Troubled Asset Relief Program
Status of Government Assistance Provided to AIG Gao ID: GAO-09-975 September 21, 2009GAO's seventh report on the Troubled Asset Relief Program (TARP) focuses on the initial assistance the government provided to American International Group, Inc. (AIG)--an organization with over 200 companies operating in over 130 countries and jurisdictions and $830 billion in assets--in September 2008 and the restructuring of that assistance in November 2008 and March 2009. The unfolding crisis threatened the stability of the U.S. banking system and the solvency of a number of financial institutions, including AIG. In September 2008, downgrades of AIG's credit rating prompted collateral calls by counterparties and raised concerns that a rapid and disorderly failure of AIG would further destabilize the markets. As a result, the Board of Governors of the Federal Reserve System (Federal Reserve) authorized the Federal Reserve Bank of New York (FRBNY), in consultation with the Department of the Treasury (Treasury), to provide assistance to AIG. This report describes (1) the basis for the federal assistance, (2) the nature and type of assistance and steps intended to protect the government's interest, and (3) selected GAO-developed indicators of the status of federal assistance and AIG's financial condition. To do this, GAO reviewed signed agreements and other relevant documentation from the Federal Reserve, FRBNY, Treasury, and AIG and interviewed their officials, among others. To develop the indicators, GAO reviewed rating agencies' reports, identified critical activities, and discussed them with the above named agencies and AIG. Treasury had no substantive comments on the report. It provided technical comments along with the Federal Reserve, FRBNY, and AIG.
The Federal Reserve and Treasury provided assistance to AIG to limit further disruption to financial markets. These agencies determined that market events could have caused AIG to fail, which would have posed systemic risk to the financial system. According to the Federal Reserve, a disorderly failure of AIG would have contributed to higher borrowing costs and additional failures, further destabilizing fragile financial markets. The Federal Reserve and Treasury determined that an AIG default would place considerable pressure on AIG's counterparties and trigger serious disruptions to an already distressed commercial paper market. They concluded that because AIG was a large seller of credit default swaps--protection against losses from defaults--on collateralized debt obligations (CDO), had AIG failed, its counterparties would have been exposed to large losses if the values of the CDOs had continued to decline and AIG defaulted on its contracts. The Federal Reserve intended the initial September 2008 assistance to enable AIG to meet these added obligations with its counterparties and begin the process of selling business lines to raise monies to repay the government and resolve other liabilities. Subsequent assistance in November 2008 and March 2009 was intended to augment these goals, support liquidity needs, and repay FRBNY while mitigating disruptions in the broader financial markets. To address systemic risk that could result if AIG were to fail, the Federal Reserve and Treasury made over $182 billion available to assist AIG between September 2008 and April 2009. As of September 2, 2009, AIG's outstanding balance of assistance was $120.7 billion. Some federal assistance was designated for specific purposes, such as a special purpose vehicle to provide liquidity for purchasing assets such as CDOs. Other assistance, such as that available through the Treasury's Equity Facility, is available to meet the general financial needs of the parent company and its subsidiaries. Repayment of the $120.7 billion outstanding government exposure is expected to come from various sources. As of September 2, 2009, $6.8 billion was paid toward principal on the Maiden Lane facilities created by FRBNY to purchase certain AIG assets and provide AIG with liquidity. In providing the assistance, the Federal Reserve and Treasury have taken several steps intended to protect the government's interest. These include making loans that are secured with collateral, instituting certain controls over management, and obtaining compensation for risks such as charging interest, requiring dividend payments, and obtaining warrants. Moreover, Federal Reserve and Treasury staff routinely monitor AIG's operations and receive reports on AIG's condition and restructuring. While these efforts are being made, the government remains exposed to risks, including credit risk and investment risk, which could result in the Federal Reserve and Treasury not being repaid in full. While federal assistance has helped stabilize AIG's financial condition, GAO-developed indicators suggest that AIG's ability to restructure its business and repay the government is unclear at this time. Indicators of AIG's financial risk suggest that since AIG reported significant losses in late 2008, AIG's operations, with federal assistance, have begun to show signs of stabilizing in mid 2009. Similarly, after a declining trend through 2008 and early 2009, indicators of AIG insurance companies' financial risk suggest improved financial conditions that were largely results of federal assistance. Indicators of AIG's repayment of federal assistance show some progress in AIG's ability to repay the federal assistance; however, improvement in the stability of AIG's business depends on the long-term health of the company, market conditions, and continued government support. Therefore, the ultimate success of AIG's restructuring and repayment efforts remains uncertain.
GAO-09-975, Troubled Asset Relief Program: Status of Government Assistance Provided to AIG
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
September 2009:
Troubled Asset Relief Program:
Status of Government Assistance Provided to AIG:
GAO-09-975:
GAO Highlights:
Highlights of GAO-09-975, a report to congressional committees.
Why GAO Did This Study:
GAO‘s seventh report on the Troubled Asset Relief Program (TARP)
focuses on the initial assistance the government provided to American
International Group, Inc. (AIG)”an organization with over 200 companies
operating in 130 countries and $830 billion in assets”in September 2008
and the restructuring of that assistance in November 2008 and March
2009. The recent financial crisis threatened the stability of the U.S.
banking system and the solvency of a number of financial institutions,
including AIG. In September 2008, downgrades of AIG‘s credit rating
prompted collateral calls by counterparties and raised concerns that a
rapid failure of AIG would further destabilize the markets. As a
result, the Board of Governors of the Federal Reserve (Federal Reserve)
and the Federal Reserve Bank of New York (FRBNY), in consultation with
the Department of the Treasury (Treasury), provided assistance to AIG.
This report describes (1) the basis for the federal assistance, (2) the
nature and type of assistance and steps intended to protect the
government‘s interest, and (3) selected GAO-developed indicators of the
status of federal assistance and AIG‘s financial condition.
To do this, GAO reviewed signed agreements and other relevant
documentation from the Federal Reserve, FRBNY, Treasury, and AIG and
interviewed their officials, among others. To develop the indicators,
GAO reviewed rating agencies‘ reports, identified critical activities,
and discussed them with the above named agencies and AIG.
What GAO Found:
The Federal Reserve and Treasury provided assistance to AIG to limit
further disruption to financial markets. These agencies determined that
market events could have caused AIG to fail, which would have posed
systemic risk to the financial system. According to the Federal
Reserve, a disorderly failure of AIG would have contributed to higher
borrowing costs and additional failures, further destabilizing fragile
financial markets. The Federal Reserve and Treasury determined that an
AIG default would place considerable pressure on AIG‘s counterparties
and trigger serious disruptions to an already distressed commercial
paper market. They concluded that because AIG was a large seller of
credit default swaps”protection against losses from defaults”on
collateralized debt obligations (CDO), had AIG failed, its
counterparties would have been exposed to large losses if the values of
the CDOs had continued to decline and AIG defaulted on its contracts.
The Federal Reserve intended the initial September 2008 assistance to
enable AIG to meet these added obligations with its counterparties and
begin the process of selling business lines to raise monies to repay
the government and resolve other liabilities. Subsequent assistance in
November 2008 and March 2009 was intended to augment these goals,
support liquidity needs, and repay FRBNY while mitigating disruptions
in the broader financial markets.
To address systemic risk that could result if AIG were to fail, the
Federal Reserve and Treasury made over $182 billion available to assist
AIG between September 2008 and April 2009. As of September 2, 2009, AIG‘
s outstanding balance of assistance was $120.7 billion. Some federal
assistance was designated for specific purposes, such as a special
purpose vehicle to provide liquidity for purchasing assets such as
CDOs. Other assistance, such as that available through the Treasury‘s
Equity Facility, is available to meet the general financial needs of
the parent company and its subsidiaries. The table on the next page
provides an overview of the total federal assistance to AIG and its
related entities. Repayment of the $120.7 billion outstanding
government exposure is expected to come from various sources. As of
September 2, 2009, $6.8 billion was paid toward principal on the Maiden
Lane facilities created by FRBNY to purchase certain AIG assets and
provide AIG with liquidity. In providing the assistance, the Federal
Reserve and Treasury have taken several steps intended to protect the
government‘s interest. These include making loans that are secured with
collateral, instituting certain controls over management, and obtaining
compensation for risks such as charging interest, requiring dividend
payments, and obtaining warrants. Moreover, Federal Reserve and
Treasury staff routinely monitor AIG‘s operations and receive reports
on AIG‘s condition and restructuring. While these efforts are being
made, the government remains exposed to risks, including credit risk
and investment risk, which could result in the Federal Reserve and
Treasury not being repaid in full.
While federal assistance has helped stabilize AIG‘s financial
condition, GAO-developed indicators suggest that AIG‘s ability to
restructure its business and repay the government is unclear at this
time. Indicators of AIG‘s financial risk suggest that since AIG
reported significant losses in late 2008, AIG‘s operations, with
federal assistance, have begun to show signs of stabilizing in mid
2009. Similarly, after a declining trend through 2008 and early 2009,
indicators of AIG insurance companies‘ financial risk suggest improved
financial conditions that were largely results of federal assistance.
Indicators of AIG‘s repayment of federal assistance show some progress
in AIG‘s ability to repay the federal assistance; however, improvement
in the stability of AIG‘s business depends on the long-term health of
the company, market conditions, and continued government support.
Therefore, the ultimate success of AIG‘s restructuring and repayment
efforts remains uncertain. GAO plans to continue to review the Federal
Reserve‘s and Treasury‘s monitoring efforts and report on these
indicators to determine the likelihood of AIG repaying the government‘s
assistance in full and the government recouping its investment.
Table: Overview of Federal Assistance Provided to AIG as of September
2, 2009 (Dollars in millions):
Implemented: Federal Reserve;
Description of the federal assistance: FRBNY created a Revolving Credit
Facility to provide AIG a revolving loan that AIG and its subsidiaries
could use to enhance their liquidity. In exchange for the facility and
$500,000, a trust received Series C preferred stock for the benefit of
the Treasury, which gave Treasury 77.9 percent equity interest in AIG.
Amount of assistance authorized, Debt: $60,000[A];
Amount of assistance authorized: Equity: $$0.5;
Outstanding balance: $38,792.5;
Sources to repay the government: Proceeds from dispositions of AIG
businesses, internal cash flows, and restructuring part of the
Revolving Credit Facility from debt into equity; the $500,000 paid for
the Series C shares will not be repaid.
Implemented: Federal Reserve;
Description of the federal assistance: FRBNY created a special purpose
vehicle (SPV)”Maiden Lane II”to provide AIG liquidity by purchasing
residential mortgage-backed securities (RMBS) from AIG life insurance
companies. FRBNY provided a loan to Maiden Lane II for the purchases.
FRBNY also terminated its securities lending program with AIG, which
had provided additional liquidity associated with AIG‘s securities
lending program when it created Maiden Lane II.
Amount of assistance authorized, Debt: $22,500;
Amount of assistance authorized: Equity: [Empty];
Outstanding balance: $16,899;
Sources to repay the government: Proceeds from asset sales in Maiden
Lane II will be used to repay the FRBNY loan to Maiden Lane II.
Implemented: Federal Reserve;
Description of the federal assistance: FRBNY created a SPV called
Maiden Lane III to provide AIG liquidity by purchasing CDOs from AIG
Financial Products. FRBNY again provided a loan to the SPV for the
purchases;
Amount of assistance authorized, Debt: $30,000;
Amount of assistance authorized: Equity: [Empty];
Outstanding balance: $20,196;
Sources to repay the government: Proceeds from asset sales in Maiden
Lane III will be used to repay the FRBNY loan.
Implemented: Treasury;
Description of the federal assistance: Treasury purchased Series D
cumulative preferred stock from AIG. AIG used the proceeds to pay down
part of the Revolving Credit Facility; also Treasury received a warrant
exercisable into a 2 percent equity interest in AIG. Series D shares
were later exchanged for Series E noncumulative preferred shares.
Unpaid dividends on the series D shares were added to the Treasury‘s
equity in the Series E shares.
Amount of assistance authorized, Debt: [Empty];
Amount of assistance authorized: Equity: $40,000;
Outstanding balance: $41,605;
Sources to repay the government: Proceeds from dispositions of AIG
businesses and internal cash flows of AIG.
Implemented: Treasury;
Description of the federal assistance: Treasury purchased Series F
noncumulative preferred shares of AIG and is allowing AIG to draw up to
$29.835 billion through an equity facility to meet its liquidity needs.
Amounts drawn by AIG represent the cost of the federal equity interest
in these shares;
Amount of assistance authorized, Debt: [Empty];
Amount of assistance authorized: Equity: $29,835;
Outstanding balance: $3,400[B];
Sources to repay the government: Proceeds from dispositions of AIG
businesses and internal cash flows of AIG.
Implemented: Subtotals;
Amount of assistance authorized, Debt: $112,500;
Amount of assistance authorized: Equity: $69,835.5.
Implemented: Total authorized and outstanding assistance[C];
Amount of assistance authorized: Equity: $182,335.5;
Outstanding balance: $$120,892.5.
Description of the federal assistance: Pending: AIG created two SPVs
for two of its foreign insurance businesses to enhance AIG‘s capital
and liquidity, and to facilitate an orderly restructuring of AIG.
Revolving Facility will be reduced by the amount of preferred equity
interest;
Amount of assistance authorized, Debt: $25,000[D];
Amount of assistance authorized: Equity: [Empty];
Outstanding balance: $0;
Sources to repay the government: Proceeds from the public sale of the
SPVs‘ common stock could be used to buy out the federal preferred
equity and/or pay down part of the Revolving Credit Facility.
Description of the federal assistance: Pending: SPVs are to be created
to purchase the securitized cash flows of certain domestic life
insurance policies from AIG. FRBNY plans to loan up to $8.5 billion to
the SPVs to make the purchase. AIG will use the proceeds to pay down
part of the Revolving Credit Facility.
Amount of assistance authorized, Debt: $8,500[D];
Amount of assistance authorized: Equity: [Empty];
Outstanding balance: $0;
Sources to repay the government: FRBNY‘s loan to the SPVs will be
repaid from cash flows of the life insurance policies.
Source: AIG SEC filings, Federal Reserve, and Treasury data.
[A] The facility was initially $85 billion but was reduced to $60
billion in November 2008.
[B] Amount as of September 8, 2009.
[C] Does not include AIG‘s participation in the Federal Reserve‘s
Commercial Paper Funding Facility.
[D] This transaction has not been completed and is not included in the
total assistance provided to AIG because the amount of the revolving
facility will be decreased by an equal amount.
[End of table]
View [hyperlink, http://www.gao.gov/products/GAO-09-975] or key
components. For more information, contact Orice Williams Brown at (202)
512-8678 or williamso@gao.gov.
[End of section]
Contents:
Letter:
Background:
The Federal Reserve and Treasury Provided Assistance to AIG to Limit
Systemic Risk to the Financial Markets:
The Federal Reserve, FRBNY, and Treasury Have Taken a Variety of Steps
to Stabilize AIG:
In Providing Assistance to AIG, the Federal Reserve and Treasury Have
Taken Steps to Protect the Government's Interest, but Risks Still
Remain:
Federal Assistance Has Helped Stabilize AIG's Financial Condition, but
Indicators Suggest that It Is Too Soon to Evaluate AIG's Ability to
Restructure Its Business and Repay the Government:
Agency Comments and Our Evaluation:
Appendix I: Comments from the Department of Treasury:
Appendix II: Comments from the Board of Governors of the Federal
Reserve:
Appendix III: Overview of the American International Assurance and
American Life Insurance Company Transactions:
Appendix IV: Overview of the Executive Compensation Restriction:
Appendix V: Summary of Rating Agencies' Ratings:
Appendix VI: Overview of the AIG Risk and Repayment Indicators:
Appendix VII: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: U.S. Government Efforts to Assist AIG and the Government's
Remaining Exposure as of September 2, 2009:
Table 2: Overview of Indicators of AIG's Financial Risk and Repayment
of Federal Assistance:
Table 3: Credit Ratings, as of March 31, 2009, and May 15, 2009:
Table 4: Sources and Amounts of Available Corporate Liquidity (dollars
in millions), at November 5, 2008, February 18, 2009, April 29, 2009,
and July 29, 2009:
Table 5: Composition of U.S. Government Efforts to Assist AIG and the
Government's Remaining Exposure, as of September 2, 2009 (Dollars in
Millions):
Table 6: AIG Inc. Business Unit Divestitures by Quarter, Second Quarter
of 2008 through Second Quarter of 2009:
Figures:
Figure 1: AIG Organizational Structure, as of December 31, 2008:
Figure 2: Timeline of AIG's Financial Difficulties and Government
Actions in Response to Market Turmoil, Fall 2007 to September 30, 2008:
Figure 3: Timeline of the Restructuring of AIG's Assistance, Market
Events, and Related Government Actions, October 1, 2008, to April 30,
2009:
Figure 4: AIG Restructuring and SPV Sale:
Figure 5: AIG: Corporate Available Liquidity and Company-Wide Debt
Projections (dollars in millions), Third Quarter of 2008 to Second
Quarter of 2009:
Figure 6: AIG: Trends in and Main Components of Consolidated
Shareholders' Equity, Fourth Quarter of 2007 through Second Quarter of
2009:
Figure 7: AIG's Operations by Major Segment: Operating Income/Loss
Before Taxes, First Quarter of 2008 through Second Quarter of 2009:
Figure 8: Status of the Winding Down of AIG's Financial Products
Business, as of September 30, 2008, December 31, 2008, and March 31,
2009:
Figure 9: AIGFP: Super Senior Credit Default Swap Portfolio Net
Notional Amount, Fair Value of Derivative Liability, and Unrealized
Market Valuation Gains and Loss, Third Quarter of 2008 through Second
Quarter of 2009:
Figure 10: AIGFP: Gross Notional Value of Multi-Sector Collateralized
Debt Obligations That Are Rated Less than BBB, Third Quarter of 2008
through Second Quarter of 2009:
Figure 11: AIG Credit Default Swap Premiums, January 2007 through July
2009:
Figure 12: AIG Insurance Subsidiaries: Regulatory (Adjusted) Capital
and Primary Activities Affecting Stockholders' Equity in 2008 (dollars
in millions), December 31, 2007, and December 31, 2008:
Figure 13: AIG Life and Retirement Services: Additions to and
Withdrawals from Policyholder Contract Deposits Including Annuities,
Guaranteed Investment Contracts, and Life Products, First Quarter of
2007 through Second Quarter of 2009:
Figure 14: AIG Life Insurance and Retirement Services: Key Quarterly
Revenues and Expenses, First Quarter of 2007 through Second Quarter of
2009:
Figure 15: AIG General Insurance: Premiums Written by Division, First
Quarter of 2007 through Second Quarter of 2009:
Figure 16: AIG Property/Casualty Insurance: AIG Commercial Insurance
Operating Ratios and AIG Foreign General Insurance Operating Ratios,
Second Quarter of 2007 through Second Quarter of 2009:
Figure 17: FRBNY Revolving Credit Facility Balance Owed and Total
Amount Available, October 2008 through September 2009:
Figure 18: Principal Owed and Portfolio Values of Maiden Lane
Facilities:
Figure 19: Proceeds of AIG Inc. Business Divestitures, Second Quarter
of 2008 through Second Quarter of 2009:
Abbreviations:
AGF: American General Finance, Inc.
AIA: American International Assurance Company, Ltd:
AIG: American International Group, Inc.
AIGFP: AIG Financial Products:
ALICO: American Life Insurance Company:
ARRA: American Recovery and Reinvestment Act or 2009:
CDO: collateralized debt obligations:
CDS: credit default swaps:
CPFF: Federal Reserve's Commercial Paper Funding Facility:
FDIC: Federal Deposit Insurance Corporation:
Federal Reserve: Board of Governors of the Federal Reserve System:
FRBNY: Federal Reserve Bank of New York:
ILFC: International Lease Finance Corporation:
NAIC: National Association of Insurance Commissioners:
OFS: Office of Financial Stability:
OTS: Office of Thrift Supervision:
RBC: risk-based capital:
RMBS: residential mortgage-backed security:
S&P: Standard & Poor's:
SEC: Securities and Exchange Commission:
SIGTARP: Special Inspector General for the Troubled Asset Relief
Program:
SPV: special purpose vehicle:
SSFI: TARP's Systemically Significant Failing Institutions Program:
TARP: Troubled Asset Relief Program:
the act: Emergency Economic Stabilization Act of 2008:
TLGP: Temporary Liquidity Guarantee Program:
[End of section]
United States Government Accountability Office: Washington, DC 20548:
September 21, 2009:
Congressional Committees:
The United States is experiencing a financial crisis that has
threatened the stability of not only the U.S. banking system but also
the U.S. and global economies and the solvency of a number of critical
banks and nonbank institutions. Consequently, over the past year and a
half, the U.S. government has taken extraordinary measures. The
Emergency Economic Stabilization Act of 2008 (the act) created the
Office of Financial Stability (OFS) within the Department of the
Treasury (Treasury) and authorized the Troubled Asset Relief Program
(TARP) to address the crisis.[Footnote 1] In addition, Treasury
collaborated with the Board of Governors of the Federal Reserve System
(Federal Reserve) to provide government assistance to institutions it
deemed to be systemically significant to avoid further disruptions in
the financial markets that could result from their failure.
American International Group, Inc. (AIG) is one of the largest
recipients of government assistance. The Federal Reserve and the
Federal Reserve Bank of New York (FRBNY), in consultation with
Treasury, initially provided assistance to AIG in September 2008
following its rating downgrade, which had prompted collateral calls by
its counterparties and raised concerns that a rapid failure of the
company would further destabilize financial markets. However, AIG's
condition continued to decline. In November 2008 the Federal Reserve
and Treasury announced plans to restructure AIG's federal assistance to
further strengthen its financial condition and, once again, avert the
failure of the company. In March 2009, the Federal Reserve and Treasury
provided additional assistance and further restructured the terms of
the existing assistance. As a result of these actions, the federal
government owns almost 80 percent of AIG.
