outfit whose reputation has also been blackened by an accounting scandal. A company that has to sell chunks of its life and casualty insurance and leasing assets to pay off its government loans -- but gets few takers. And a company that admits its bad name has slowed the sales of its investment products.

Speculators have glommed onto every snippet of good news from AIG. Their enthusiasm pushed the stock higher, forcing short-sellers to buy the stock, helping the rally along. Those who had sold the shares short, betting on a decline, had to buy the stock to close their positions.

Silver Lining

AIG is undoubtedly working in a better environment. Government intervention has saved the banking system along with AIG. The U.S. economy, which fell 1 percent in the second quarter, is improving.

The company reported a profit of $1.82 billion, or $2.30 a share, for the second quarter, after six quarters of red ink and total losses of more than $100 billion.

Benmosche, 65, comes to a thankless job with the right resume. He was CEO of MetLife Inc., the largest U.S. life insurer, until 2006 and oversaw its conversion to a stock from a mutual company. AIG is paying him $7 million a year plus $3.5 million in long-term incentives.

The new CEO has been running AIG -- or at least giving interviews on his plans for the insurer -- from Croatia, where he’s been on vacation.

Investors liked his talk about paying off the government and biding his time on selling assets until market prices recover. So far, AIG has raised only $9.3 billion from divestitures.

Greenberg Effect

One leg of AIG’s stock rally came when Benmosche said he hoped to benefit from the advice of Maurice Greenberg, who ran AIG for 38 years before being ousted in 2005. Letting the fox nudge back into the hen house? Last month, Greenberg, without admitting wrongdoing, agreed to pay a $15 million fine to settle U.S. claims that he had manipulated AIG earnings.

Benmosche, so far, doesn’t seem to realize that AIG is really run by the government, which bailed out the company and owns almost 80 percent of its stock.

He says the government has done everything wrong at AIG and that he only took the job -- after declining it three times -- to make a statement about capitalism. He has told AIG employees not to be intimidated by regulators and says he will let the company’s new chairman, former American Express Co. CEO Harvey Golub, deal with government officials.

While AIG’s rally may not make sense -- the shares fell more than $4 in early trading today -- American taxpayers can be happy. Their share of AIG has soared in value. Shares of Fannie Mae and Freddie Mac, the mortgage-buying companies also controlled by the U.S. government after the subprime debacle, have been rising too. After languishing at less than a buck for months, Freddie Mac closed last week at $2.40.

AIG may look richer than it really is because of a 1-for-20 reverse split of its shares in June. Without that, the stock would have closed last week at $2.51.

It’s hard to know what motivates people speculating in AIG. Maybe they’re the same folks who bought General Motors Co. shares after GM went bankrupt and said its stock was worthless.

(David Pauly is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: David Pauly in Normandy Beach, New Jersey dpauly@bloomberg.net

Last Updated: August 31, 2009 09:53 EDT