The act requires GAO to provide oversight of actions taken under TARP.
To fulfill our responsibilities, we have been monitoring and providing
timely reporting on Treasury's assistance to AIG--the largest
participant in TARP and currently the sole participant in TARP's
Systemically Significant Failing Institutions Program (SSFI).[Footnote
2] We testified on the status of this government effort in March 2009.
[Footnote 3] Because the government assistance to AIG is a coordinated
approach, we are also monitoring the efforts of the Federal Reserve.
Our ability to review the Federal Reserve's assistance was recently
clarified by the Helping Families Save Their Homes Act of 2009, enacted
on May 20, 2009, which provided GAO authority to audit Federal Reserve
actions taken under section 13(3) of the Federal Reserve Act with
respect to "a single and specific partnership or corporation."[Footnote
4] Among other things, this amendment provides GAO with authority to
audit Federal Reserve actions taken with respect to three entities also
assisted under TARP--Citigroup, Inc.; AIG; and Bank of America
Corporation. This amendment also gave GAO the access to information
from entities participating in TARP programs, such as AIG, for purposes
of reviewing the performance of TARP.
GAO is required to report at least every 60 days on the activities and
performance of TARP.[Footnote 5] This 60-day report provides an
overview of (1) the basis for the Federal Reserve's and Treasury's
assistance to AIG, (2) the nature and type of assistance provided to
AIG, (3) the steps taken by AIG and Treasury that are intended to
protect the government's interest and remaining risks, and (4) the
status of federal assistance and GAO-developed indicators of AIG's
financial condition.
To address the first three objectives--describing both the basis for
federal assistance to AIG and the nature and type of assistance
provided to AIG--we reviewed relevant documents from the Federal
Reserve and FRBNY; recent congressional testimonies on AIG; reports
from the Federal Reserve, FRBNY, Treasury, and the Special Inspector
General for the Troubled Asset Relief Program (SIGTARP); and several
GAO reports on AIG and TARP to obtain information on how the Federal
Reserve and Treasury became involved with AIG, the general goals of the
federal assistance, the nature of the assistance, and how the
assistance was restructured. We also conducted numerous interviews with
officials and staff from the Federal Reserve, FRBNY, Treasury, the
National Association of Insurance Commissioners (NAIC), three state
insurance regulators with major roles in regulating AIG's insurance
companies, two industry observers, and three rating agencies to
understand the government's involvement and the condition of the
financial markets as well as the insurance industry at the time of
AIG's request for assistance. In addition, we reviewed AIG's annual and
quarterly accounting and financial filings (10Ks, 10Qs) with the
Securities and Exchange Commission (SEC) to describe the evolving
financial condition of AIG and factors affecting AIG's financial
condition.[Footnote 6] Furthermore, we reviewed federal laws for
information about the legal framework of the assistance. We also
reviewed studies from NAIC, academics, and rating agencies.
To assess AIG's financial condition, we developed a set of indicators
of AIG's financial condition and the status of federal assistance to
AIG. We reviewed reports by several credit rating agencies on how they
rate long-term and short-term debt and financial strength. We also
interviewed officials and staff from the Federal Reserve, Treasury, and
AIG about possible indicators. No single indicator provides a
definitive measure of AIG's progress, and indicators should be
considered collectively. We selected indicators that appeared to track
the most critical activities related to the goals for federal
assistance to AIG. The resulting indicators address several dimensions
of AIG's business, including its credit ratings, operating performance,
capital, debt repayment, and liquidity. The data used to create the
indicators came from several sources, but most are based on publicly
available information, such as AIG's 10K and 10Q filings and NAIC
reports. Specifically, AIG's SEC filings provided information on its
credit ratings, liquidity, debt, shareholders' equity, operating
income, credit default swap (CDS) portfolio, collateralized debt
obligations (CDO), additions to and withdrawals from AIG life and
retirement policyholder contracts, and insurance premiums. In
congressional testimony, AIG provided information about its planned
restructuring, including its divestiture plans and the winding down of
CDS portfolio. We used Thomson Reuters Datastream to collect
information about AIG's CDS premiums over time. In addition, NAIC
sources provided information on regulatory capital and primary
activities affecting stockholders' equity for AIG's insurance
subsidiaries. AIG also provided information on credit ratings, revenues
and expenditures on AIG's life and retirement services, AIG's property/
casualty operation ratios, and AIG business unit divestitures and asset
sales. Rating agencies provided information on credit ratings. Finally,
Federal Reserve reports provided information on the FRBNY Revolving
Credit Facility and the Maiden Lane facilities. We assessed the
reliability of the data and found that the data were sufficiently
reliable for our purposes.
We conducted this performance audit from March 2009 to September 2009
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
Background:
AIG Operations:
AIG is a holding company that, through its subsidiaries, is engaged in
a broad range of insurance and insurance-related activities in the
United States and abroad, including general insurance, life insurance
and retirement services, financial services, and asset management. AIG
comprises at least 223 companies and has operations in over 130
countries and jurisdictions worldwide (see figure 1). As of June 30,
2009, AIG had assets of approximately $830 billion and $50 billion in
revenues for the 6 preceding months, and AIG and its subsidiaries had
106,000 employees. The AIG organization includes the largest domestic
life insurer and the second-largest domestic and property/casualty
companies insurer in the United States, and it has a large foreign
general insurance business. Figure 1 illustrates the complexity of AIG
and its subsidiaries.
Figure 1: AIG Organizational Structure, as of December 31, 2008:
[Refer to PDF for image: illustration]
Top level entities in the organizational structure are as follows:
AIG Property Casualty Group, Inc.
The Philippine American Life and General Insurance Company;
American Life Insurance Company;
AIG Global Services, Inc.
AIU Holding, LLC;
AIG Retirement Services, Inc.
AIG Capital Corporation;
AIG Financial Products Corporation;
AIG Life Holdings (US) Inc.
There are numerous sublevel entities listed under each main heading.
Source: Schedule Y of the 2008 Annual Statements filed by AIG's
Insurance companies with NAIC.
[End of figure]
AIG also has a financial products division. AIG Financial Products
(AIGFP), which engaged in a variety of financial transactions,
including standard and customized financial products, has been a key
source of AIG's financial difficulties. Through AIGFP, AIG was a large
issuer of commercial paper, a mortgage lender, and a participant in the
derivatives markets.[Footnote 7] As of June 30, 2008, AIGFP's business
included an estimated $15 billion of outstanding commercial paper and
an estimated $32 billion in mortgage assets, and the company sold CDS
with $441 billion gross notional exposure on CDO.[Footnote 8]
Additionally, AIG maintained a large securities lending program
operated by its insurance subsidiaries. The securities lending program
allowed insurance companies, primarily the life insurance companies, to
lend securities in return for cash collateral that was invested in
residential mortgage-backed securities (RMBS). This program was another
major source of AIG's liquidity problems in 2008.
Aspects of AIG and its subsidiaries are regulated by federal and state
authorities. The Office of Thrift Supervision (OTS) is the consolidated
supervisor of AIG, which is a thrift holding company by virtue of its
ownership of AIG Federal Savings Bank. As the consolidated supervisor,
OTS is charged with identifying systemic issues or weaknesses and
ensuring compliance with regulations that govern permissible activities
and transactions.[Footnote 9] In recent testimony, OTS said that it
supervised and assessed AIG as a conglomerate and communicated with
other functional regulators and supervisors who share jurisdiction over
portions of the conglomerate.[Footnote 10] AIG's domestic and life and
property/casualty insurance companies are regulated by the state
insurance regulators in which these companies are domiciled.[Footnote
11] These state agencies regulate the financial solvency and market
conduct of these companies and they have the authority to approve or
disapprove certain transactions between an insurance company and its
parent or its parent's subsidiaries. These agencies also coordinate the
monitoring of companies' insurance lines among multiple state insurance
regulators. Regarding AIG in particular, these regulators have reviewed
reports on liquidity, investment income, and surrender and renewal
statistics; evaluated potential sales of AIG's domestic insurance
companies; and investigated allegations of pricing disparities.
In addition, TARP funds received by AIG are subject to oversight by
SIGTARP. As part of its quarterly reports to Congress, SIGTARP has
provided information on federal assistance and the restructuring of the
federal assistance provided to AIG, as well as information on the
unwinding of AIGFP and the sale of AIG's assets.[Footnote 12] Recently,
we and SIGTARP have initiated a joint review of the U.S. government's
governance over institutions such as AIG where the government has
provided extraordinary assistance and has a significant ownership
interest. The key focus of this review includes the extent of
government involvement in management of such companies and the extent
to which effective risk management, internal controls, and monitoring
are in place to protect and balance the government's interests in
relation to corporate needs.
Overview of the Federal Reserve's and Treasury's Authorities:
The Federal Reserve and Treasury provided assistance to AIG under the
following authorities:
* Section 13(3) of the Federal Reserve Act.[Footnote 13] This provision
allows the Federal Reserve, in "unusual and exigent circumstances," to
authorize any Federal Reserve bank to extend credit in the form of a
discount to individuals, partnerships, or corporations when the credit
is "indorsed or otherwise secured" to the satisfaction of the Federal
Reserve bank, after obtaining evidence that the individual,
partnership, or corporation is unable to secure adequate credit
accommodations from other banking institutions. The Federal Reserve has
used this emergency authority in support of the government's efforts to
stabilize systemically critical financial institutions, including AIG,
and this is the same authority used for various other Federal Reserve
actions in the ongoing financial crisis.
* Emergency Economic Stabilization Act (the act).[Footnote 14] The act
authorized Treasury to establish TARP and to implement the program
through a new Office of Financial Stability within Treasury. Among
other things, the act grants Treasury broad, flexible authorities to
purchase and insure troubled assets from financial institutions. The
act defines troubled assets to include residential or commercial
mortgages and securities based on such mortgages. Troubled assets may
also include any other financial instrument (e.g., equities) that the
Secretary of the Treasury, after consultation with the Federal Reserve,
determines is necessary to purchase to promote financial market
stability.
* The American Recovery and Reinvestment Act of 2009.[Footnote 15]
Provisions of this act amend and restate the executive compensation and
corporate governance provisions of the act.
The Federal Reserve and Treasury Provided Assistance to AIG to Limit
Systemic Risk to the Financial Markets:
The Federal Reserve and Treasury determined through analysis of
information provided by AIG and insurance regulators, as well as
publicly available information, that market events in September 2008
could cause AIG to fail, which would pose systemic risk to financial
markets.[Footnote 16] Consequently, the Federal Reserve and Treasury
took steps to ensure that AIG could complete an orderly sale of its
operating assets and closing of investment positions in its securities
lending program and AIGFP. The Federal Reserve explained that a major
concern was public confidence in the financial system and the economy.
The Federal Reserve and Treasury said that financial markets and
financial institutions were experiencing unprecedented strains
resulting from, among other things, the placing of Fannie Mae and
Freddie Mac under conservatorship; the failure of financial
institutions, including Lehman Brothers Holdings, Inc.; and the
collapse of the housing markets. The Federal Reserve said that in light
of these events, a disorderly failure of AIG could have contributed to
higher borrowing costs, diminished availability of credit, and
additional failures. They concluded that a collapse of AIG would have
been much more severe than that of Lehman Brothers because of its
global operations, large and varied retail and institutional customer
base, and different types of financial service offerings. The Federal
Reserve and Treasury said that a default by AIG would place
considerable pressure on numerous counterparties and trigger serious
disruptions to the commercial paper market. Moreover, owners of CDO
portfolios would no longer have protection or insurance against losses
if AIGFP, a major seller of CDS contracts, defaulted on its obligations
and CDO portfolio values continued to decline. The Federal Reserve
intended the initial September 2008 assistance to enable AIG to meet
these obligations to its counterparties and begin the process of
selling business units in order to raise cash to repay the credit
facility and other liabilities.[Footnote 17] However, AIG's continuing
financial deterioration and instability in the financial markets
resulted in subsequent assistance by the Federal Reserve and Treasury
in November 2008 and March 2009 to support AIG's liquidity and to
facilitate an orderly sale of assets and maximum repayment of federal
financial assistance while mitigating disruptions in the broader
financial markets.
AIG's Financial Problems Mounted Rapidly in 2008:
From July 2008 through early September 2008, AIG faced increasing
pressure on its liquidity following a downgrade in its credit ratings
in May 2008 due in part to losses from its securities lending program
(see figure 2). This deterioration followed liquidity strains earlier
in the year, although AIG was able to raise capital in May 2008 to
address its needs. Specifically, the declines in its securities lending
reinvestment portfolio of RMBS assets and declining values of CDOs
against which AIGFP had written CDS protection forced AIG to use an
estimated $9.3 billion of its cash reserves in July and August 2008 to
repay securities lending counterparties that terminated existing
agreements and to post additional collateral required by the trading
counterparties of AIGFP. AIG attempted to raise additional capital in
the private market in September 2008, but was unsuccessful. On
September 15, 2008, the rating agencies downgraded AIG‘s debt rating,
which resulted in the need for an additional $20 billion to fund its
added collateral demands and transaction termination payments.[Footnote
18] In addition, AIG‘s share price fell from $22.76 on September 8 to
$4.76 per share on September 15.[Footnote 19] Following the credit
rating downgrade, an increasing number of counterparties refused to
transact with AIG for fear that it would fail. Also around this time,
the insurance regulators decided they would no longer allow AIG‘s
insurance subsidiaries to lend funds to the parent company under a
revolving credit facility that AIG maintained. Furthermore, the
insurance regulators demanded that any outstanding loans be repaid and
that the facility be terminated.
Figure 2: Timeline of AIG's Financial Difficulties and Government
Actions in Response to Market Turmoil, Fall 2007 to September 30, 2008:
[Refer to PDF for image: illustration]
AIG-related actions:
Fall 2007:
As conditions in the U.S. housing market deteriorate, AIGFP begins to
lose massive amounts of money on CDS issued on RMBS.
January 2007 to June, 2008:
AIG experiences significant losses, primarily attributable to AIGFP and
decreasing values in its securities, particularly in its securities
lending portfolio, leading AIG to request to place large amounts of
cash collateral. AIG recognizes $8.9 billion in impairment charges in
the first 6 months of the year, primarily related to RMBS and
structured securities.
February 2008:
AIGFP co-founder and President Joseph Cassano resigns after the
division writes off $11.1 billion on CDS.
March 2008:
AIG forms a compensation committee to discuss AIGFP and decides to
offer retention bonuses to prevent defections of key employees.
March 7, 2008:
SEC proposes a ban on naked short selling.
May 2, 2008:
Federal Reserve‘s Schedule 2 Term Securities Lending Facility-eligible
collateral expands to include AAA-rated ABS.
May 12, 2008:
Credit ratings agencies Standard & Poor‘s (S&P) and Fitch Ratings each
downgrade their ratings on AIG.
May 20, 2008:
AIG raises $20 billion in private capital.
May 23, 2008:
Credit ratings agency Moody‘s Investor Service downgrades its ratings
on AIG.
July - August 31, 2008:
The super senior CDO securities protected by AIGFP‘s super senior CDS
portfolio continue to decline and ratings of CDO securities are
downgraded, resulting in AIGFP posting additional $5.9 billion
collateral. AIG does a strategic review of its businesses and reviewing
measures to address the liquidity concerns in its securities lending
portfolio and to address the ongoing collateral calls regarding AIGFP‘s
super senior multi-sector CDS portfolio, which as of July 31, 2008,
totals $16.1 billion.
Other market events:
Early September, 2008:
Securities lending requirements and postings of additional collateral
to address securities lending activities and continued declining values
of super senior CDO protected by CDS place increasing stress on the AIG
parent company‘s liquidity.
September 7, 2008:
Fannie Mae and Freddie Mac are placed in federal conservatorship.
September 8-12, 2008:
AIG‘s common stock price decline from $22.76 to $12.14. AIG reported
that as of July 31, 2008, S&P‘s, Moody‘s, and Fitch‘s had placed its
senior long-term debt on negative outlook.
September 11 or 12, 2008:
AIG approaches the FRBNY with two concerns (1) AIG had lent out
investment grade securities for cash collateral, which was invested in
illiquid mortgage-backed securities. Consequently, AIG would not be
able to liquidate its assets to meet the demands of its counterparties.
Since AIG is not regulated by the Federal Reserve, the agency is not
aware of the company‘s financial problems. (2) Because AIG is facing a
downgrade in its credit rating the next week, it needs immediate
liquidity help.
September 12, 2008:
S&P places AIG on CreditWatch with negative implications and notes that
upon completion of its review, the agency could affirm the AIG parent
company‘s current rating of AA- or lower the rating by one to three
notches. AIG‘s subsidiaries, International Lease Finance Corporation
(ILFC) and American General Finance, Inc. (AGF), are unable to replace
all of their maturing commercial paper with new issuances of commercial
paper. As a result, AIG advances loans to these subsidiaries to meet
their commercial paper obligations.
September 13-14, 2008:
AIG accelerates the process of attempting to raise additional capital
and discusses potential capital injections and other liquidity measures
with potential investors. AIG also meets with Blackstone Advisory
Services LP to discuss possible options. The Federal Reserve examines
AIG to determine if it is systemically important. This is the same
weekend that Lehman Brothers goes into bankruptcy.
September 14, 2008:
10 banks create $70 billion liquidity fund. Eligible collateral for the
Federal Reserve‘s Term Securities Lending Facility (TSLF) and Primary
Dealer Credit Facility (PDCF) broadened.
September 15, 2008:
AIG is again unable to access the commercial paper market for its
primary commercial paper programs, AIG Funding, ILFC, and AGF. AIG
advances loans to ILFC and AGF to meet their funding obligations. AIG
meets with representatives of Goldman, Sachs & Co., J.P. Morgan, and
the FRBNY to discuss the creation of a $75 billion secured lending
facility. S&P, Moody‘s, and Fitch Ratings downgrade AIG‘s long-term
debt rating. As a result, AIGFP has to post additional collateral.
AIGFP estimates it needs more than $20 billion to fund additional
collateral demands and transaction termination payments in a short
period of time. AIG‘s common stock price falls to $4.76 per share.
September 15, 2008:
Lehman files for bankruptcy. Bank of America purchases Merrill Lynch.
September 16, 2008:
Reserve Management Corporation‘s money market fund ’breaks the buck“–
net asset value drops below $1.
September 16, 2008:
AIG‘s plans for the secured lending facility fail. To provide
liquidity, both ILFC and AGF draw down on their existing revolving
credit facilities, resulting in borrowings of approximately $6.5
billion and $4.6 billion, respectively. AIG is notified by its
insurance regulators that it will no longer be permitted to borrow
funds from its insurance company subsidiaries under a revolving credit
facility that AIG maintained with certain of its insurance subsidiaries
acting as lenders. Subsequently, the insurance regulators require AIG
to repay any outstanding loans under that facility and to terminate it.
Determining that AIG has no viable private sector solution to its
liquidity problems, the Federal Reserve extends the facility to AIG to
prevent systemic failure. AIG‘s Board of Directors approves borrowing
from FRBNY based on a term sheet that sets forth the terms of the
secured credit agreement and related equity participation.
September 19, 2008:
Treasury establishes a money market fund guarantee program for up to
$50 billion. Federal Reserve establishes the Asset-Backed Commercial
Paper Money Market Fund Facility (AMLF). SEC bans shortselling on 799
financial stocks.
September 21, 2008:
Goldman Sachs and Morgan Stanley are approved as bank holding companies
by Federal Reserve, pending statutory antitrust waiting period. To
provide increased liquidity support to these firms as they transition
to managing their funding within a bank holding company structure, the
Federal Reserve authorizes the FRBNY to extend credit to the U.S.
broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley against
all types of collateral that may be pledged at the Federal Reserve's
primary credit facility for depository institutions or at the existing
PDCF; the Federal Reserve also makes these collateral arrangements
available to the broker-dealer subsidiary of Merrill Lynch. Federal
Reserve also authorizes the FRBNY to extend credit to the London-based
broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley, and
Merrill Lynch against collateral that would be eligible to be pledged
at the PDCF.
September 22, 2008:
The intercompany facility is terminated effective September 22, 2008.
AIG enters into a Credit Agreement in the form of a 2-year secured loan
with the Federal Reserve.
September 22, 2008:
Based on consultation with the Department of Justice regarding the
applications of Goldman Sachs and Morgan Stanley to become bank holding
companies, the Federal Reserve Board announces on Monday that the
transactions may be consummated immediately without the application of
the 5-day antitrust waiting period.
September 25, 2008:
Washington Mutual closed by OTS.
September 26, 2008:
The swap lines for the European Central Bank and the Swiss National
Bank are increased.
Source: GAO.
[End of figure]
AIG Contacted FRBNY as Its Liquidity Level Deteriorated, but Options
for Government Assistance Were Limited:
Given the liquidity constraints and its inability to raise new funds,
AIG contacted FRBNY on September 12, 2008, to seek assistance, fearing
that low cash reserves could soon cause its failure. Federal Reserve
and FRBNY officials with whom we spoke said that while FRBNY was the
initial point of contact for AIG, Treasury officials and New York state
insurance regulators were included in subsequent discussions about
forms of assistance. Treasury officials--who were already in New York
to deliberate on an appropriate policy response to the distress of
Lehman Brothers--attended meetings at AIG with FRBNY officials during
the week prior to the final decision to provide assistance. FRBNY and
Treasury officials were joined by the New York state insurance
regulators in discussions during the following weekend. Given the short
time frame, Federal Reserve officials added that OTS, the consolidated
regulator of AIG, was not consulted about the condition of AIG. FRBNY
officials said that prior to these discussions, they had no nonpublic
information on AIG operations because they did not supervise the
company. FRBNY officials added that state insurance regulators provided
information on the condition of AIG's insurance subsidiaries, including
the potential impact of RMBS portfolio losses on the subsidiaries'
capital base. In addition, during these meetings, AIG provided the
Federal Reserve, FRBNY, and Treasury with financial and operational
data, including updates on liquidity and counterparty information, to
assist them with assessing AIG's financial condition. Following these
meetings, FRBNY and Federal Reserve officials presented their
assessment of the situation to the Board of Governors of the Federal
Reserve System, which authorized FRBNY to provide liquidity in the form
of a Revolving Credit Facility to AIG on September 16. We discuss the
basis for and the form of this assistance later in this report.
Federal Reserve officials told us that the potential failure of AIG was
different from two other prominent failures in 2008--Bear Stearns and
Lehman Brothers. A bankruptcy of Bear Stearns was averted through a
sale process, and Lehman Brothers' principal U.S. broker-dealer
subsidiary was largely resolved through a sale process overseen by the
bankruptcy court. Federal Reserve officials were skeptical that a sale
process could be successfully completed for AIG, which was larger than
Bear Stearns and Lehman Brothers. The Federal Reserve added that it
also had more limited options in providing assistance to Lehman
Brothers. The officials stated that Section 13(3) of the Federal
Reserve Act requires that emergency loans extended by Federal Reserve
Banks be adequately secured, and Lehman Brothers' assets available as
collateral fell short of the amount needed to secure a Federal Reserve
loan of sufficient size to avert failure.
As the Federal Reserve, in consultation with Treasury, attempted to
address the systemic risk that AIG's default could have posed, it noted
that it faced regulatory and legal constraints. While the Federal
Deposit Insurance Corporation (FDIC) has the authority to unwind banks,
the Federal Reserve and Treasury noted that regulatory bodies involved
with AIG did not have an effective mechanism for unwinding such a large
nonbank financial institution in an orderly manner.[Footnote 20] AIG's
business units reported to hundreds of regulators, none of which
maintained the authority to unwind AIG's various businesses. At the
same time, AIG maintained financial relationships with a large number
of banks, insurance companies, and other market participants across the
globe, creating the possibility for system-wide disruption in the event
of the failure of AIG.
According to Federal Reserve officials, this lack of a centralized and
orderly resolution mechanism presented the Federal Reserve and Treasury
with few alternatives in September 2008. Federal Reserve officials told
us that the only other viable outcome besides the assistance package
would have been bankruptcy. Without additional liquidity, AIG likely
would have been forced to declare bankruptcy following any default on
its contracts with counterparties. AIG's negotiations with
counterparties and creditors to reduce the outstanding obligations
through contract renegotiation had proven unsuccessful. Providing new
liquidity to AIG and its affiliates would allow the company to satisfy
its obligations. Thus, time was increasingly limited and the amount of
assistance required continued to grow following the credit downgrade
and the Lehman Brothers failure on September 15, 2008, as many AIG
contracts required increased collateral and as market prices decreased.
The Federal Reserve described its actions in mid-September 2008 as an
effort to avoid the effects that AIG's disorderly failure could have
had on financial markets and the broader economy and allow AIG to
conduct an orderly restructuring of its operations. As the Chairman of
the Federal Reserve Board stated, "at best the consequences of AIG's
failure would have been a significant intensification of an already
severe financial crisis and worsening of global economic conditions.
Conceivably, its failure could have resulted in a 1930s-style global
financial and economic meltdown, with catastrophic implications for
production, income, and jobs."[Footnote 21] Avoiding the immediate
threat of bankruptcy was the short-term goal of the federal agencies
and state regulators who met to discuss the company's situation prior
to the establishment of the first form of assistance. The Federal
Reserve and Treasury determined that AIG would be able to put up cash
collateral and avoid imminent failure by receiving sufficient liquidity
support. Counterparties would also avoid the possibility of holding
defaulted contracts and needing to raise additional capital in adverse
market conditions. In addition, Treasury noted in public documents the
need to slow the spread of financial crisis and to allow for AIG to
regroup and satisfy its obligations.
Critics of the government's assistance have noted that by providing
assistance to AIG for the purpose of providing or returning cash
collateral to counterparties, the government was indirectly assisting
the counterparties, and they questioned the efficiency of this
approach. Some noted that banks that had bought CDS contracts from
other failed insurers were paid 13 cents on the dollar in deals
mediated by New York's insurance regulator, whereas AIG's
counterparties were paid market value. They said that new capital to
AIG in effect served as direct infusions to the counterparties,
including foreign financial institutions. Conversely, Federal Reserve
officials believed that if AIG had failed to pay the collateral amounts
due, it would have been in default of its agreements, which could have
resulted in AIG's counterparties forcing it into bankruptcy. Moreover,
they believed that the unfolding crisis warranted swift action to
prevent a total collapse of the financial system given its fragile
state at that time.
The Federal Reserve Determined That AIG and Its Insurance Subsidiaries
Posed a Systemic Risk to the Financial System Amid Market Turmoil in
September 2008:
The Federal Reserve concluded through internal discussions and dialogue
with AIG's state insurance regulators that the failure of AIG would
pose systemic risk for four primary reasons: (1) failure could have
undermined already fragile business and investor confidence; (2)
counterparty risk, through defaults and collateral requirements, could
have negatively affected numerous financial institutions and the
financial system; (3) default by AIG on its commercial paper could have
negatively affected the money markets; and (4) failure could have
disrupted the derivatives markets and caused liquidity problems for
holders of AIG products.
Failure Would Have Undermined Business and Investor Confidence:
First, given the nature of the ongoing crisis, the Federal Reserve was
concerned that the disorderly failure of AIG would have undermined
already fragile business and investor confidence that had been shaken
by numerous events since the onset of the financial crisis in 2007,
including the decision 2 weeks earlier to place Fannie Mae and Freddie
Mac in conservatorship and the bankruptcy of Lehman Brothers on
September 15, 2008. The Federal Reserve believed that the failure of
AIG under the conditions then prevailing would have increased investor
risk aversion and consequently contributed to higher borrowing costs
and materially weaker economic performance. Additionally, the Chairman
of the Federal Reserve noted that market confidence would have been
hurt in other areas that would have been affected by AIG's failure,
including the insurance industry, state and local governments that
invested with AIG, 401(k) plans that purchased insurance with AIG, and
banks that extended loans and credit lines to the company. He further
stated that focusing on direct effects of a default on AIG's
counterparties understates the risks to the financial system as a
whole.[Footnote 22]
The initial market stress that surrounded AIG's troubles can be traced
to the tension in the broad-based decline in home prices and the
cascading effect on mortgage-backed securities that began in 2007. The
decline in home prices was a factor in the significant increase in
delinquencies in the mortgage market. This was especially felt in the
subprime markets.[Footnote 23] Furthermore, these defaults and declines
in underlying mortgages decreased the value of mortgage-backed
securities and securitizations in general. These other securitized
products declined subsequent to the decrease in mortgage-backed
security valuations and included other asset-backed securities and
CDOs. Essentially, with the collapse of underlying loans, the values of
these instruments also suffered. The decline in value of these
instruments and the collapse of Bear Stearns and Lehman Brothers led
financial market participants to question about whether they would be
able to collect on outstanding obligations.[Footnote 24] Therefore,
market confidence was further eroded in an environment already facing
tightening of credit and interbank lending activities.
Counterparty Risk Would Have Negatively Affected Numerous Financial
Institutions and the Financial System:
As another reason for systemic risk concern, the Federal Reserve stated
that counterparty risk would have negatively affected the financial
system because AIG's default on its obligations to trading
counterparties could have seriously disrupted the ability of the
financial system to operate effectively through its counterparty
relationships with important market participants. The fluid operation
of the payments and settlements system is critical to the U.S.
financial markets, as market participants depend on this system to move
funds between counterparties and to close transactions. Through the
securities lending program and its AIGFP subsidiary, AIG maintained
counterparty relationships that could have been negatively affected by
the inability of AIG to fulfill terms under outstanding contracts. For
example, there would have been harmful consequences to AIG's
counterparties--including large banks such as Société Générale,
Deutsche Bank, Goldman Sachs, and Merrill Lynch--and defaults directly
related to AIG would then have rippled through the system and affected
transactions between other counterparties.[Footnote 25] This contagion
would have been difficult to manage, as investor confidence would have
plummeted with each market participant failure. The Federal Reserve
Chairman stated in his March 2009 testimony that it would have been
difficult to prevent additional failures in the wake of AIG's
failure.[Footnote 26]
Default on Commercial Paper Would Have Negatively Affected Money
Markets:
The Federal Reserve also noted that a default by AIG on its commercial
paper would have negatively affected money market participants, led to
higher lending rates, and reduced credit availability for borrowers as
other commercial paper lenders and money market funds viewed the
markets as riskier. The Federal Reserve anticipated that a default by
AIG on its commercial paper could have triggered runs on money market
mutual funds holding defaulted AIG commercial paper of an estimated $20
billion. This run could have led to spreading pessimistic views of the
money market as a whole and runs on related money market funds with no
exposure to AIG as investors fled what had been considered a highly
safe class of assets. Furthermore, these money funds' inability to
invest and investor fears could have disrupted the commercial paper
market, limiting the ability of financial and nonfinancial firms to
access the short-term funding market to meet obligations. Federal
Reserve officials with whom we spoke stated that this concern became
increasingly important following disruptions in the money market in the
wake of Lehman Brothers' failure. The Federal Reserve and other
government agencies anticipated funding issues for many firms in the
United States. These concerns ultimately contributed to the development
of a number of other programs around this time to stem the crisis in
the credit markets, such as the FDIC's Temporary Liquidity Guarantee
Program and the Federal Reserve's own Commercial Paper Funding
Facility; the latter program being one in which at least four AIG
affiliates have participated.[Footnote 27]
AIG had encountered such funding problems when it was unable to access
the short-term funding market to obtain liquidity needed to meet its
obligations. The collapse of large financial institutions and falling
investor confidence had affected lending and trading conditions in the
credit markets. In particular, short-term funding rates increased in
response to perceived higher risk as the mortgage markets and related
derivative markets effectively ceased to operate in the fall of 2008.
This led to high spreads between lending rates and the target federal
funds rate and illiquid trading conditions in the short-term money
markets. As a result of these conditions, AIG was unable to raise
additional liquidity. This inability became the greatest obstacle to
AIG stabilizing its financial condition in mid-September, as it became
evident that falling prices and the risk of counterparty failure would
not be temporary. AIG publicly disclosed in its financial reports that
declining asset prices had forced the posting of additional collateral
in connection with its derivative positions.[Footnote 28] A further
downgrade in AIG's credit rating could have triggered a default because
the downgrade would have resulted in AIG having to post additional
collateral with counterparties.
Failure Would Have Disrupted the Derivatives Markets and Caused
Liquidity Issues for Holders of AIG Products:
Finally, the Federal Reserve and Treasury stated in separate reports
and testimonies in the fall of 2008 and early 2009 that the failure of
AIGFP could have led to billions of dollars of losses at bank
counterparties that bought CDS contracts from AIG.[Footnote 29] Because
many banks used these contracts as credit protection, following losses
to CDS contract holders, if any, AIG's failure could have led to
mounting losses through sudden, unhedged, uncollateralized exposure as
market conditions worsened and underlying assets continued to decline
in value. Banks and other counterparties could have faced declining
capital bases because of these unrealized losses. Moreover,
counterparties with unfulfilled derivative contracts could have faced
difficulties in offsetting balance sheet exposures through replacement
derivatives, and they would have had to confront the possibility of
entering into new contracts at a time when market participants had
become increasingly risk averse and unwilling to execute new
transactions.
After September 2008, Treasury and the Federal Reserve Determined That
AIG Needed Further Assistance as Market Conditions Continued to
Deteriorate:
In the period following FRBNY's establishment of the Revolving Credit
Facility for AIG in September 2008, market confidence continued to fall
and lending rates continued to rise as financial institutions became
increasingly reluctant to lend. Federal Reserve officials noted that
the financial markets also experienced increased illiquidity in many
asset classes where market participants were forced to trade assets at
declining values. An effect of market illiquidity and borrowers'
inability to access lending markets was a halt to the secondary market
for asset sales. Treasury officials noted that ensuring financial
stability was the most important goal, including the restoration of
consumers' and businesses' access to funding and credit, and they
viewed the troubles in the credit market as an inhibitor to success.
Treasury and the Federal Reserve were also concerned that these
troubles would hamper AIG's ability to dispose of operating assets to
stabilize the business and repay outstanding debt to FRBNY according to
the plan in place at the time AIG and FRBNY entered in the agreement
establishing the Revolving Credit Facility.
To facilitate AIG's efforts to restructure and prevent further
degradation to AIG's balance sheet and further credit downgrades, in
November 2008 Treasury joined the Federal Reserve in the efforts to
assist AIG (see figure 3). Treasury's assistance was organized as a
preferred equity investment under the SSFI program of TARP rather than
as debt. Treasury formed its investment in this manner in consideration
of the effect of the Revolving Credit Facility on AIG's balance sheet,
which had increased the company's debt levels, or leverage, and lowered
the company's interest coverage ratio.[Footnote 30] These are two of
the metrics used by credit rating agencies in assessing the financial
strength of an issuer. Maintaining AIG's credit rating continued to be
an important goal of Treasury and FRBNY. Treasury's use of an equity
infusion, a tool unavailable to it until the Emergency Economic
Stabilization Act of 2008 became law, allowed AIG to obtain new capital
without putting further strain on its financial position through
additional leverage. According to Treasury's press release, improving
AIG's ability to dispose of its assets in an orderly manner was a
primary goal of the restructuring and of the additional capital
provided to the company.[Footnote 31]
Figure 3: Timeline of the Restructuring of AIG's Assistance, Market
Events, and Related Government Actions, October 1, 2008, to April 30,
2009:
[Refer to PDF for image: illustration]
AIG-related actions:
October 7:
AIG makes $18.7 billion in payments tied to credit default swaps to
counterparties that include Goldman Sachs and Societe Generale SA.
October 7:
Federal Reserve establishes the Commercial Paper Funding Facility
(CPFF).
October 8:
The Fed pledges another $37.8 billion to AIG.
October 21:
Money Market Investor Funding Facility (MMIFF) is established.
Oct. 28:
Consumer confidence hits lowest point on record.
November:
As part of the November restructuring, FRBNY announces plans to extend
credit to Maiden Lane II to purchase residential mortgage-backed
securities from the U.S. securities lending portfolio of AIG
subsidiaries, and FRBNY extends credit to Maiden Lane III to purchase
multi-sector collateralized debt obligations on which AIG Financial
Products has written credit default swaps. FRBNY terminates the $37.8
billion securities program.
November 10:
Treasury‘s Office of Financial Stability (OFS) announces plans to use
its Systemically Significant Failing Institutions program, under TARP,
to purchase $40 billion in AIG preferred shares.
November 25: AIG enters into an agreement with OFS, whereby Treasury
agrees to purchase $40 billion of fixed-rate cumulative preferred stock
of AIG (Series D) and a warrant to purchase approximately 2 percent of
the shares of AIG‘s common stock to OFS.
March 1:
AIG enters into the Series C Preferred Stock Purchase Agreement.
March 2:
The March restructuring includes AIG, FRBNY, and Treasury announcing
agreements in principle to modify the terms of the credit agreement and
the Series D Preferred Stock and to provide a $30 billion equity
capital commitment facility; FRBNY announcing their intent to enter
into the AIA and ALICO SPV transactions; and AIG and FRBNY announcing
their intent to enter into a transaction for SPVs backed by inforce
blocks of life insurance policies and their agreement in principle to
amend the Fed Credit Agreement to remove the interest rate floor. AIG
announces $61.7 billion fourth-quarter loss, the largest in U.S.
corporate history.
April 17:
AIG and OFS enter into an agreement in which OFS agrees to exchange the
$40 billion of Series D cumulative preferred shares for $41.6 billion
of Series E noncumulative preferred shares. AIG and Treasury enter into
an agreement under which AIG agrees to issue 3,000 shares of
noncumulative preferred stock (Series F) and a warrant to purchase up
to 3,000 shares of AIG common stock. In return, Treasury agrees to
create an equity capital facility to provide immediately available
funds to AIG up to about $29.8 billion.
Other market events:
None listed.
Source: GAO.
[End of figure]
By November 2008, it was evident that the Revolving Credit Facility had
not sufficiently halted the withdrawal of counterparties from
transactions with AIGFP or claims for additional collateral in
connection with AIG's securities lending business. As counterparty
withdrawals and claims for collateral continued, AIG faced additional
liquidity shortfalls in an effort to meet its obligations. AIG
estimates that between September 16, 2008, and December 31, 2008, $22.4
billion in cash was paid directly by AIG to AIGFP counterparties as
collateral, while FRBNY provided another $46.6 billion in assistance
for this purpose. The restructuring and other assistance the Federal
Reserve and Treasury announced in November 2008 were intended to allow
AIG to concentrate on using remaining liquidity available from the
Revolving Credit Facility for purposes other than posting collateral
for outstanding transactions contracted prior to the establishment of
the Revolving Credit Facility. As discussed more fully later in this
report, to address this situation, the Federal Reserve committed in
November to provide additional assistance to AIG through the
establishment of special purpose vehicles that would allow AIG to close
out most of AIGFP's super senior CDS portfolio as well as to liquidate
the portfolio of RMBS assets that was purchased through the securities
lending reinvestment program of its insurance subsidiaries.[Footnote
32] The Federal Reserve noted that this RMBS portfolio and the CDS
protection underwritten by AIGFP accounted for the majority of the
liquidity shortfall and $19 billion of the $24.5 billion in losses
reported by AIG for the third quarter of 2008.[Footnote 33]
In Early 2009 the Federal Reserve and Treasury Determined That
Assistance Needed to Be Restructured to Allow Time for AIG to Dispose
of Its Assets:
In March 2009, continuing market stress and the difficult business
conditions affecting AIG and would-be buyers of AIG's business units
forced the Federal Reserve and Treasury to again restructure the
various forms of assistance provided to AIG. AIG continued to work on
the divestiture and repayment plan created with the establishment of
the Revolving Credit Facility in September 2008. Nevertheless, the
continuing difficult market conditions compelled AIG to restructure
existing forms of assistance with FRBNY and Treasury in order to
decrease leverage and create additional time and flexibility to dispose
of key business assets.
According to AIG's financial reports and testimony by the AIG Chairman,
the company faced persistent difficult market conditions as it entered
2009.[Footnote 34] In particular, the deteriorating state of the
financial markets created large losses for AIG in the fourth quarter of
2008. Furthermore, AIG had difficulties finding buyers for operating
businesses that it had put up for sale in the last half of 2008 because
many potential buyers were facing financial challenges of their own.
However, ongoing federal assistance prevented further downgrades in
AIG's credit rating through the first half of 2009. This allowed AIG to
conserve critical cash in its drive to maintain sufficient liquidity
and unwind its AIGFP portfolio. The AIGFP officials with whom we spoke
said that a downgrade of the parent company's credit rating and staff
retention remained the most pressing issues, rather than portfolio
volatility. In March 2009, the President of FRBNY continued to believe
that derivative positions of substantial magnitude still remained in
force at AIGFP that could lead to billions of dollars of losses and a
corresponding loss of taxpayer dollars invested in the company in the
form of equity and debt. Subsequently, AIGFP officials stated that
AIGFP had succeeded in exiting many of its riskiest positions,
including many of the CDS positions related to corporate CDOs, foreign
exchange positions, commodities positions, and private equity-related
businesses as of June 2009.
In March 2009, the Federal Reserve and Treasury approved several
changes to their existing debt and equity relationships with AIG to
lower leverage and create additional time and flexibility for AIG to
divest businesses and repay federal assistance. For example, the
Federal Reserve authorized FRBNY to extend credit to securitize life
insurance policies underwritten by certain AIG life insurance
subsidiaries and, in addition, to receive a nonvoting, preferred equity
stake in AIG subsidiaries American International Assurance Company,
Ltd. (AIA) and American Life Insurance Company (ALICO) in exchange for
a reduction in the outstanding balance under the Revolving Credit
Facility, with a corresponding reduction in FRBNY's commitment to lend
under the facility. FRBNY believed that, considering the market
difficulties, the exchange offer would help to protect the government's
investment in AIG by not forcing the company to make decisions that
would harm its ability to repay its obligations to FRBNY. In another
example, Treasury exchanged its equity interest purchased through the
SSFI. These, and other actions, are discussed in detail in the next
section of this report. Treasury viewed inaction as a potentially
costlier and riskier option because of the risk of a credit rating
downgrade, which would have led to a disorderly failure of the firm.
Creating a more durable capital structure for AIG that allows the
company time and flexibility to dispose of its noncore assets continues
to be a main goal of the restructuring process. The Federal Reserve
noted that it expects the disposition of assets to be the principal way
by which AIG will repay government funds lent by FRBNY, recoup equity
investments made by Treasury, and pay other expenses associated with
the government's efforts. AIG noted in public reports that through the
third quarter of 2009, it had completed dispositions and asset sales of
an estimated $5.9 billion in total proceeds, which we discuss later in
the report.
The Federal Reserve, FRBNY, and Treasury Have Taken a Variety of Steps
to Stabilize AIG:
To address concerns about the systemic risk posed by AIG's potential
disorderly failure, the Federal Reserve and Treasury have agreed to
make over $182 billion of federal assistance available to AIG since
September 2008. This assistance was intended to stabilize AIG by
providing it with a reliable source of liquidity to allow for an
orderly restructuring of its operations. While some of the assistance
was designated for specific purposes--such as reducing the debt
outstanding to the Federal Reserve or establishing SPVs created by
FRBNY to purchase specific assets such as CDOs and RMBS--other
assistance was provided to enable AIG to meet the general corporate
needs of the parent company and its subsidiaries. Finally, the
government made investments in AIG to stabilize its capital position.
Table 1 provides an overview of the various forms of assistance, the
purpose of each form of assistance, the amounts authorized, the amounts
loaned or used for investments, and the outstanding balance as of
September 2, 2009.
Table 1: U.S. Government Efforts to Assist AIG and the Government's
Remaining Exposure as of September 2, 2009 (Dollar in millions):
Implemented: Federal Reserve;
Description of the federal assistance: FRBNY created a Revolving Credit
Facility to provide AIG a revolving loan that AIG and its subsidiaries
could use to enhance their liquidity. In exchange for the facility and
$500,000, a trust received Series C preferred stock for the benefit of
the Treasury, which gave Treasury 77.9 percent equity interest in AIG;
Amount of assistance authorized: Debt: $60,000[A]; Amount of assistance
authorized: Equity: $0.5; Outstanding balance: $38,792.5;
Sources to repay the government: Proceeds from dispositions of AIG
businesses, internal cash flows, and restructuring part of the
Revolving Credit Facility from debt into equity; the $500,000 paid for
the Series C shares will not be repaid.
Implemented: Federal Reserve;
Description of the federal assistance: FRBNY created a special purpose
vehicle (SPV)--Maiden Lane II--to provide AIG liquidity by purchasing
residential mortgage-backed securities (RMBS) from AIG life insurance
companies. FRBNY provided a loan to Maiden Lane II for the purchases.
FRBNY also terminated its securities lending program with AIG, which
had provided additional liquidity associated with AIG's securities
lending program when it created Maiden Lane II; Amount of assistance
authorized: Debt: $22,500; Amount of assistance authorized: Equity:
[Empty]; Outstanding balance: $16,899;
Sources to repay the government: Proceeds from asset sales in Maiden
Lane II will be used to repay the FRBNY loan to Maiden Lane II.
Implemented: Federal Reserve;
Description of the federal assistance: FRBNY created a SPV called
Maiden Lane III to provide AIG liquidity by purchasing CDOs from AIG
Financial Products. FRBNY again provided a loan to the SPV for the
purchases; Amount of assistance authorized: Debt: $30,000; Amount of
assistance authorized: Equity: [Empty]; Outstanding balance: $20,196;
Sources to repay the government: Proceeds from asset sales in Maiden
Lane III will be used to repay the FRBNY loan.
Implemented: Treasury;
Description of the federal assistance: Treasury purchased Series D
cumulative preferred stock from AIG. AIG used the proceeds to pay down
part of the Revolving Credit Facility; also Treasury received a warrant
exercisable into a 2 percent equity interest in AIG. Series D shares
were later exchanged for Series E noncumulative preferred shares.
Unpaid dividends on the series D shares were added to the Treasury's
equity in the Series E shares; Amount of assistance authorized: Debt:
[Empty]; Amount of assistance authorized: Equity: $40,000; Outstanding
balance: $41,605;
Sources to repay the government: Proceeds from dispositions of AIG
businesses and internal cash flows of AIG.
Implemented: Treasury;
Description of the federal assistance: Treasury purchased Series F
noncumulative preferred shares of AIG and is allowing AIG to draw up to
$29.835 billion through an equity facility to meet its liquidity needs.
Amounts drawn by AIG represent the cost of the federal equity interest
in these shares; Amount of assistance authorized: Debt: [Empty]; Amount
of assistance authorized: Equity: $29,835; Outstanding balance:
$3,400[B];
Sources to repay the government: Proceeds from dispositions of AIG
businesses and internal cash flows of AIG.
Description of the federal assistance: Amount of assistance authorized:
Debt: $112,500; Amount of assistance authorized: Equity: $69,835.5.
Description of the federal assistance: Total authorized and outstanding
assistance[C]; Amount of assistance authorized: Debt: [Empty]; Amount
of assistance authorized: Equity: $182,335.5; Outstanding balance:
$120,892.5.
Pending: Description of the federal assistance: AIG created two SPVs
for two of its foreign insurance businesses to enhance AIG's capital
and liquidity, and to facilitate an orderly restructuring of AIG.
Revolving Facility will be reduced by the amount of preferred equity
interest; Amount of assistance authorized: Debt: $25,000[D]; Amount of
assistance authorized: Equity: [Empty]; Outstanding balance: 0;
Sources to repay the government: Proceeds from the public sale of the
SPVs' common stock could be used to buy out the federal preferred
equity and/or pay down part of the Revolving Credit Facility.
Pending: Description of the federal assistance: SPVs are to be created
to purchase the securitized cash flows of certain domestic life
insurance policies from AIG. FRBNY plans to loan up to $8.5 billion to
the SPVs to make the purchase. AIG will use the proceeds to pay down
part of the Revolving Credit Facility; Amount of assistance authorized:
Debt: $8,500[D]; Amount of assistance authorized: Equity: [Empty];
Outstanding balance: 0;
Sources to repay the government: FRBNY's loan to the SPVs will be
repaid from cash flows of the life insurance policies.
Source: AIG SEC filings, Federal Reserve, and Treasury data.
Notes:
[A] The facility was initially $85 billion but was reduced to $60
billion in November 2008.
[B] Amount as of September 8, 2009.
[C] Does not include AIG's participation in the Federal Reserve's
Commercial Paper Funding Facility.
[D] This transaction has not been completed and is not included in the
total assistance provided to AIG because the amount of the revolving
facility will be decreased by an equal amount.
[End of table]
FRBNY's Revolving Credit Facility Provided AIG with a Source of
Liquidity but Increased Its Debt, which Is Being Restructured through
Several Subsequent Actions:
In September 2008 the Federal Reserve announced that, with the support
of Treasury, it had authorized FRBNY to lend AIG up to $85 billion
under the emergency provisions of Section 13(3) of the Federal Reserve
Act. The amount was subsequently reduced to $60 billion as discussed
below. This secured loan was structured as a revolving credit facility--
a secured revolving loan or line of credit that AIG could use to meet
its obligations as they came due.[Footnote 35] However, in light of
ongoing concerns about AIG's condition and the continued threat it
posed to the stability of financial markets, this debt was subsequently
restructured in November 2008 and again in March 2009. The term of the
loan was initially 2 years but was subsequently extended to 5 years to
allow AIG additional time to restructure its operations and repay the
debt.
AIG's mounting debt--the result of borrowing from the Revolving Credit
Facility--led to concerns that its credit ratings would be lowered,
which would have caused its condition to deteriorate further. In
response, the Federal Reserve and Treasury restructured AIG's debt in
November 2008. Under the restructured terms, Treasury purchased $40
billion shares of AIG preferred stock (the Series D securities purchase
agreement discussed later in this report), and the cash from the sale
was used to pay down a portion of AIG's outstanding balance. The limit
on the Revolving Credit Facility was also reduced from $85 billion to
$60 billion. This restructuring was critical to helping AIG maintain
its credit ratings.
In March 2009, the Federal Reserve and Treasury announced plans to
further restructure AIG's assistance. Consistent with earlier
assistance, this restructuring also was designed to enhance AIG's
capital and liquidity to facilitate orderly restructuring of the
company. According to the Federal Reserve, the facility is to be
reduced in exchange for the FRBNY's receipt of preferred interests in
two special purpose vehicles created by AIG to hold the outstanding
common stock of two life insurance holding company subsidiaries of AIG--
ALICO valued at about $9 billion and AIA valued at about $16 billion.
The valuation for FRBNY's preferred stock interests, which was set at
$25 billion in June 2009 when the agreements were finalized, is a
percentage of the fair market value of ALICO and AIA as determined by
FRBNY. AIG expects to close these transactions by early 2010 pending
the appropriate regulatory approvals and desirable market conditions.
While this transaction will lower the amount of AIG's debt to FRBNY, it
shifts the debt to equity interest in AIG subsidiaries and does not
decrease the government's overall risk exposure. For the details of the
terms of the AIA and ALICO agreement, see appendix II.
FRBNY Creates Two New Lending Facilities, Maiden Lane II and III, to
Relieve Liquidity Pressures Related to Two Portfolios of Mortgage-
Related Assets:
To help resolve AIG's ongoing liquidity issues, the Federal Reserve
authorized FRBNY to create two new facilities to purchase some of AIG's
more troubled assets. AIG's securities lending program continued to be
one of the greatest ongoing demands on its liquidity, and on November
10, 2008, FRBNY announced plans to create a RMBS facility--Maiden Lane
II LLC--to purchase RMBS assets from AIG's U.S. securities lending
collateral portfolio. According to FRBNY, this facility was established
to prevent continuing liquidity strains on AIG. The Federal Reserve
authorized FRBNY to lend up to $22.5 billion to Maiden Lane II; AIG
also acquired a subordinated, $1 billion interest in the facility,
which will absorb the first $1 billion of any losses. On December 12,
2008, FRBNY extended a $19.5 billion loan to Maiden Lane II to fund its
portion of the purchase price of the securities. The facility purchased
$39.3 billion face value of the RMBS directly from AIG subsidiaries
(domestic life insurance companies).[Footnote 36] As of September 18,
2009, the amount owed was $17.1 billion.
By October 2008, AIG had used $72 billion of the $85 billion available
under the Revolving Credit Facility. To provide it with additional
liquidity, the Federal Reserve authorized FRBNY to borrow securities
from certain regulated U.S. life insurance subsidiaries of AIG. Under
this program, FRBNY was authorized to borrow up to $37.8 billion in
investment-grade, fixed-income securities from AIG in return for cash
collateral. These securities had previously been lent by AIG's life
insurance company subsidiaries to third parties. This program provided
AIG with another source of liquidity to pay its obligations associated
with its securities lending program, one of its major sources of
liquidity problems.[Footnote 37] It also enabled AIG to use the
remainder of the Revolving Credit Facility for other liquidity needs.
This agreement was terminated in December 2008 simultaneously with the
closing of the Maiden Lane II transaction.
The FRBNY loan to Maiden Lane II is expected to be repaid with the
proceeds from the interest and principal payments or proceeds from the
liquidation of the assets held by the facility. Accordingly, the
Federal Reserve has not set a date for selling the assets; rather it
has indicated that it is prepared to hold the assets to maturity if
necessary. Until this time, the government's investment remains exposed
to risk of loss. Payments are to be made in the following order, and
each category must be fully paid before proceeding to the next
category:
1. necessary costs and expenses of Maiden Lane II, plus a cash reserve
for future expenses;
2. all principal on the FRBNY loan;
3. all interest on the FRBNY loan;
4. up to $1 billion of deferred consideration to AIG's Life Insurance
Companies; and:
5. interest due on the deferred consideration to AIG's life insurance
companies.
If Maiden Lane II has paid in full its obligations to FRBNY and AIG's
life insurance companies, any remaining proceeds will be distributed
between FRBNY and the life insurance companies. FRBNY is to receive
approximately 83 percent of the remaining proceeds, while the AIG life
insurance subsidiaries are to receive 17 percent of any remaining
proceeds.
Also on November 10, 2008, FRBNY announced plans to create a separate
facility--Maiden Lane III LLC--to purchase multi-sector CDOs on which
AIGFP had written CDS contracts. This facility was aimed at
facilitating the restructuring of AIG by addressing the greatest threat
to AIG's liquidity. In connection with the purchase of the CDOs, AIG's
CDS counterparties agreed to terminate the CDS contracts.[Footnote 38]
The Federal Reserve authorized FRBNY to lend up to $30 billion to
Maiden Lane III. On November 25, and December 18, 2008, FRBNY extended
a total of $24.3 billion in loans to Maiden Lane III; AIG also paid $5
billion equity interest in Maiden Lane III and would absorb the first
$5 billion of any losses.
The FRBNY loan to Maiden Lane III is expected to be repaid with the
proceeds from the maturity or liquidation of the assets in the
facility. As with Maiden Lane II, the repayment will occur through cash
flows from the underlying securities as they are paid off. Similarly,
the Federal Reserve may hold the assets to maturity. Until this time,
the government's investment remains exposed to risk of loss. Payments
from the portfolio holdings of Maiden Lane III will be made in the
following order and each category must be fully paid before proceeding
to the next category:
1. necessary costs and operating expenses of Maiden Lane III;
2. amounts due under certain currency hedging transactions;
3. amounts to fund a reserve for necessary expenses payable by Maiden
Lane III between monthly payment dates;
4. amounts to fund a reserve for payments that may be incurred by
Maiden Lane III in connection with management of CDO defaults;
5. all principal due on the FRBNY loan;
6. all interest due on the FRBNY loan;
7. a release to Maiden Lane III, to repay AIG's $5 billion equity
contribution;
8. a release to Maiden Lane III, to pay distributions accruing to AIG
on its equity contribution; and:
9. amounts due under certain currency hedging transactions to the
extent the counterparty to the hedge is in default.
After Maiden Lane III has paid in full FRBNY and all other outstanding
secured obligations, any remaining proceeds will be distributed between
FRBNY's and AIG's subsidiaries. FRBNY will receive 67 percent of the
remaining proceeds, while the AIG subsidiaries will receive 33 percent
of any remaining proceeds.
FRBNY Also Can Provide Credit to AIG Subsidiaries but Intends to Reduce
the Revolving Credit Facility by an Equivalent Amount:
Also in March 2009, FRBNY was authorized to make new loans under
section 13(3) of the Federal Reserve Act of up to an aggregate amount
of approximately $8.5 billion by acquiring notes issued by the special
purpose vehicles that will be established by certain AIG domestic life
insurance subsidiaries. As announced, the special purpose vehicles are
to repay the notes from the net cash flows they receive from designated
blocks of existing life insurance policies issued by the insurance
companies. Effectively, these net cash flows are a portion of the
operating profits of the life insurance companies. The proceeds of the
notes would pay down an equivalent amount of outstanding debt under the
Revolving Credit Facility. Therefore, this amount has no effect on the
total government exposure. The amounts lent, the size of the haircuts
taken by FRBNY, and other terms of the notes are to be determined based
on valuations FRBNY deems acceptable.[Footnote 39] Federal Reserve
officials said that they are working to complete the transactions with
AIG.
Treasury's OFS Is Using TARP's SSFI Program to Invest in AIG:
On November 10, 2008, Treasury's OFS announced plans to use its SSFI
program, under TARP, to purchase $40 billion in AIG preferred shares.
AIG entered into an agreement with Treasury on November 25, 2008,
whereby Treasury agreed to purchase $40 billion of fixed-rate
cumulative preferred stock of AIG (Series D) and received a warrant to
purchase approximately 2 percent of the shares of AIG's common
stock.[Footnote 40] As previously discussed, the proceeds of this sale
were used to pay down AIG's outstanding balance on the Revolving Credit
Facility by the same amount.[Footnote 41] This transaction left the
government's overall exposure unchanged but allowed AIG to reduce its
debt outstanding and increase its equity position by $40 billion. The
rating agencies viewed this structure as more favorable. And as noted
previously, AIG and FRBNY also agreed to reduce the amount available to
borrow under the Revolving Credit Facility from $85 billion to $60
billion.
On April 17, 2009, AIG and Treasury entered into an agreement in which
Treasury agreed to exchange its $40 billion of Series D cumulative
preferred stock for $41.6 billion of Series E fixed-rate noncumulative
preferred stock of AIG, allowing for a reduction in leverage and
dividend requirements. The $1.6 billion difference between the initial
aggregate liquidation preference of the Series D stock and the
aggregate liquidation preference of the Series E stock represents a
compounding of accumulated but unpaid dividends owed by AIG to Treasury
on the Series D stock. Because the Series E preferred stock more
closely resembles common stock, principally because its dividends are
noncumulative, rating agencies viewed the stock more positively when
rating AIG's financial condition.
Also on April 17, 2009, Treasury provided a $29.835 billion Equity
Capital Facility to AIG whereby AIG issued to Treasury 300,000 shares
of fixed-rate noncumulative perpetual preferred stock (Series F) and a
warrant to purchase up to 3,000 shares of AIG common stock. As AIG
draws on the Equity Capital Facility, the aggregate liquidation
preference of the Series F stock is adjusted upward.[Footnote 42] As of
September 8, 2009, AIG had drawn down $3.2 billion of the commitment.
In Providing Assistance to AIG, the Federal Reserve and Treasury Have
Taken Steps to Protect the Government's Interest, but Risks Still
Remain:
Federal assistance to the private sector includes accountability
measures to help ensure that Congress and the public can have
confidence that the assistance is used in a manner consistent with the
identified objectives and that the government's interests are being
protected. In previous work we have identified fundamental principles
that can serve as a framework for considering federal government
financial assistance to large firms.[Footnote 43] One of the key
principles of this framework is to protect the government's interests.
Given the significant financial exposure the government may assume, any
federal assistance to the private sector should include appropriate
mechanisms to protect taxpayers from excessive or unnecessary risks.
In crafting the government's loans to and investments in AIG, the
Federal Reserve and Treasury have taken a number of actions aimed at
protecting the government's interests, including (1) making loans that
are secured with collateral; (2) instituting certain controls over
management, including loan covenants and restrictions on executive
compensation; and (3) obtaining compensation for risks, including
dividends, interest, and fees. The Federal Reserve and Treasury have
also appointed staff and hired advisors to monitor the operations of
AIG and routinely receive periodic reports about the status of its
condition and restructuring. However, while these actions may serve to
help protect the government's interests, risks remain.
All FRBNY Loans Are Secured by AIG Assets:
In lending to AIG, FRBNY has drafted credit agreements that contain
provisions for securing the loans. FRBNY took AIG's pledge of a portion
of its assets, including its ownership interests in its domestic and
foreign insurance subsidiaries, as collateral on the Revolving Credit
Facility. Moreover, when the facility was reduced from $85 billion to
$60 billion at the November 2008 restructuring, the posted collateral
remained unchanged. While FRBNY believes that the pledged collateral is
generally sufficient to repay the debt AIG owes to FRBNY, AIG's ability
to divest its assets to make repayment relies heavily on conditions in
financial markets. Moreover, as discussed above, the Federal Reserve
expects to reduce AIG's outstanding debt by accepting a preferred
ownership interest in certain AIG life insurance holding companies in
lieu of a cash payment. While the amount of debt would be reduced,
FRBNY will assume investment risk that FRBNY may lose on the amount of
the investment.
While AIG Continues to Manage the Company, the Federal Reserve and
Treasury Have Instituted Certain Controls over Management:
While the government has not taken over management of AIG, it has taken
a number of steps to create certain controls over AIG's management of
the company. For example, FRBNY has used its rights as a creditor to
work with AIG's new management team to help wind down AIGFP and to
oversee AIG's restructuring and divestiture strategy. Due to the
government's large loans to and investments in AIG, FRBNY has observer
status at board of director meetings and Treasury has certain rights to
elect directors. The Federal Reserve noted in its September 2008 report
that following the implementation of the Revolving Credit Facility,
FRBNY had regular contact with AIG senior management, and FRBNY
representatives attended all AIG Board of Directors meetings as
observers. According to the Federal Reserve, FRBNY, and Treasury, the
Federal Reserve and FRBNY have 20-25 staff assigned to monitor AIG.
FRBNY has also hired professional advisors to assist in monitoring AIG.
FRBNY officials said they receive reports on a daily and weekly basis,
in FRBNY's role as a creditor, to track the ongoing performance of AIG.
For example, reports include cash forecasts, liquidity updates, and
regulatory developments. In addition, as Treasury's investment in AIG
has grown, the staff responsible for monitoring its condition and
restructuring efforts have grown from 1 to 4. Like the Federal Reserve,
Treasury also receives periodic reports as required by its securities
purchase agreements. AIG told us, and the Federal Reserve and Treasury
officials confirmed, that any substantial cash outlays are disclosed to
the government before they occur. These measures were taken to help
ensure that government staff are available to monitor the government's
large investment in the company.
In addition, the Federal Reserve announced that, as a condition of
establishing the initial $85 billion credit facility, a trust
established for the sole benefit of the United States Treasury would
become the majority equity investor in AIG.[Footnote 44] This was
achieved through the establishment of an independent trust to manage
Treasury's equity interest in preferred shares (Series C) of AIG.
[Footnote 45] When the trust agreement was executed in January 2009,
the Series C stock was convertible into approximately 77.9 percent of
the issued and outstanding shares of common stock of AIG. [Footnote 46]
Proceeds from the Credit Facility Trust are to go directly to the
Treasury for the benefit of taxpayers. The Credit Facility Trust is
intended to prevent inherent conflicts of interest that could arise
from direct government or Federal Reserve control of AIG.
The three trustees who manage the trust are required to be independent
of the Federal Reserve and FRBNY, and all have corporate management
experience. According to the terms of the Credit Facility Trust
agreement, the trustees are responsible for managing the AIG equity
stake in matters such as voting and rights associated with
shareholders, but they are to leave day-to-day management of AIG to its
officers. For example, according to Treasury officials with whom we
spoke, the trustees used their voting power to vote in a majority of
new board members who subsequently hired a new chief executive officer
in August 2009. However, FRBNY and Treasury continue to have their own
relationship and conduct their own monitoring of AIG operations. The
trustees are also accountable for developing a plan to dispose of the
shares over time. FRBNY is also working with Treasury and the trustees
to ensure that AIG reviews and updates its corporate governance. While
the Credit Facility Trust was intended to protect the taxpayers'
interests, the agreement clearly holds AIG responsible for the day-to-
day operations and management of the company and makes the trustees
autonomous from outside influence. Some in Congress have questioned the
trust structure and whether it should be used as a model for providing
government assistance to other big companies. We are conducting a joint
review with SIGTARP of the government's management and governance of
its ownership interests and plan to address these issues as part of
that ongoing work.
As another protective measure, the FRBNY loan agreement includes
covenants to prevent AIG from engaging in actions that would be
detrimental to the loans provided and ultimately the government's
interests. For example, the loan agreement precludes AIG from incurring
additional debt, paying dividends, and making capital expenditures
without the approval of FRBNY. Moreover, Treasury's securities purchase
agreements further restrict AIG's ability to declare dividends, lobby,
and repurchase stock as long as Treasury has equity in the company.
Also as part of its equity investments, Treasury required that if AIG
does not pay dividends due for four dividend periods, consecutive or
not, Treasury will be able to directly elect the greater of two
directors or a number of directors equal to 20 percent of the total
number of directors to the AIG Board of Directors. As of September
2009, AIG had not declared and paid the three scheduled dividend
payments since the inception of the preferred equity investments.
[Footnote 47] According to Treasury, if AIG fails to make its next
dividend payment due on November 1, Treasury will be able to directly
elect at least two board members.
Finally, Congress, the Federal Reserve, and Treasury have taken steps
to limit executive compensation.[Footnote 48] According to the Federal
Reserve Chairman, the Federal Reserve has pressed AIG to ensure that
all compensation decisions are covered by robust corporate governance,
including internal review, review by AIG's Compensation Committee of
the Board of Directors, and consultations with outside experts. Under
this framework, and in agreement with Treasury, AIG has limited the
salary, bonuses, and other types of compensation for senior management
for 2008 and 2009. Moreover, Congress, Treasury, and the New York
Attorney General have also imposed restrictions on compensation at AIG.
Following the $165 million payout of retention bonuses to AIGFP staff
in March 2009, AIG now vets payouts of bonuses with Treasury. AIG has
yet to make its scheduled July 2009 retention bonus payment pending
feedback from Treasury. See appendix III for a complete discussion of
Treasury's executive compensation requirements.
The Federal Reserve and Treasury Have Taken a Number of Steps to Help
Ensure That They Will Be Compensated for the Risks Involved in the
Assistance:
The Federal Reserve and Treasury have taken a number of steps to ensure
they will be compensated for the risks they are assuming on behalf of
AIG. First, FRBNY required an initial gross commitment fee of 2 percent
totaling an estimated $1.7 billion.[Footnote 49] In addition, FRBNY is
charging interest on the outstanding balance of the Revolving Credit
Facility as well as any unused commitment. Initially, the rate on
outstanding balances was the 3-month London Interbank Offered Rate,
with a 3.5 percent minimum. As part of the November 2008 restructuring,
the interest rate on the loan was reduced to the London Interbank
Offered Rate plus 3 percent, and the unused commitment fee was reduced
to an annualized rate of .75 percent from 8.5 percent.[Footnote 50] In
March 2009 the 3.5 percent minimum rate requirement was removed. While
the Federal Reserve viewed the restructured terms of the assistance as
necessary to address AIG's continued challenges following the initial
assistance, some critics questioned whether they eroded the
government's interests. FRBNY will receive less compensation for its
risk exposure, but in light of AIG's continued reliance on the facility
to pay its continuing obligations, including interest and commitment
fees on the facility, the Federal Reserve concluded that restructuring
the debt was in the government's interest.
Second, the Federal Reserve negotiated that upon repayment of
outstanding loans made by FRBNY to Maiden Lanes II and III, and AIG's
subordinated interest in the SPVs, approximately 83 percent and 67
percent, respectively, of any residual income will be apportioned to
FRBNY, with the remainder going to AIG. In addition, according to the
Federal Reserve, AIG also cannot receive any return on its stakes in
these vehicles until the FRBNY loans have been repaid in full. Thus,
AIG is also required to take the first loss up to a predetermined
amount should there be any losses.[Footnote 51]
Third, AIG is also required to pay dividends of 10 percent per annum on
Treasury's cumulative preferred share investment.[Footnote 52] While
the March 2009 restructuring authorized AIG to convert the shares from
cumulative preferred shares to noncumulative preferred shares, thereby
providing AIG relief from paying dividends on the preferred shares when
dividends are not declared, it did not decrease the 10 percent
requirement.[Footnote 53] Additionally, the accrued but unpaid
dividends from the initial capital investment were added to the amount
outstanding for purposes of the stock conversion. Treasury viewed the
conversion as necessary to further stabilize AIG and protect financial
markets and protect its investment. AIG is scheduled to make a dividend
payment in November 2009; however, there is no indication as to whether
AIG will declare and make this payment.
Fourth, as part of the various purchases of equity from AIG, Treasury
obtained warrants in connection with each capital commitment.[Footnote
54] The initial $40 billion capital injection under the SSFI program
specified that Treasury would receive a warrant to purchase 2 percent
of the then issued and outstanding shares of common stock with an
exercise, or purchase, price of $2.50 per share. Similar to other TARP
investments, this warrant has a term of 10 years. These terms remained
when the Series D shares were exchanged for the Series E shares in
April 2009. As noted above, the agreement establishing the Equity
Capital Facility also provided that Treasury would receive a warrant to
purchase common stock equal to 3,000 shares of the then issued and
outstanding shares of common stock with an exercise price of $2.50 per
share.
Finally, FRBNY has agreed to obtain an equity interest in certain AIG
life insurance subsidiaries by accepting preferred ownership interests
in AIG life insurance holding companies to facilitate an alternative
means to recoup a portion of FRBNY's loan to AIG. While the equity
interest will give the government an opportunity for upside gain, it
also will continue to expose the government to risk that its investment
may not be recouped. The long-term value of stakes in the companies to
be held by FRBNY will also depend on the companies' performance and
eventual valuation by the market or prospective buyer.
Despite Efforts to Protect the Government, Some Risks Remain:
Despite these efforts, the Federal Reserve and Treasury continue to
carry significant exposure as a result of the assistance to AIG. Until
the debt is repaid and the equity interests are repurchased or sold,
the Federal Reserve and Treasury remain exposed to credit and
investment risks. The ongoing potential of systemic risk remains a
concern until AIG is restructured and market conditions improve.
According to Treasury, "an orderly restructuring is essential to AIG's
repayment of the support it has received from U.S. taxpayers and to
preserving financial stability." However, an orderly restructuring
depends heavily on AIG's ability to successfully divest assets.
According to AIG's former chief executive officer, AIG's plan is to
sell businesses that constitute almost 65 percent of the company and
employ approximately 70,000 people. According to Treasury officials,
the current chief executive officer is re-evaluating this plan.
In March 2009, the Federal Reserve and Treasury most recently noted
their commitment to AIG in order to avoid future market disruptions and
have acknowledged that AIG's ability to sell its assets depends on
financial markets continuing to stabilize and its assets maintaining
their market value. While this level of government commitment has
helped AIG maintain its key credit ratings, which are important for
AIG's ongoing financial stability and restructuring efforts, it also
exposes the government to risks that must continue to be monitored and
managed. In addition, the Federal Reserve's interest as a creditor must
be appropriately balanced with those of Treasury as an investor. We
have ongoing work with SIGTARP that will more fully address how the
government is managing its investments in AIG and other institutions
that have received extraordinary assistance.
Federal Assistance Has Helped Stabilize AIG's Financial Condition, but
Indicators Suggest that It Is Too Soon to Evaluate AIG's Ability to
Restructure Its Business and Repay the Government:
While the federal assistance provided to AIG has helped stabilize its
operations, a number of variables will continue to affect the company's
ability to restructure its business and repay the government. AIG's
recovery depends not only on the long-term health of the company but
also on market conditions, and other factors. Consistent with our
mandated responsibilities to assess the effectiveness of TARP programs
and our development of macroeconomic indicators of TARP's overall
effectiveness, we have developed a number of microeconomic indicators
to help Congress and the public monitor the level of financial risk
posed by AIG and the status of AIG's restructuring and repayment
efforts. Our indicators track the following elements:
* status of AIG's financial condition,
* status of the wind down of AIGFP,
* financial condition AIG's insurance subsidiaries, and:
* amount of repayment of federal assistance.
The indicators, which are discussed in detail in appendix V, are
designed to help guide Congress and the public in their oversight
efforts and raise questions for AIG, Treasury, and Federal Reserve
officials about observed trends and the status of progress toward
achieving desired goals. Because no single indicator provides a
definitive measure of AIG's progress, they should be considered
collectively and evaluated in the context of the ongoing situation.
Moreover, these indicators should not be viewed as exhaustive, and
there may be other indicators, such as those that track the market
value of AIG's assets, that also would provide insights into the status
of AIG's operations and ability to repay. We plan to continue to refine
these indicators and to provide periodic updates as part of our ongoing
oversight of TARP.
Federal Assistance Has Been Key to Helping Stabilize AIG's Financial
Condition:
While AIG's financial condition stabilized or improved in the second
quarter of 2009 by several measures--including liquidity, credit
ratings, shareholders' equity, and operating income--most of this
improvement was attributable to the assistance it received from the
Federal Reserve and Treasury.
* Liquidity. AIG's primary sources of liquidity continue to be the
FRBNY Revolving Credit Facility and Treasury's equity facility. While
the long-term goal is for the company to be able to acquire its
liquidity from private sources and its own operations instead of the
government, AIG remains heavily reliant on federal assistance to meet
its liquidity needs.
* Credit ratings. Overall, AIG's credit ratings have remained stable
since May 2009, due in part to the support of the government. Although
Fitch's credit ratings of AIG in the long-term debt, property/casualty
insurer, and life insurer categories were lower in May 2009 than in
March 2009, AM Best, Moody's, and Standard & Poor's (S&P) maintained
the same ratings in those categories.[Footnote 55] Fitch's downgrades
did not have a major effect on AIG's its insurance business. However,
if AIG becomes unable to meet its obligations, rating agencies could
downgrade the company's key credit ratings, which could impede its
restructuring efforts. Conversely, an upgrade in AIG's credit ratings
would indicate an improvement in its condition.
* Shareholders' equity. Trends, level, and composition of AIG's
consolidated shareholders' equity--generally a company's total assets
minus total liabilities--are also indicators of solvency. The efforts
of AIG, FRBNY, and Treasury to restructure the composition of the
federal assistance have reduced AIG's debt and boosted its
shareholders' equity. Moreover, the largest contributor to leveling off
shareholders' equity has been paid-in capital primarily associated with
the federal assistance and investment.[Footnote 56] In the second
quarter of 2009, AIG's accumulated deficits were cut to $3.1 billion
from of $16.7 billion in the previous quarter.
* Operating income and losses. Operating income and losses include the
profits or losses generated by AIG's operating companies and provide a
measure of AIG's financial condition. A large portion of AIG's losses
in the second half of 2008 were associated with investment losses in
its life insurance and retirement services subsidiaries. Another
significant portion of AIG's operating losses in the fourth quarter of
2008 resulted from interest expense and fees on the FRBNY Revolving
Credit Facility, which totaled over $10 billion. In the first quarter
of 2009, these losses were cut dramatically due to the sale of certain
assets to the Maiden Lane facilities created by FRBNY, the unwinding of
portions of AIGFP's portfolio of assets, and the restructuring of the
assistance provided to AIG, which reduced its debt and the interest and
fees paid on the debt. In the second quarter of 2009, AIG reported an
operating income before taxes of $1.3 billion, compared to an operating
loss of $8.8 billion in the same quarter of the previous year.
Increased profitability in its various operating segments could improve
AIG's ability to sell its noncore assets, restructure its operations,
and repay federal assistance, while increased losses could pose an
ongoing threat to its viability.
Maiden Lane III Enabled AIGFP to Unwind Most of Its Riskiest Positions
and, with Other Unwinding Actions, Contributed to Progress in AIG's
Financial Strength:
FRBNY's creation of Maiden Lane III enabled AIGFP to unwind its book of
CDS that protects multi-sector CDOs, a major source of the liquidity
strain.[Footnote 57] In the fall of 2008, AIGFP developed a strategy to
unwind its derivatives portfolio in which it attempted to strike the
most efficient balance between loss mitigation and the rapid unwinding
of this portfolio. Initially, AIGFP focused on unwinding the riskiest
books in its portfolio, and according to AIGFP, this goal has been
substantially accomplished. Overall, AIGFP has fewer outstanding trade
positions and fewer books of business. In addition, two areas that
should be monitored closely--the amount of underlying CDOs rated below
BBB and AIG CDS premiums--only started to show signs of stabilizing in
the second quarter of 2009. While AIGFP officials originally estimated
that the unwinding of positions would take from approximately 2 to 4
years, they now believe that the majority of the unwinding can be
completed by the end of 2009, provided the markets remain stable and
AIG maintains its credit rating.
AIGFP monitors the status of four indicators, which have all declined,
indicating progress in winding down AIGFP's operations (see app. V).
First, the number of outstanding trade positions--the number of AIGFP's
outstanding long and short derivative contracts--has continued to
decline. Second, the gross notional amount of derivatives outstanding,
which is a measure of the size of AIGFP's derivatives portfolio (not
actual risk), has also continued to fall slightly. Third, 5 of the 22
businesses or risk books that AIGFP is winding down have "decreased."
[Footnote 58] Finally, the number of employees or the staff size of
AIGFP, which may change for several reasons, such as the sale of
businesses, closing offices, or employee resignations, has continued to
decrease.
We also found that AIGFP's unwinding of its super senior CDS portfolio
appears to be progressing, as indicated by the following measures:
[Footnote 59]
* The net notional amount has decreased over the past year, potentially
indicating progress in unwinding AIGFP's obligations.[Footnote 60]
* The fair value of derivative liability has also decreased, indicating
that the market views AIG's liabilities as being less risky.[Footnote
61] This should enable AIGFP to eliminate these liabilities at less
expense.
* The unrealized market valuation gain or loss tracks the change in the
fair value of AIGFP's derivative liabilities from quarter to quarter.
This value has fluctuated over the past year but trended upward in the
second quarter of 2009, indicating a positive change in fair values.
Activity in selected aspects in AIGFP's portfolio also provides
information about the status of AIGFP's unwinding efforts.
* AIGFP's book of regulatory capital CDS that provide protection to
European banks against default from certain loans on their balance
sheets has seen a steady decline in the net notional amount since the
fall of 2008 and achieved a reduction in the fair value of the
liabilities in the second quarter of 2009. Though these CDS contracts
continue to have a high net notional value relative to the other types
of products, AIGFP continues to believe that these contracts will
expire or be called by counterparties with little to no cost to AIG.
AIGFP does not plan to sell these contracts but plans to let them
expire because management believes that trying to sell them would not
be cost effective.
* The net notional and fair values of AIGFP's CDS on multi-sector CDOs
dropped in the fourth quarter of 2008 when most of the assets in this
category were sold to Maiden Lane III. Moreover, the amount of asset-
backed securities rated below BBB has been significantly lower
following the sale of most of these assets to Maiden Lane III, which
helped stabilize the multi-sector CDOs portfolio since the third
quarter of 2008.[Footnote 62] However, with the exception of subprime
mortgage-backed securities, from the fourth quarter of 2008 to the
first quarter of 2009, the amount of underlying asset-backed securities
rated below BBB rose in every category. By the second quarter some had
begun to fall, but some remained elevated over 2008 levels. This
indicates deteriorating credit quality of its other holdings including
prime, commercial, and Alt-A mortgage-backed securities.
* Finally, AIGFP has also shown some modest progress in reducing its
CDS portfolios relating to corporate collateralized loan obligation
portfolio and mezzanine tranches.
Another indicator of AIG's financial strength is the price of
purchasing CDS protection against AIG defaulting on senior unsecured
debt. This indicator measures what the market believes is AIG's
probability of default. The higher the CDS premiums, the greater the
market's expectation that AIG will default. Conversely, the lower the
CDS premiums, the lower the market's expectation that AIG will default
or the greater its confidence in AIG's financial strength. AIG's CDS
premiums as of September 8, 2009, are lower than they were in the
fourth quarter of 2008, but it is too soon to say whether they are
stabilizing. As the Federal Reserve noted, the premium on AIG's CDS is
based on both the market's assessment of the government's level of
commitment to assist AIG as well as AIG's financial strength.
AIG's Insurance Operations Show Some Signs of Recovery with the Life
Insurance Companies Largely Aided by the Federal Assistance:
The success of AIG's insurance operations is important to its
restructuring plans. Indicators of their financial health have started
to show signs of stabilizing and their long-term financial stability is
vital to AIG's restructuring plans and the ultimate repayment of
assistance. However, it will take several quarters of data to be able
to determine more meaningful trends.
* Levels of capital. AIG's property/casualty insurers and domestic life
insurance and retirement services companies have maintained levels of
capital higher than the minimum requirement set by NAIC. However,
without the federal assistance provided to AIG's domestic life and
retirement companies associated with Maiden Lane II, the capital
balance would not have been adequate to cover losses in 2008.
Conversely, AIG's property/casualty companies have maintained levels of
adjusted capital in excess of requirements with virtually no direct
federal assistance.
* Income gains and losses. The life insurance and retirement services
segment losses associated with investment activity through its
securities lending program accounted for a significant portion of AIG's
losses in the fourth quarter of 2008. The federal assistance provided
through Maiden Lane II helped enable this segment to realize income
gains from operations and post a moderate income gain in the second
quarter of 2009.
* Withdrawals and deposits. In the fourth quarter of 2008, the life and
retirement services segment saw a sharp decline in policyholders'
contract deposits and a large spike in withdrawals. However, without
more granular data, we cannot determine whether the withdrawals were
driven by concerns about the condition of AIG specifically or by the
overall economic downturn, which may have resulted in policyholders
cashing in policies for economic reasons. The almost $26 billion
disparity between the withdrawals and deposits adversely affected the
liquidity position of this segment in late 2008. However, the segment
started to rebound in the first quarter of 2009 and by the second
quarter of 2009, the gap had closed significantly to $3 billion,
bringing the amounts closer to historical levels. However, withdrawals
continue to outstrip deposits and should be monitored.
* Premiums written. AIG's property/casualty insurance businesses are
expected to be AIG's core business once it is restructured and divests
other operations. Therefore, in monitoring the status of AIG's
restructuring efforts, premiums written in this segment provide an
indicator of AIG's ability to retain business and attract new business.
However, this is not a perfect measure because multiple factors,
including industry-wide factors such as softening or hardening markets,
can affect premiums written. Nevertheless, changes in premiums written
can also provide some indication of the success of AIG's efforts to
retain and attract business, such as the formation of Chartis, Inc. and
effectively rebranding the company. Through 2007, 2008, and the first
quarter of 2009, premiums written by AIG's property and casualty
subsidiaries trended downward, which closely followed the general
industry trend. The current data are not clear as to whether this trend
is leveling off.
With Restructured Federal Assistance, AIG Has Begun to Repay Its Debt
to the Government but the Success of These Repayment Efforts Is
Unclear:
The U.S. government has committed around $182 billion in its efforts to
prevent the failure of AIG.[Footnote 63] As of September 2, 2009,
$120.9 billion had been used and, as discussed earlier in this report,
the assistance has taken a variety of forms. Changes in the amount and
composition of the federal assistance may provide insights about the
overall condition of AIG and the extent of its reliance on federal
assistance. The assistance falls into four broad categories: (1) debt
owed by AIG to the government, (2) equity shares in AIG owned by the
government, (3) other debt owe to the government on behalf of AIG, and
(4) equity shares in AIG-related entities owned by the government.
While most of the $120.9 billion in assistance provided as of September
2, 2008, has been a $38.8 billion secured loan balance to AIG via the
FRBNY Revolving Credit Facility and Treasury's approximately $45
billion purchase of preferred shares and outstanding balance on the
equity facility, the government has also provided about $37 billion in
more indirect assistance by creating and making loans to Maiden Lanes
II and III for the purchase of CDOs from AIG's counterparties and
residential mortgage-backed securities from AIG. The other forms of
indirect assistance have not been completed as of September 2, 2009.
[Footnote 64] For more detailed information, see appendix V.
The outstanding amount AIG owes as of September 2, 2009, on the FRBNY
Revolving Credit Facility is almost $39 billion, which includes loan
principal, all capitalized interest and fees, and the amortized portion
of FRBNY's initial commitment fee.[Footnote 65] Since December 2008,
the outstanding balance on the facility has remained fairly steady at
around $40 billion. Changes in amounts owed on the facility fluctuate
weekly and could indicate increased liquidity needs related to
restructuring decisions or decreased liquidity needs, resulting in
payments to the facility. Similar to the liquidity measure discussed
earlier, the balance of the facility provides some indication of AIG's
ongoing reliance on federal assistance to fund its obligations.
The Maiden Lane II and Maiden Lane III portfolios are funded primarily
by loans from FRBNY, which are not debt owed by AIG but rather are to
be repaid from the maturity or liquidation of assets held in each
facility.[Footnote 66] The amount owed on the loans and their portfolio
values peaked in December 2008 and subsequently have trended downward.
[Footnote 67] The Federal Reserve said it plans to hold on to the
Maiden Lane assets until they mature or increase in value to a point
where the Federal Reserve can maximize the amount of money recovered
through a sale of assets. While the portfolio value has declined
slightly, the Federal Reserve continues to believe that the assets held
in the Maiden Lanes will appreciate over time and the Maiden Lanes will
continue to receive payments of principal and interest on their
portfolios before maturity or sale. As assets mature, are sold, or pay
interest, any portion remaining after paying operating expenses of the
Maiden Lanes goes toward the loan balance. These payments will reduce
the amount of principal owed to the FRBNY. By monitoring these
balances, we can track the status of AIG's repayment of the assistance.
As of September 2, 2009, proceeds from the Maiden Lanes had been used
to pay down $6.8 billion of the outstanding principal.
Finally, as part of AIG's restructuring plan, the company is selling
some of its businesses. Tracking the sales of AIG entities and net cash
proceeds from these sales provides an additional indicator of the
status of AIG's restructuring efforts. AIG has realized $8.6 billion in
total proceeds from sales as of September 30, 2009, $5 billion of which
was cash. AIG plans to use the cash proceeds from these sales to meet
its obligations, including the FRBNY Revolving Credit Facility, to
cover capital needs, and to provide loans to its subsidiaries. As of
May 1, 2009, AIG said that it had paid down $1.4 billion on the FRBNY
Revolving Credit Facility from the proceeds of sales. AIG stated that
it expects to have $4.6 billion available to pay toward the facility
from the proceeds of sales that it has recently closed. Sales in 2009
have far surpassed those in 2008.
As a result of the determination that AIG posed systemic risk to the
financial system in light of the unfolding events of the last year, the
Federal Reserve and Treasury have taken unprecedented steps to help
stabilize AIG's operations and allow for an orderly divestiture of its
operations. While the second quarter of 2009 provided some signs of
improvement over the first quarter, the company continues to rely
heavily on the federal government as its source of liquidity and
capital. AIG's insurance companies have started to show some positive
signs in the second quarter of 2009, but it is too early to determine a
trend. Likewise, AIGFP has stated it has unwound a substantial amount
of its riskiest books with expectations of unwinding the majority of
its books by the end of 2009. AIG is continuing to sell some of its
businesses, the Maiden Lanes have begun to make payments on their
facilities, and Federal Reserve officials remain positive about future
repayment from the Maiden Lanes.
The sustainability of any positive trends of AIG's operations and
repayment efforts is not yet clear. The government's ability to recoup
the federal assistance money depends on the long-term health of AIG,
its sales of certain businesses, and the maturation or sale of assets
in the Maiden Lanes, among other factors. Although the Federal Reserve
and Treasury have yet to develop specific milestones and targets for
AIG's progress, the Federal Reserve's secured loan, which has a 5-year
term, carries an implicit timeline. Treasury has publicly stated that
it wants to sell its investments back to the companies in which it has
invested under TARP as soon as possible. We will continue to monitor
these issues in our future work.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Federal Reserve, FRBNY, and
Treasury for comment. We also provided an informational copy to AIG for
its review. We received written comments from Treasury that are
reprinted in appendix I. The Federal Reserve and FRBNY did not provide
written comments. We received technical comments from Treasury, the
Federal Reserve, FRBNY, and AIG that are incorporated, as appropriate.
In its written comments Treasury noted that it had no substantive
comments on the report.
We are sending copies of this report to the Congressional Oversight
Panel, Financial Stability Oversight Board, SIGTARP, interested
congressional committees and members, Treasury, the federal banking
regulators, and others. The report also is available at no charge on
the GAO Web site at [hyperlink, http://www.gao.gov].
Orice Williams Brown is our point of contact on this report. She can be
reached at (202) 512-8678 or williamso@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff who made major contributions to
this report are listed in appendix VI.
Signed by:
Gene L. Dodaro:
Acting Comptroller General of the United States:
List of Congressional Committees:
The Honorable Daniel K. Inouye:
Chairman:
The Honorable Thad Cochran:
Vice Chairman:
Committee on Appropriations:
United States Senate:
The Honorable Christopher J. Dodd:
Chairman:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Kent Conrad:
Chairman:
The Honorable Judd Gregg:
Ranking Member:
Committee on the Budget:
United States Senate:
The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable David R. Obey:
Chairman:
The Honorable Jerry Lewis:
Ranking Member:
Committee on Appropriations:
House of Representatives:
The Honorable John M. Spratt, Jr.
Chairman:
The Honorable Paul Ryan:
Ranking Member:
Committee on the Budget:
House of Representatives:
The Honorable Barney Frank:
Chairman:
The Honorable Spencer Bachus:
Ranking Member:
Committee on Financial Services:
House of Representatives:
The Honorable Charles B. Rangel:
Chairman:
The Honorable Dave Camp:
Ranking Member:
Committee on Ways and Means:
House of Representatives:
[End of section]
Appendix I: Comments from the Department of the Treasury:
Department Of The Treasury:
Washington, D.C 20220:
September 17, 2009:
Thomas J. McCool:
Director, Center for Economics:
Applied Research and Methods:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Mr. McCool:
Thank you for providing the Department of the Treasury (Treasury) the
opportunity to review and comment on your draft audit report regarding
government assistance to American International Group (AIG). Treasury
appreciates the Government Accountability Office's (GAO) comprehensive
review of actions taken by Treasury and the Federal Reserve to assist
AIG in order to stabilize the financial system. This letter provides
Treasury's official response to the GAO's study.
Treasury has reviewed the report for factual accuracy and provided
technical corrections to GAO staff. We have no substantive comments as
to the content of the report. We thank you again for your continuing
work in reviewing Treasury's actions to stabilize the financial system.
Sincerely,
Signed by:
Herbert M. Allison, Jr.
Assistant Secretary for Financial Stability:
Enclosure:
[End of section]
Appendix II: Overview of the American International Assurance and
American Life Insurance Company Transactions:
In March 2009, the Board of Governors of the Federal Reserve System
(Federal Reserve) and American International Group, Inc. (AIG)
announced that two special purpose vehicles would be formed to hold all
of the common stock in American International Assurance (AIA) and
American Life Insurance Company (ALICO)--two life insurance companies--
on behalf of the Federal Reserve Bank of New York (FRBNY). Upon closing
of this transaction, AIG's debt outstanding on the $60 billion
Revolving Credit Facility created by FRBNY in September 2008 would be
reduced by $25 billion ($16 billion from AIA and $9 billion from
ALICO).[Footnote 68] AIG and FRBNY reached a final agreement on June
25, 2009, on the terms of the agreement, which is expected to close in
2009. Under the terms of the agreements, AIG will retain 100 percent of
the common interests of the AIA and ALICO special purpose vehicles
(SPV) but FRBNY will have a substantial ownership interest in the form
of preferred interests in the SPVs. AIG will retain 100 percent of the
voting power of the SPVs, including the right to appoint the boards of
managers of both SPVs, but FRBNY will have certain governance rights.
After the common stock of ALICO and AIA is transferred to the SPVs, the
SPVs are expected to be sold or entered into an initial public
offering. The proceeds from the sale or offering of AIA's SPV will be
divided in the following order and each category must be fully paid
before proceeding to the next lower category (see figure 4):
1. pay the current quarter return on equity owed to FRBNY;
2. pay 1 percent of net income for all previous years to FRBNY;
3. pay the liquidation preference of $16 billion to FRBNY;
4. pay $9 billion to the common members of the SPV, plus 99 times the
amount paid in clause 2 above, plus the amount of any additional
capital contributions made by the common members; and:
5. pay 99 percent of any remaining proceeds from the sale to the common
members of the SPV. FRBNY is entitled to 1 percent of any remaining
proceeds from the sale of the SPV.
Figure 4: AIG Restructuring and SPV Sale:
[Refer to PDF for image: illustration]
This illustration represents AIG Restructuring and SPV Sale, as
indicated above.
Source: GAO.
[End of figure]
The proceeds from the sale of ALICO SPV will be divided in the
following order and each category must be fully paid before proceeding
to the next lower category (see figure 4):
1. pay the current quarter return on equity owed to FRBNY;
2. pay the liquidation preference of $9 billion to FRBNY;
3. pay $6 billion to the common members of the SPV, plus the amount of
any additional capital contributions made by the common members; and:
4. pay 95 percent of any remaining proceeds from the sale to the common
members of the SPV. FRBNY is entitled to 5 percent of any remaining
proceeds from the sale of the SPV.
According to Federal Reserve officials, the transfer of the preferred
interest in the AIA and ALICO SPVs is expected to occur before the end
of 2009. FRBNY's preferred interests will entitle it to limited veto
rights over certain significant actions and the right, subject to
certain restrictions, to compel the SPVs to take certain actions,
including issuing an initial public offering or selling the SPVs.
[End of section]
Appendix III: Overview of the Executive Compensation Restrictions:
The Emergency Economic Stabilization Act of 2008 (the act) included
limitations on executive compensation for firms participating in the
Troubled Asset Relief Program (TARP). Accordingly, the November 25,
2008, agreement between American International Group, Inc. (AIG) and
the Department of the Treasury (Treasury) concerning the purchase of
Series D preferred shares included a requirement that AIG comply with
the act's executive compensation requirements. Also on November 25, AIG
announced its agreement to executive compensation restrictions that
went beyond the act's requirements. In addition to eliminating 2008
annual bonuses and salary increases through 2009 for AIG's top
management, and eliminating salary increases through 2009 for a group
of senior executives, AIG also announced plans to develop a funding
structure to ensure that no taxpayer dollars were used for annual
bonuses or future cash performance awards to the top 60 members of
management. The American Recovery and Reinvestment Act of 2009 (ARRA)
restated and amended the act's executive compensation provisions; the
terms of Treasury's subsequent investments in AIG require the firm to
be in compliance with the act's executive compensation and corporate
governance requirements, as amended by ARRA, as well as any related
guidance or regulations.
On June 10, 2009, Treasury announced an interim final rule to implement
the executive compensation and corporate governance provisions of the
act, as amended by ARRA, as well as to adopt certain additional
standards deemed necessary by the Secretary to carry out the purposes
of the act.[Footnote 69] The interim final rule requires that
recipients of TARP financial assistance meet standards for executive
compensation and corporate governance. The requirements generally
include:
* limits on compensation that exclude incentives for senior executive
officers to take unnecessary and excessive risks that threaten the
value of TARP recipients;[Footnote 70]
* provision for the recovery of any bonus, retention award, or
incentive compensation paid to a senior executive officer or the next
20 most highly compensated employees based on materially inaccurate
statements of earnings, revenues, gains, or other criteria;
* prohibition on making any large severance payments, or "golden
parachute" payments, to a senior executive officer or any of the next 5
most highly compensated employees;
* prohibition on the payment or accrual of bonuses, retention awards,
or incentive compensation to senior executive officers or certain
highly compensated employees, subject to certain exceptions for
payments made in the form of restricted stock; and:
* prohibition on employee compensation plans that would encourage
manipulation of earnings reported by TARP recipients to enhance
employees' compensation.
The new interim regulations also require the establishment of the
Office of the Special Master for TARP Executive Compensation (Special
Master) to address the application of the rules to TARP recipients and
their employees. The duties and responsibilities of the Special Master
with respect to TARP recipients of "exceptional assistance," such as
AIG, include reviewing and approving compensation payments and
compensation structures applicable to the senior executive officers and
certain highly compensated employees.[Footnote 71] The Special Master
will also have responsibility for administering the review of bonuses,
retention awards, and other compensation paid to employees of TARP
recipients before February 17, 2009, and the negotiation of appropriate
reimbursements to the federal government. Finally, the interim final
rule also establishes compliance reporting and record-keeping
requirements regarding the rule's executive compensation and corporate
governance standards. While certain scheduled bonus payments are not
subject to the interim final rule's requirements or the jurisdiction of
the Special Master, AIG has solicited Treasury's input. As of September
15, 2009, Treasury had not provided an opinion.
[End of section]
Appendix IV: Summary of Rating Agencies' Ratings:
Grade and Quality: Highest grade and quality;
Definitions: There is an extremely strong capacity to meet financial
commitments on the obligation and bonds have little investment risk;
Moody's[A]: Aaa;
S&P[B]: AAA;
Fitch[B]: AAA.
Grade and Quality: High grade and quality;
Definitions: There is a very strong capacity to meet financial
commitment on the obligation and bonds have very little investment
risk, but margins of protection may be lower than with the highest
grade bonds;
Moody's[A]: Aa;
S&P[B]: AA;
Fitch[B]: AA.
Grade and Quality: Upper medium grade and quality;
Definitions: There is a strong capacity to meet financial commitment on
the obligation and the principle and interest are adequately secured,
but the bonds are more vulnerable to a changing economy;
Moody's[A]: A;
S&P[B]: A;
Fitch[B]: A.
Grade and Quality: Medium and lower medium grade;
Definitions: There are adequate protections for these obligations but
the bonds have investment and speculative characteristics. This group
comprises the lowest level of investment grade bonds;
Moody's[A]: Baa;
S&P[B]: BBB;
Fitch[B]: BBB.
Grade and Quality: Noninvestment and speculative grades;
Definitions: There is little protection on these obligations and the
interest and principle may be in danger, where default may be likely;
Moody's[A]: Ba1 and below;
S&P[B]: BB+ and below;
Fitch[B]: BB+ and below.
Sources: Moody's, S&P, and Fitch.
[A] Moody's has numerical modifiers of 1, 2, and 3 in each rating
classification from Aa to B: '1' indicates that the issue ranks in the
higher end of the category, '2' indicates a mid-range ranking, and '3'
indicates that the issue ranks in the lower end of the category.
[B] S&P and Fitch: Ratings from 'AA' to 'CCC' may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing
within the major rating categories.
[End of table]
[End of section]
Appendix V: Overview of the AIG Risk and Repayment Indicators:
We have developed several indicators intended to help monitor the
financial risk posed by American International Group, Inc. (AIG) and
the status of AIG repayment efforts. These indicators are identified
and summarized below.
Table 2: Overview of Indicators of AIG's Financial Risk and Repayment
of Federal Assistance:
AIG:
Figure/Table: Table; 3;
Indicator: Credit Ratings;
Purpose--to monitor: Changes in key credit ratings.
Figure/Table: Figure; 5;
Indicator: AIG Inc.: Corporate Available Liquidity and Company-Wide
Debt Projections;
Purpose--to monitor: The timing of potential future demand on AIG's
liquidity posed by its debt obligations.
Figure/Table: Table; 4;
Indicator: Sources and Amount of Available Corporate Liquidity;
Purpose--to monitor: The timing of potential future demand on AIG's
liquidity posed by its debt obligations.
Figure/Table: Figure; 6;
Indicator: AIG Inc.: Trends in and Main Components of Consolidated
Shareholders' Equity;
Purpose--to monitor: The trends, level, and composition of AIG's equity
capital as an indicator of solvency and capital adequacy.
Figure/Table: Figure; 7;
Indicator: AIG Inc.'s Operations by Major Segment: Operating
Income/Losses Before Taxes;
Purpose--to monitor: The contribution of AIG's operating segments to
overall operating earnings or losses.
Figure/Table: Figure; 8;
Indicator: Status of the Winding Down of AIG's Financial Products
Business;
Purpose--to monitor: The status of the winding down of AIG Financial
Product's business.
Figure/Table: Figure; 9;
Indicator: AIGFP: Super Senior Credit Default Swap Portfolio Net
Notional Amount, Fair Value of Derivative Liability, and Unrealized
Market Valuation Gains and Loss;
Purpose--to monitor: The wind down of the AIG Financial Products' Super
Senior Credit Default Swap portfolio and value of corresponding
liabilities.
Figure/Table: Figure; 10;
Indicator: AIGFP: Gross Notional Value of the Multi-Sector
Collateralized Debt Obligations that Are Rated Less than BBB;
Purpose--to monitor: The credit quality of the underlying assets of
AIGFP's remaining Multi-Sector Collateralized Debt Obligation
portfolio.
Figure/Table: Figure; 11;
Indicator: AIG Credit Default Swap Premiums;
Purpose--to monitor: What the market believes is AIG's probability of
default by tracking prices of 3-year and 5-year Credit Default Swaps
insuring against AIG's default.
AIG Insurance Companies:
Figure/Table: Figure; 12;
Indicator: AIG Insurance Subsidiaries: Regulatory (Adjusted) Capital
and Primary Activities Affecting Stockholders' Equity in 2008;
Purpose--to monitor: The capital of AIG insurers for adequacy and
additional losses that could further deplete capital and require
additional capital contributions by the federal government.
Figure/Table: Figure; 13;
Indicator: AIG Life and Retirement Services: Additions to and
Withdrawals from Policyholder Contract Deposits Including Annuities,
Guaranteed Investment Contracts, and Life Products;
Purpose--to monitor: For potential redemption "runs" by AIG annuitants
and policyholders.
Figure/Table: Figure; 14;
Indicator: AIG Life Insurance and Retirement Services: Key Quarterly
Revenues and Expenses;
Purpose--to monitor: The profitability of AIG's life insurance and
retirement services companies as AIG arranges their disposition.
Figure/Table: Figure; 15;
Indicator: AIG General Insurance: Premiums Written by Division;
Purpose--to monitor: Business retention and new business activity of
AIG property/casualty insurance businesses.
Figure/Table: AIG: Figure; 16;
Indicator: AIG Property/Casualty Insurance: AIG Commercial Insurance
Operating Ratios and AIG Foreign General Insurance Operating Ratios;
Purpose--to monitor: Operating performance of major domestic and
foreign AIG property/casualty insurance businesses.
Repayment of Federal Assistance:
Figure/Table: Table; 5;
Indicator: Composition of U.S. Government Efforts to Assist AIG and the
Government's Remaining Exposure;
Purpose--to monitor: The changes to the composition of assistance and
amount that AIG is obligated to repay the government.
Figure/Table: Figure; 17;
Indicator: FRBNY Revolving Credit Facility Balance Owed and Total
Amount Available;
Purpose--to monitor: AIG's outstanding balance owed to the Revolving
Credit Facility established by the Federal Reserve Bank of New York.
Figure/Table: Figure; 18;
Indicator: Principal Owed and Portfolio Values of Maiden Lane
Facilities;
Purpose--to monitor: Repayment of Federal Reserve Bank of New York
loans to purchase AIG assets and the portfolio values of these assets.
Figure/Table: AIG: Figure; 19;
Indicator: Proceeds of AIG Inc. Business Divestitures, Second Quarter
of 2008 through Second Quarter of 2009;
Purpose--to monitor: The proceeds of AIG's business divestitures.
Figure/Table: AIG: Table; 6;
Indicator: AIG Inc. Business Unit Divestitures by Quarter;
Purpose--to monitor: Sales of AIG Inc. entities and net cash proceeds
from these sales.
Source: GAO.
[End of table]
Indicators of AIG's Financial Condition:
Credit Ratings. This indicator monitors key changes in AIG's credit
ratings (see table 3). Credit ratings measure a company's ability to
repay its obligations and directly affect the cost and availability to
that company of unsecured financing. Downgrades in the ratings can
affect AIG's major insurance operations as well as AIG's liquidity and
ability to restructure. AIG noted that a downgrade on its credit
ratings could likely result in downgrades on insurer financial strength
ratings for the AIG life and property/casualty companies. AIG also
noted that a downgrade could result in further declines in credit
limits and in counterparties' willingness to transact with AIG (to
hedge their portfolios, for example).
Overall, the government's assistance has helped keep AIG's credit
ratings relatively stable since May 2009. Although Fitch Ratings
(Fitch) downgraded AIG in the long-term debt, property and casualty
insurer, and life insurer categories on May 15, 2009, Moody's Investors
Service (Moody's) and Standard & Poor's Ratings Services (S&P)
maintained the same rating in those categories. Therefore, Fitch's
downgrade did not have a major effect on AIG's access to capital or its
counterparty relationships.
Table 3: Credit Ratings, as of March 31, 2009, and May 15, 2009:
Debt; Long-term:
Rating agency: S&P;
Credit rating: Mar. 31, 2009: A-/Negative[A];
Credit rating: May 15, 2009: A-/Negative[A];
Potential consequences of future downgrade: AIGFP would have to post
collateral and termination payments. The total obligations depend on
the market and other factors at the time of the downgrade. For example:
* By close of business on Feb. 18, 2009, a 1-notch, 2-notch, or 3-notch
downgrade from S&P and Moody's would have cost AIG Financial Products
(AIGFP) $8 billion, $10 billion, or $11 billion, respectively;
* By close of business on Mar. 31, 2009, a 1-notch, 2-notch, or 3-notch
downgrade from S&P and Moody's would have cost AIGFP $4.2 billion, $8.2
billion, or $9.2 billion, respectively;
* By close of business on May 22, 2009, a 1-notch, 2-notch, or 3-notch
downgrade from S&P and Moody's would have cost AIGFP $3.8 billion, $6.8
billion, or $7.7 billion, respectively.
Rating agency: Moody's;
Credit rating: Mar. 31, 2009: A3/Negative[A];
Credit rating: May 15, 2009: A3/Negative[A];
Potential consequences of future downgrade: AIGFP would have to post
collateral and termination payments. The total obligations depend on
the market and other factors at the time of the downgrade. For example:
* By close of business on Feb. 18, 2009, a 1-notch, 2-notch, or 3-notch
downgrade from S&P and Moody's would have cost AIG Financial Products
(AIGFP) $8 billion, $10 billion, or $11 billion, respectively;
* By close of business on Mar. 31, 2009, a 1-notch, 2-notch, or 3-notch
downgrade from S&P and Moody's would have cost AIGFP $4.2 billion, $8.2
billion, or $9.2 billion, respectively;
* By close of business on May 22, 2009, a 1-notch, 2-notch, or 3-notch
downgrade from S&P and Moody's would have cost AIGFP $3.8 billion, $6.8
billion, or $7.7 billion, respectively.
Rating agency: Fitch;
Credit rating: Mar. 31, 2009: A;
Credit rating: May 15, 2009: BBB/Evolving;
Potential consequences of future downgrade: AIGFP would have to post
collateral and termination payments. The total obligations depend on
the market and other factors at the time of the downgrade. For example:
* By close of business on Feb. 18, 2009, a 1-notch, 2-notch, or 3-notch
downgrade from S&P and Moody's would have cost AIG Financial Products
(AIGFP) $8 billion, $10 billion, or $11 billion, respectively;
* By close of business on Mar. 31, 2009, a 1-notch, 2-notch, or 3-notch
downgrade from S&P and Moody's would have cost AIGFP $4.2 billion, $8.2
billion, or $9.2 billion, respectively;
* By close of business on May 22, 2009, a 1-notch, 2-notch, or 3-notch
downgrade from S&P and Moody's would have cost AIGFP $3.8 billion, $6.8
billion, or $7.7 billion, respectively.
Short-term:
Rating agency: S&P;
Credit rating: Mar. 31, 2009: A-1 for AIG Funding, Curzon, and
Nightingale a;
Credit rating: May 15, 2009: A-1 for AIG Funding, Curzon, and
Nightingale a;
Potential consequences of future downgrade: AIG affiliates in
commercial paper programs (AIG Funding, Curzon Funding LLC, and
Nightingale LLC) could be ineligible for participation in the
Commercial Paper Funding Facility (CPFF). Note: AIG's International
Lease Finance Corporation lost access to CPFF funds after an S&P
downgrade on Jan. 21, 2009.
Rating agency: Moody's;
Credit rating: Mar. 31, 2009: P-1 for AIG Funding[A];
Credit rating: May 15, 2009: P-1 for AIG Funding[A];
Potential consequences of future downgrade: [Empty].
Rating agency: Fitch;
Credit rating: Mar. 31, 2009: F1;
Credit rating: May 15, 2009: F1;
Potential consequences of future downgrade: [Empty].
Financial strength: Life insurer:
Rating agency: AM Best;
Credit rating: Mar. 31, 2009: A/Negative[A];
Credit rating: May 15, 2009: A/Negative[A];
Potential consequences of future downgrade: Domestic retirement
services would be severely affected by a high surrender rate and
further suspension of sales in some firms, and would suffer a
significant loss of wholesalers.
Rating agency: S&P;
Credit rating: Mar. 31, 2009: A+/Negative;
Credit rating: May 15, 2009: A+/Negative;
Potential consequences of future downgrade: Domestic life new business
would be severely affected, in several instances forcing the company to
exit businesses that serve either the high-net-worth marketplace or
businesses that are governed by trust contracts. The company would need
to continue to dedicate key resources to retention and management of
existing relationships.
Rating agency: Moody's;
Credit rating: Mar. 31, 2009: A1/developing;
Credit rating: May 15, 2009: A1/developing;
Potential consequences of future downgrade: [Empty].
Rating agency: Fitch;
Credit rating: Mar. 31, 2009: AA-;
Credit rating: May 15, 2009: A-/Evolving;
Potential consequences of future downgrade: [Empty].
P&C insurer:
Rating agency: AM Best;
Credit rating: Mar. 31, 2009: A/Negative[A];
Credit rating: May 15, 2009: A/Negative[A];
Potential consequences of future downgrade: AIG commercial
property/casualty businesses expect that a financial strength rating
downgrade would result in a loss of approximately 50 percent of the net
premiums written and operating losses for the domestic business. For
the foreign businesses, a downgrade could cause regulators to further
strengthen operational and capital requirements. Staff retention could
become a key issue, and premiums would significantly deteriorate.
Rating agency: S&P;
Credit rating: Mar. 31, 2009: A+/Negative;
Credit rating: May 15, 2009: A+/Negative;
Potential consequences of future downgrade: [Empty].
Rating agency: Moody's;
Credit rating: Mar. 31, 2009: Aa3/Negative;
Credit rating: May 15, 2009: Aa3/Negative;
Potential consequences of future downgrade: [Empty].
Rating agency: Fitch;
Credit rating: Mar. 31, 2009: AA-;
Credit rating: May 15, 2009: A+/Evolving;
Potential consequences of future downgrade: [Empty].
Sources: AIG Securities and Exchange Commission (SEC) filings; S&P,
Fitch, Moody's, and AM Best press releases; and AIG.
[A] These are key ratings.
[End of table]
AIG: Corporate Available Liquidity and Company-Wide Debt Projections.
This indicator monitors the timing of potential future demand on AIG's
liquidity posed by its debt obligations (see figure 5 and table 4).
These liquidity measures reflects AIG's ability to meet its cash
payment needs. A decrease in available liquidity, or an increase in
debt, could increase the risk of insolvency. Sources of available
liquidity provide an indication of how AIG obtains the funds needed to
meet its obligations. The greater the portion of current available
liquidity provided by AIG's own operations, the less reliant they are
on federal assistance.
AIG's liquidity has increased primarily because of federal assistance.
As illustrated in figure 5, in order to assist AIG with its liquidity
needs, the Federal Reserve Bank of New York (FRBNY) modified the
original repayment date for the Revolving Credit Facility from 2010 to
2013. The amount owed on the facility also decreased as a result of AIG
using the proceeds of its sales of preferred stock to the Department of
the Treasury (Treasury) to pay down the outstanding balance on the
facility. As discussed earlier in this report, AIG is expected to have
similar decreases in the future as assets are sold and/or its debt is
restructured.
Figure 5: AIG: Corporate Available Liquidity and Company-Wide Debt
Projections (dollars in millions), Third Quarter of 2008 through Second
Quarter of 2009:
[Refer to PDF for image: illustration]
Q3 - 2008:
Corporate available liquidity (as of date): $33,420 (11/15/08);
Company-wide debt maturing in 2009: $28,057;
Company-wide debt maturing in 2010: $62,960 (Federal Reserve facility)
$21,690;
Company-wide debt maturing in 2011: $14,517;
Company-wide debt maturing in 2012: $13,230;
Company-wide debt maturing in 2013: $10,756;
Company-wide debt maturing thereafter: $61,882.
Q4 - 2008:
Corporate available liquidity (as of date): $26,653 (2/18/09);
Company-wide debt maturing in 2009: $21,581;
Company-wide debt maturing in 2010: $17,492;
Company-wide debt maturing in 2011: $15,212;
Company-wide debt maturing in 2012: $9,865;
Company-wide debt maturing in 2013: $40,431 (Federal Reserve facility)
$8,861;
Company-wide debt maturing thereafter: $58,193.
Q1 - 2009:
Corporate available liquidity (as of date): $49,620 (4/29/09);
Company-wide debt maturing in 2009: $17,741;
Company-wide debt maturing in 2010: $16,999;
Company-wide debt maturing in 2011: $15,080;
Company-wide debt maturing in 2012: $9,598;
Company-wide debt maturing in 2013: $47,405 (Federal Reserve facility)
$8,430;
Company-wide debt maturing thereafter: $53,710.
Q2 - 2009:
Corporate available liquidity (as of date): $52,585 (6/30/09);
Company-wide debt maturing in 2009: $13,809;
Company-wide debt maturing in 2010: $17,204;
Company-wide debt maturing in 2011: $15,355;
Company-wide debt maturing in 2012: $9,786;
Company-wide debt maturing in 2013: $44,816 (Federal Reserve facility)
$8,575;
Company-wide debt maturing thereafter: $53,783.
Source: AIG SEC filings.
Notes: Available liquidity is at the corporate level and debt maturing
is at the corporate and operating division levels. Much of the debt of
the operating divisions is associated with assets serving as collateral
or funding sources; thus repayment of this debt is not likely to rely
on corporate liquidity. The figures exclude borrowings on consolidated
investments that were less than 3.5 percent of total long-term
borrowings.
[End of figure]
Table 4: Sources and Amounts of Available Corporate Liquidity (dollars
in millions), at November 5, 2008, February 18, 2009, April 29, 2009,
and July 29, 2009:
FRBNY Revolving Credit Facility;
@November 5, 2008: $24,000;
@February 18, 2009: $24,800;
@April 29, 2009: $17,400;
July 29, 2009: $20,000.
Commercial paper under CPFF and syndicated & bilateral facilities;
@November 5, 2008: $5,600;
@February 18, 2009: $753;
@April 29, 2009: $1,940;
July 29, 2009: $3,493.
Unused bank syndicated & bilateral facilities;
@November 5, 2008: $3,820;
@February 18, 2009: [Empty];
@April 29, 2009: [Empty];
July 29, 2009: [Empty].
AIG Cash and short-term investments;
@November 5, 2008: [Empty];
@February 18, 2009: $1,100;
@April 29, 2009: $445;
July 29, 2009: $407.
Treasury Equity Facility;
@November 5, 2008: [Empty];
@February 18, 2009: [Empty];
@April 29, 2009: $29,835;
July 29, 2009: $28,685.
Totals;
@November 5, 2008: $33,420;
@February 18, 2009: $26,653;
@April 29, 2009: $49,620;
July 29, 2009: $52,585.
Sources: Sept. 30, 2008 10Q, Dec. 31, 2008 10K, Mar. 31, 2009 10Q, and
June 30, 2009 10Q.
[End of table]
AIG: Trends in and Main Components of Consolidated Shareholders'
Equity. This indicator is intended to monitor the trends, level, and
composition of AIG's Consolidated Shareholders' Equity as an indicator
of solvency (see figure 6). Shareholders' equity is generally a
company's total assets minus total liabilities. Paid-in capital is
equity capital provided by investors in exchange for common or
preferred stock. Stabilizing or decreasing deficits could indicate
AIG's operating profitability is recovering.
As figure 6 shows, AIG's shareholders' equity fell throughout 2008 and
the first quarter of 2009. In the second quarter of 2009, this trend
reversed as the company saw an increase in shareholders' equity.
However, paid-in capital, primarily from government assistance, was the
largest contributor to this change in shareholders' equity.[Footnote
72] AIG's accumulated deficit for the second quarter of 2009 improved
to $3.1 billion from $16.7 billion in the previous quarter. In
September 2008, AIG, through a non-cash transaction, added $23 billion
to shareholders' equity as additional paid-in capital to record the
fair value of Series C preferred shares that was later issued in order
to obtain AIG's Revolving Credit Facility established by
FRBNY.[Footnote 73] On December 31, 2008, AIG added $40 billion to
shareholders' equity as additional paid-in capital to record the
issuance of AIG Series D preferred shares and a warrant to Treasury. As
mentioned previously, the $40 billion in proceeds were used to pay a
portion of AIG's debt owed on the FRBNY credit facility. To the extent
that AIG improves its profitability, accumulated deficits should shrink
and become retained earnings.
Figure 6: AIG: Trends in and Main Components of Consolidated
Shareholders' Equity, Fourth Quarter of 2007 through Second Quarter of
2009 (Dollars in millions):
[Refer to PDF for image: combined vertical bar and line graph]
Q4, 2007:
Retained earnings/accumulated deficits: $89,029;
Additional paid-in capital: $2,848;
Total shareholders equity: $95,801.
Q1, 2008:
Retained earnings/accumulated deficits: $79,732;
Additional paid-in capital: $9,940;
Total shareholders equity: $79,703.
Q2, 2008:
Retained earnings/accumulated deficits: $73,743;
Additional paid-in capital: $16,448;
Total shareholders equity: $78,088.
Q3, 2008:
Retained earnings/accumulated deficits: $49,291;
Additional paid-in capital: $39,503;
Total shareholders equity: $71,182.
Q4, 2008:
Retained earnings/accumulated deficits: -$12,368;
Additional paid-in capital: $79,468;
Total shareholders equity: $52,710.
Q1, 2009:
Retained earnings/accumulated deficits: -$16,706;
Additional paid-in capital: $79,318;
Total shareholders equity: $45,759.
Q2, 2009:
Retained earnings/accumulated deficits: -$3,073;
Additional paid-in capital: $80,259;
Total shareholders equity: $57,958.
Source: AIG SEC filings.
Note: Other components of total shareholders' equity are preferred
stock (Series C, preferred stock), Series D (common stock exchanged in
April 2009 for Series E preferred shares), accumulated other
comprehensive losses, and Treasury stock. Drawdowns from the $29
billion authorized under the Series F transaction will increase paid-in
capital in the future by an equal amount.
[End of figure]
AIG's Operations by Major Segment: Operating Income/Loss Before Taxes.
This indicator is intended to monitor the contribution of AIG's
operating segments to overall operating earnings or losses (see figure
7). Operating income/losses include the profits or losses generated by
the operating companies. Increased profitability in these segments
could improve AIG's ability to sell its noncore assets, restructure its
operations, and repay federal assistance, while increased losses could
create a greater risk of insolvency. The insurance data include both
investment and underwriting performance.
Federal assistance allowed AIG to stay in business and cut its losses
in late 2008 and early 2009. In the second quarter of 2009, AIG
achieved moderate income gains from its operations. As shown in figure
5, over half of the losses in the fourth quarter of 2008 and over 82
percent of the losses in the third quarter of 2008 were associated with
the financial services and life insurance and retirement services
segments. AIG's general insurance business continued to earn a profit
in the first half of 2008 and had the lowest losses among the major
segments thereafter. In the first quarter of 2009, losses were cut by
nearly 90 percent largely due to the creation of the Maiden Lane
facilities and the unwinding of portions of AIGFP's portfolio of
assets. The "Other" segment in figure 7 was also a major factor in the
fourth quarter 2008 losses. Specifically, 82 percent of the losses in
this segment resulted from interest expense and fees on the FRBNY
Revolving Credit Facility. In the second quarter of 2009, AIG reported
an operating income before taxes of $1.3 billion compared to an
operating loss of $8.8 billion in the same quarter of the previous
year.
Figure 7: AIG's Operations by Major Segment: Operating Income/Loss
Before Taxes, First Quarter of 2008 through Second Quarter of 2009
(Dollars in millions):
[Refer to PDF for image: stacked vertical bar graph]
Q1, 2008:
General Insurance: $1,337;
Life insurance and retirement services: -$1,831;
Financial services: -$8,772;
Asset management: -$1,251;
Other: -$768;
Total: -$11,264.
Q2, 2008:
General Insurance: $827;
Life insurance and retirement services: -$2,401;
Financial services: -$5,905;
Asset management: -$314;
Other: -$715;
Total: -$8,756.
Q3, 2008:
General Insurance: -$2,557;
Life insurance and retirement services: -$15,329;
Financial services: -$8,203;
Asset management: -$1,144;
Other: -$1,416;
Total: -$28,185.
Q4, 2008:
General Insurance: -$5,353;
Life insurance and retirement services: -$17,885;
Financial services: -$17,941;
Asset management: -$6,478;
Other: -$12,156;
Total: -$60,556.
Q1, 2009:
General Insurance: -$1;
Life insurance and retirement services: -$1,873;
Financial services: -$1,122;
Asset management: -$633;
Other: -$2,739;
Total: -$6,368.
Q2, 2009:
General Insurance: $971;
Life insurance and retirement services: $1,818;
Financial services: -$89;
Asset management: -$222;
Other: -$1,337;
Total: $1,319.
Source: AIG SEC filings.
Notes: The insurance data include both investment and underwriting
performance.
The "Other" category includes consolidations and eliminations, equity
earnings in partly owned companies, interest expense on the FRBNY
facility, other interest expenses, unallocated corporate expenses, net
realized capital gains/losses, and other miscellaneous expenses (net).
Compounding interests and fees of the FRBNY facility were $10.6 billion
and $1.5 billion in 2008-q4 and 2009-q1, respectively.
[End of figure]
Indicators of the Status of Winding Down AIG Financial Products:
Status of the Winding Down of AIG's Financial Products' Business. This
indicator is intended to monitor the wind-down status of AIG Financial
Products Corporation (AIGFP). The status of winding down of AIGFP's
business is illustrated by four indicators (see figure 8). First, the
number of outstanding trade positions is the number of AIGFP's
outstanding long and short (positions) derivative contracts. This
number has continued to decline, and AIGFP continues to unwind its
books of business. Second, the notional of derivatives outstanding is
the maximum dollar level exposure of AIGFP's derivatives outstanding,
which has also continued to fall slightly. Third, the number of
businesses is the number of risk books that AIGFP is winding down. In
its switch from growth and profit maximization to risk mitigation and
unwinding, AIGFP reorganized its business into 22 separate risk books
determined in part by type of risk, which fall into the following five
groupings: (1) credit books, (2) investment securities and liabilities
books, (3) capital markets books, (4) principal guaranty products, and
(5) private equity and strategic investment books. The number of books
has decreased from 22 to 17. Finally, the number of employees is the
staff size of AIGFP, which may change for several reasons, such as the
sale of businesses, closing offices, or employee resignation.
Figure 8: Status of the Winding Down of AIG's Financial Products
Business, as of September 30, 2008, December 31, 2008, and March 31,
2009:
[Refer to PDF for image: illustration]
Approximate number of outstanding trade positions:
September 30, 2008: 44,000;
December 31, 2008: 35,000;
March 31, 2009: 28,000.
Gross notional of long and short derivatives positions outstanding
(dollars in trillions):
September 30, 2008: $1.8;
December 31, 2008: $1.6;
March 31, 2009: $1.5.
Number of businesses (risk books):
September 30, 2008: 22;
December 31, 2008: 21;
March 31, 2009: 17;
Number of employees:
September 30, 2008: 428;
December 31, 2008: 375;
March 31, 2009: 362.
Source: Testimony by Mr. Edward M. Liddy, Chairman and Chief Executive
Officer, AIG, before the House Financial Services Subcommittee on
Capital Markets, Insurance and Government Sponsored Enterprises, March
18, 2009, and AIG Restructuring Update, May 7, 2009.
Note: These figures have not been publicly updated by AIG since they
were released in the May 7, 2009 Restructuring Update.
[End of figure]
AIG Financial Products: Super Senior Credit Default Swap Portfolio Net
Notional Amount, Fair Value of Derivative Liability, and Unrealized
Market Valuation Gains and Losses. This indicator is intended to
monitor the wind-down of the AIGFP Super Senior Credit Default Swaps
(CDS) portfolio and value of corresponding liabilities (see figure 9).
Notional denotes the size on which AIGFP wrote credit protection. This
is the maximum dollar-level exposure for the portfolio and represents
an underlying quantity upon which payment obligations are computed. A
decrease in the net notional amount could indicate progress in
unwinding AIGFP's obligations. The fair value of derivative liability
represents the fair market valuation of AIGFP's liabilities in each
asset portfolio. The unrealized market valuation loss (gain) tracks the
increase (decrease) in this valuation from quarter to quarter. A
decrease in the fair value of derivative liability represents a
decrease in the cost to AIGFP to transfer the respective derivatives to
other counterparties in any effort to reduce its liabilities (i.e., the
risk associated with the liabilities is viewed more favorably in the
marketplace and reflects increased willingness to hold the
liabilities). Therefore, such a decrease would be accompanied by
comparable unrealized market valuation gains.
The unwinding of this portfolio appears to be progressing, with a
decrease in the net notional amount of Super Senior CDS portfolio, a
decrease in the fair value of derivative liability, and increases in
unrealized market valuation. The net notional amount represents the
maximum dollar level exposure for the portfolio taking into account
offsetting positions, and measures an underlying quantity upon which
payment obligations are computed. As with the overall portfolio, a
decrease in the net notional amount could indicate progress in
unwinding AIGFP's obligations.
The regulatory capital book of positions was written for European banks
and allows the banks to keep lower reserves by buying protection
against losses on the underlying assets. This book provides protection
to the banks against default from their clients. AIGFP continues to
believe that these positions will unwind at little to no cost, even
though these positions continue to have a high net notional value
relative to the other types of products. Figure 9 shows a large drop in
the net notional and fair values of the multi-sector collateralized
debt obligations from the third quarter to the fourth quarter of 2008.
This decrease largely resulted from federal assistance through the sale
of most of the underlying assets in this category to Maiden Lane III
and the termination of the related CDS. Finally, figure 9 shows that
AIGFP has also shown some modest progress in reducing the CDS portfolio
relating to its corporate collateralized loan obligation portfolio and
mezzanine tranches.
Figure 9: AIGFP: Super Senior Credit Default Swap Portfolio Net
Notional Amount, Fair Value of Derivative Liability, and Unrealized
Market Valuation Gains and Loss, Third Quarter of 2008 through Second
Quarter of 2009:
[Refer to PDF for image: illustrated vertical bar graphs]
Net notional amount (Dollars in millions):
Regulatory capital[A], Q3 2008: $249,947;
Regulatory capital[A], Q4 2008: $234,449;
Regulatory capital[A], Q1 2009: $192,554;
Regulatory capital[A], Q1 2009: $177,473;
Multi-sector collateralized debt obligations[B], Q3 2008: $71,644;
Multi-sector collateralized debt obligations[B], Q4 2008: $12,557;
Multi-sector collateralized debt obligations[B], Q1 2009: $11,984;
Multi-sector collateralized debt obligations[B], Q1 2009: $9,151;
Corporate collateralized loan obligations[C], Q3 2008: $50,678;
Corporate collateralized loan obligations[C], Q4 2008: $50,495;
Corporate collateralized loan obligations[C], Q1 2009: $49,601;
Corporate collateralized loan obligations[C], Q1 2009: $40,941;
Mezzanine tranches[D], Q3 2008: $5,013;
Mezzanine tranches[D], Q4 2008: $4,701;
Mezzanine tranches[D], Q1 2009: $4,217;
Mezzanine tranches[D], Q1 2009: $3,501.
Fair value of derivative liability (Dollars in millions):
Regulatory capital[A], Q3 2008: $397;
Regulatory capital[A], Q4 2008: $379;
Regulatory capital[A], Q1 2009: $393;
Regulatory capital[A], Q1 2009: $47;
Multi-sector collateralized debt obligations[B], Q3 2008: $30,207;
Multi-sector collateralized debt obligations[B], Q4 2008: $5,906;
Multi-sector collateralized debt obligations[B], Q1 2009: $6,715;
Multi-sector collateralized debt obligations[B], Q1 2009: $5,271;
Corporate collateralized loan obligations[C], Q3 2008: $1,534;
Corporate collateralized loan obligations[C], Q4 2008: $2,554;
Corporate collateralized loan obligations[C], Q1 2009: $2,196;
Corporate collateralized loan obligations[C], Q1 2009: $1,104;
Mezzanine tranches[D], Q3 2008: $153;
Mezzanine tranches[D], Q4 2008: $195;
Mezzanine tranches[D], Q1 2009: $182;
Mezzanine tranches[D], Q1 2009: $77.
Unrealized market valuation gain/loss (Dollars in millions):
Regulatory capital[A], Q3 2008: $272;
Regulatory capital[A], Q4 2008: ($18);
Regulatory capital[A], Q1 2009: ($14);
Regulatory capital[A], Q1 2009: $23;
Multi-sector collateralized debt obligations[B], Q3 2008: $6,262;
Multi-sector collateralized debt obligations[B], Q4 2008: $5,832;
Multi-sector collateralized debt obligations[B], Q1 2009: ($809);
Multi-sector collateralized debt obligations[B], Q1 2009: ($284);
Corporate collateralized loan obligations[C], Q3 2008: $528;
Corporate collateralized loan obligations[C], Q4 2008: $1,020;
Corporate collateralized loan obligations[C], Q1 2009: $358;
Corporate collateralized loan obligations[C], Q1 2009: $792;
Mezzanine tranches[D], Q3 2008: ($18);
Mezzanine tranches[D], Q4 2008: $42;
Mezzanine tranches[D], Q1 2009: $13;
Mezzanine tranches[D], Q1 2009: $105.
Source: AIG SEC filings and AIG.
Note: The data for unrealized market valuation gain/loss correspond to
the indicated 3-month quarter.
[A] Regulatory capital represents the CDS portfolio sold to provide
regulatory capital relief to primarily European financial institutions.
In exchange for a periodic fee, these institutions received credit
protection for a portfolio of diversified loans, thus reducing minimum
capital requirements set by their regulators.
[B] Multi-sector collateralized debt obligations represent the CDS
portfolio sold primarily for arbitrage purposes and written on CDO
transactions that generally had underlying collateral of RMBS, CMBS,
and CDO tranche securities.
[C] The corporate collateralized loan obligations portfolio consists of
CDS transactions primarily written on portfolios of senior unsecured
loans.
[D] Mezzanine tranches are a portfolio of CDS transactions written on
obligations that were rated less than investment grade at origination.
[End of figure]
AIGFP: Gross Notional Value of Multi-Sector Collateralized Debt
Obligations That Are Rated Less than BBB. This indicator is intended to
monitor the credit quality of the underlying assets of AIGFP's
remaining multi-sector CDO portfolio, since the amount of future
collateral postings is most significantly affected by declines in the
market value of these underlying assets (see figure 10). AIG has
indicated that in most cases, the assets in AIGFP's multi-sector CDS
portfolio were rated at least BBB (by S&P) or Baa (by Moody's) at
inception. An increase in the percentage of the gross notional amount
of the portfolio rated less than BBB represents deterioration in the
credit quality of the underlying assets, and could increase demands on
liquidity.
The amount of asset-backed securities rated below BBB experienced a $19
billion drop in the fourth quarter of 2008, primarily due to federal
assistance through Maiden Lane III. However, from the fourth quarter of
2008 to the first quarter of 2009, the amount of asset-backed
securities rated below BBB rose in every category except subprime
mortgage-backed securities, indicating deteriorating credit quality of
these holdings. The categories contributing to the largest amount of
increase were commercial mortgage-backed securities and Alt-A
residential mortgages. In the second quarter of 2009, these amounts
started to level off, but prime residential mortgage-backed securities
continued to increase.
Figure 10: AIGFP: Gross Notional Value of Multi-Sector Collateralized
Debt Obligations That Are Rated Less than BBB, Third Quarter of 2008
through Second Quarter of 2009 (Dollars in millions):
[Refer to PDF for image: stacked vertical bar graph]
Q3 2008:
Other: $87;
Commercial mortgage-backed securities: $683;
Prime residential mortgage-backed securities: $716;
CDOs: $4,414;
Alt-A residential mortgage-backed securities: $3,329;
Subprime residential mortgage-backed securities: $17,710;
Total of asset-backed securities: $26,939 (24.8% total gross notional);
Total gross notional value: $108,452.
Q4 2008:
Other: $100;
Commercial mortgage-backed securities: $666;
Prime residential mortgage-backed securities: $128;
CDOs: $1,547;
Alt-A residential mortgage-backed securities: $651;
Subprime residential mortgage-backed securities: $4,910;
Total of asset-backed securities: $8,002 (32% total gross notional);
Total gross notional value: $25,036.
Q1 2009;
Other: $144;
Commercial mortgage-backed securities: $1,001;
Prime residential mortgage-backed securities: $142;
CDOs: $1,798;
Alt-A residential mortgage-backed securities: $2,687;
Subprime residential mortgage-backed securities: $4,398;
Total of asset-backed securities: $10,170 (42.4% total gross notional);
Total gross notional value: $24,008.
Q2 2009:
Other: $182;
Commercial mortgage-backed securities: $1,224;
Prime residential mortgage-backed securities: $1,183;
CDOs: $1,383;
Alt-A residential mortgage-backed securities: $2,661;
Subprime residential mortgage-backed securities: $3,753;
Total of asset-backed securities: $10,406 (52.5% total gross notional);
Total gross notional value: $19,813.
Source: AIG SEC filings.
[End of figure]
AIG Credit Default Swap Premiums. This indicator is intended to monitor
what the market believes is AIG's probability of default by tracking
prices of 3-year and 5-year CDS insuring against AIG's default (see
figure 11). This graphic tracks the premiums, expressed in basis
points, paid by an insured party against a possible AIG default on a
senior unsecured bond and the spreads between the 3-year and 5-year
premiums. A basis point is a common measure used in quoting yield on
bills, notes, and bonds and represents 1/100 of a percent of yield.
Higher basis point levels indicate a higher premium for a CDS contract.
The higher the CDS premium rises, the greater the market's expectation
that AIG will default. Decreases in CDS premiums could indicate
increased confidence in AIG's financial strength.
AIG's CDS premiums are lower in the second quarter of 2009 than they
were in the fourth quarter of 2008, but it is too soon to say whether
they are stabilizing. As the Federal Reserve noted, the market is
trying to judge the government's level of commitment because the
government's backing is driving perceptions about the prospect of
default by AIG, as opposed to simply judging AIG's financial strength.
Figure 11: AIG Credit Default Swap Premiums, January 2007 through July
2009:
[Refer to PDF for image: line graph]
January 2007:
Basis points, 3-year CDs: 6.6;
Basis points, 5-year CDs: 10.7 (9.2 on 1/2/07).
February 2007:
Basis points, 3-year CDs: 6.2;
Basis points, 5-year CDs: 9.9.
March 2007:
Basis points, 3-year CDs: 7;
Basis points, 5-year CDs: 11.2.
April 2007:
Basis points, 3-year CDs: 8.7;
Basis points, 5-year CDs: 14.
May 2007:
Basis points, 3-year CDs: 7.5;
Basis points, 5-year CDs: 11.5.
June 2007:
Basis points, 3-year CDs: 7;
Basis points, 5-year CDs: 11.
July 2007:
Basis points, 3-year CDs: 12.5;
Basis points, 5-year CDs: 13.7.
August 2007:
Basis points, 3-year CDs: 47;
Basis points, 5-year CDs: 63.9.
September 2007:
Basis points, 3-year CDs: 42.1;
Basis points, 5-year CDs: 52.1.
October 2007:
Basis points, 3-year CDs: 26.6;
Basis points, 5-year CDs: 34.5.
November 2007:
Basis points, 3-year CDs: 38.4;
Basis points, 5-year CDs: 62.
December 2007:
Basis points, 3-year CDs: 67.7;
Basis points, 5-year CDs: 75.7.
January 2008:
Basis points, 3-year CDs: 79.7;
Basis points, 5-year CDs: 68.9.
February 2008:
Basis points, 3-year CDs: 137.4;
Basis points, 5-year CDs: 118.3.
March 2008:
Basis points, 3-year CDs: 251.6;
Basis points, 5-year CDs: 195.
April 2008:
Basis points, 3-year CDs: 189.7;
Basis points, 5-year CDs: 177.3.
May 2008:
Basis points, 3-year CDs: 98;
Basis points, 5-year CDs: 87.5.
June 2008:
Basis points, 3-year CDs: 160.4;
Basis points, 5-year CDs: 151.5.
July 2008:
Basis points, 3-year CDs: 243.3;
Basis points, 5-year CDs: 229.8.
August 2008:
Basis points, 3-year CDs: 263.7;
Basis points, 5-year CDs: 254.1.
September 2008:
Basis points, 3-year CDs: 419 (3,922 on 9/16/08);
Basis points, 5-year CDs: 373.3 (3,500 on 9/16/08).
October 2008:
Basis points, 3-year CDs: 1,634;
Basis points, 5-year CDs: 1,421.2.
November 2008:
Basis points, 3-year CDs: 2,798.7;
Basis points, 5-year CDs: 2,460.7.
December 2008:
Basis points, 3-year CDs: 701.8;
Basis points, 5-year CDs: 665.9.
January 2009:
Basis points, 3-year CDs: 555.9;
Basis points, 5-year CDs: 535.
February 2009:
Basis points, 3-year CDs: 542.1;
Basis points, 5-year CDs: 498.7.
March 2009:
Basis points, 3-year CDs: 1,117.6;
Basis points, 5-year CDs: 1,014.9.
April 2009:
Basis points, 3-year CDs: 2,560.4;
Basis points, 5-year CDs: 2,136.0.
May 2009:
Basis points, 3-year CDs: 4,253.9 (4,534 on 5/4/09);
Basis points, 5-year CDs: 3,647.7 (3,683 on 5/4/09).
June 2009:
Basis points, 3-year CDs: 2,036.3;
Basis points, 5-year CDs: 1,703.8.
July 2009:
Basis points, 3-year CDs: 1;577.1;
Basis points, 5-year CDs: 1,410.8.
August 2009:
Basis points, 3-year CDs: 1,257.1;
Basis points, 5-year CDs: 1,158.8.
September 2009:
Basis points, 3-year CDs: 992.2 (1,023 on 9/8/09);
Basis points, 5-year CDs: 940.2 (982 on 9/8/09).
Source: GAO analysis of Datastream data.
Note: A basis point is a common measure used in quoting yield on bills,
notes, and bonds and represents 1/100 of a percent of yield. CDS
provide protection to the buyer of the CDS contract if the assets
covered by the contract go into default.
[End of figure]
Indicators of the Health of AIG's Domestic Insurance Companies:
AIG Insurance Subsidiaries: Regulatory Capital and Primary Activities
Affecting Stockholders' Equity. This indicator is intended to monitor
the capital of AIG insurers for losses that could deplete capital and
require additional capital contributions through federal assistance
(see figure 12). The National Association of Insurance Commissioners
(NAIC) requires that insurance companies hold a minimum amount of
capital as computed by a risk-based capital formula. According to NAIC,
"a company reporting total adjusted capital of 200 percent or more of
minimum risk-based capital (RBC) is a 'no action' level company;
nothing needs to be done by regulators." On the other hand, NAIC states
that "Total Adjusted Capital of < 70 percent triggers a Mandatory
Control Level that requires the regulator to take steps to place the
insurer under control." Moreover, a company's credit ratings are
influenced by, among other things, its ratio of Total Adjusted Capital
to its control level RBC. Figure 12 shows that, as AIG stated, the
property/casualty companies and life companies had adjusted capital of
400 percent and 600 percent, respectively of RBC at year end for both
2007 and 2008. Adverse movements in the primary components of capital
and stockholders' equity may indicate weak performance by the
companies, which could be offset by capital contributions from the
federal government lines of credit in order to maintain the desired
capital ratios.
However, figure 12 also shows without capital contributions, adjusted
capital would not have been adequate to cover losses in 2008. The
capital contributions were part of the federal assistance and losses
were from securities lending activities.
Figure 12: AIG Insurance Subsidiaries: Regulatory (Adjusted) Capital
and Primary Activities Affecting Stockholders' Equity in 2008 (dollars
in millions), December 31, 2007, and December 31, 2008:
[Refer to PDF for image: illustrated vertical bar graph]
AIG‘s largest domestic property/casualty companies:
Adjusted capital, 12/31/07: $26,598;
Adjusted capital, 12/31/08: $24,092;
Control level risk-based capital, 12/31/07: $6,065;
Control level risk-based capital, 12/31/08: $5,966;
Primary activities affecting capital and stockholder‘s equity (2008):
Net income or loss: $2,327;
Unrealized capital losses[A]: -$3,019;
Investor capital contributions: $3,083;
Stockholder dividends[B]: -$4,623.
AIG‘s largest domestic life insurance/retirement services companies:
Adjusted capital, 12/31/07: $20,040;
Adjusted capital, 12/31/08: $15,653;
Control level risk-based capital, 12/31/07: $2,901;
Control level risk-based capital, 12/31/08: $2,474;
Primary activities affecting capital and stockholder‘s equity (2008):
Net income or loss: -$17,602;
Unrealized capital losses[A]: -$24,214;
Investor capital contributions: $23,116;
Stockholder dividends[B]: -$50.
Source: Financial statements filed with the National Association of
Insurance Commissioners.
[A] Includes dividends paid within AIG.
[B] NAIC financial statements show unrealized capital losses
separately.
[End of figure]
AIG Life and Retirement Services: Additions to and Withdrawals from
Policyholder Contract Deposits Including Annuities, Guaranteed
Investment Contracts, and Life Products. This indicator is intended to
monitor for potential redemption "runs" by AIG annuitants and
policyholders (see figure 13). Additions to policyholder contract
deposits are amounts customers have paid to AIG to purchase a policy or
contract. Withdrawals represent redemptions or cancellations of these
instruments. Sharp increases in contract withdrawals and/or reductions
in contract deposits could indicate sharply increased redemptions due
to customer anxiety about AIG in particular or insurance companies more
broadly. Sharp increases in redemptions could strain a company's
liquidity.
As reflected in figure 13, in the fourth quarter of 2008 AIG life and
retirement services saw a sharp decline in additions to policyholders'
contract deposits and a large spike in withdrawals resulting in a gap
of over $26 billion. Without more granular data, we cannot determine
whether the withdrawals were driven by concerns about the condition of
AIG or by the overall economic downturn, which may have resulted in
policyholders cashing in policies for economic reasons. The large
disparity between the withdrawals and deposits adversely impacted the
liquidity position of this segment of AIG. However, AIG rebounded in
the first quarter of 2009 with a 77 percent reduction in the gap
between additions and withdrawals to about $6 billion. In the second
quarter of 2009, the disparity between additions to and withdrawals
from deposits shrank even further to $2.9 billion, bringing the amounts
closer to historical levels. However, withdrawals continue to outstrip
deposits.
Figure 13: AIG Life and Retirement Services: Additions to and
Withdrawals from Policyholder Contract Deposits Including Annuities,
Guaranteed Investment Contracts, and Life Products, First Quarter of
2007 through Second Quarter of 2009:
[Refer to PDF for image: vertical bar graph]
Q1 2007:
Additions to policyholder contract deposits: $14,001;
Withdrawals from policyholder contract deposits: $15,309.
Q2 2007:
Additions to policyholder contract deposits: $14,768;
Withdrawals from policyholder contract deposits: $14,070.
Q3 2007:
Additions to policyholder contract deposits: $16,997;
Withdrawals from policyholder contract deposits: $14,195.
Q4 2007:
Additions to policyholder contract deposits: $19,063;
Withdrawals from policyholder contract deposits: $15,101.
Q1 2008:
Additions to policyholder contract deposits: $16,439;
Withdrawals from policyholder contract deposits: $15,600.
Q2 2008:
Additions to policyholder contract deposits: $16,883;
Withdrawals from policyholder contract deposits: $12,326.
Q3 2008:
Additions to policyholder contract deposits: $13,124;
Withdrawals from policyholder contract deposits: $14,455.
Q4 2008:
Additions to policyholder contract deposits: $850;
Withdrawals from policyholder contract deposits: $27,364.
Q1 2009:
Additions to policyholder contract deposits: $6,988;
Withdrawals from policyholder contract deposits: $12,968.
Q2 2009:
Additions to policyholder contract deposits: $10,546;
Withdrawals from policyholder contract deposits: $13,401.
Source: AIG SEC filings.
[End of figure]
AIG Life Insurance and Retirement Services: Key Quarterly Revenues and
Expenses. This indicator is intended to monitor the profitability of
AIG's life insurance and retirement services companies as AIG arranges
their disposition (see figure 14). Operating income before capital
gains or losses provides an indication of the profitability of the
company's underwriting operations, while capital gains and losses
relate to investment activities not directly related to insurance
underwriting. Increases in operating income or reductions in net
realized capital losses could indicate improvements in the operations
of AIG's life and retirement services companies, including improvement
in market conditions, lower other-than-temporary impairments, and
dissipating effects of lower credit ratings and negative publicity
related to the AIG brand since September 2008.
As shown previously in figure 7, a large portion of the losses incurred
by AIG in the fourth quarter of 2008 came from the life insurance and
retirement services segment. Figure 14 provides a closer look at the
operating gains and losses sustained by the Life and Retirement segment
of AIG. The core underwriting activity of the companies has remained
fairly constant since 2007, with only slight reductions in premiums and
little change in claims and member benefits. The vast majority of the
losses incurred by AIG in 2008 were the result of losses associated
with its investment activity. For example, investment losses associated
with AIG's domestic life and retirement services business accounted for
$11.9 billion of its $12.5 billion in operating losses (95 percent) in
the fourth quarter of 2008. Similarly, for its foreign companies,
losses from AIG's investment activity of almost $6.7 billion accounted
for all of the fourth quarter 2008 losses and totally wiped out
operating income of $1.3 billion, resulting in a loss of almost $5.4
billion. In the second quarter of 2009, AIG's life insurance
subsidiaries achieved an operating income of over $1.8 billion.
Figure 14: AIG Life Insurance and Retirement Services: Key Quarterly
Revenues and Expenses, First Quarter of 2007 through Second Quarter of
2009:
[Refer to PDF for image: vertical bar graph]
Key components of operating income:
Premium income and other considerations:
Q1, 2007:
Domestic: $1,812.
Q2, 2007:
Domestic: $1,667.
Q3, 2007:
Domestic: $1,795.
Q4, 2007:
Domestic: $1,752.
Q1, 2008:
Domestic: $1,871.
Q2, 2008:
Domestic: $1,894.
Q3, 2008:
Domestic: $1,995.
Q4, 2008:
Domestic: $1,616.
Q1, 2009:
Domestic: $1,395.
Q2, 2009:
Domestic: $1,282.
Q1, 2007:
Foreign: $6,613.
Q2, 2007:
Foreign: $6,503.
Q3, 2007:
Foreign: $6,505.
Q4, 2007:
Foreign: $6,980.
Q1, 2008:
Foreign: $7,447.
Q2, 2008:
Foreign: $7,691.
Q3, 2008:
Foreign: $7,359.
Q4, 2008:
Foreign: $7,422.
Q1, 2009:
Foreign: $6,940.
Q2, 2009:
Foreign: $6,837.
Interest and dividend income:
Q1, 2007:
Domestic: $2,534.
Q2, 2007:
Domestic: $2,490.
Q3, 2007:
Domestic: $2,441.
Q4, 2007:
Domestic: $2,421.
Q1, 2008:
Domestic: $2,355.
Q2, 2008:
Domestic: $2,268.
Q3, 2008:
Domestic: $2,394.
Q4, 2008:
Domestic: $2,110.
Q1, 2009:
Domestic: $2,106.
Q2, 2009:
Domestic: $2,057.
Q1, 2007:
Foreign: $2,009.
Q2, 2007:
Foreign: $2,180.
Q3, 2007:
Foreign: $2,342.
Q4, 2007:
Foreign: $2,306.
Q1, 2008:
Foreign: $2,379.
Q2, 2008:
Foreign: $2,556.
Q3, 2008:
Foreign: $2,777.
Q4, 2008:
Foreign: $2,371.
Q1, 2009:
Foreign: $2,206.
Q2, 2009:
Foreign: $2,234.
Policyholder benefits and claims incurred:
Q1, 2007:
Domestic: -$2,583.
Q2, 2007:
Domestic: -$2,420.
Q3, 2007:
Domestic: -$2,548.
Q4, 2007:
Domestic: -$2,511.
Q1, 2008:
Domestic: -$2,591.
Q2, 2008:
Domestic: -$2,714.
Q3, 2008:
Domestic: -$2,869.
Q4, 2008:
Domestic: -$2,543.
Q1, 2009:
Domestic: -$2,502.
Q2, 2009:
Domestic: -$2,152.
Q1, 2007:
Foreign: -$5,580.
Q2, 2007:
Foreign: -$5,494.
Q3, 2007:
Foreign: -$5,506.
Q4, 2007:
Foreign: -$6,643.
Q1, 2008:
Foreign: -$6,119.
Q2, 2008:
Foreign: -$6,345.
Q3, 2008:
Foreign: -$6,174.
Q4, 2008:
Foreign: -$5,223.
Q1, 2009:
Foreign: -$5,781.
Q2, 2009:
Foreign: -$5,763.
Operating income before net realized capital gains or losses:
Q1, 2007:
Domestic: $1,018.
Q2, 2007:
Domestic: $1,263.
Q3, 2007:
Domestic: $892.
Q4, 2007:
Domestic: $1,027.
Q1, 2008:
Domestic: $1,081.
Q2, 2008:
Domestic: $927.
Q3, 2008:
Domestic: $50.
Q4, 2008:
Domestic: -$605.
Q1, 2009:
Domestic: -$128.
Q2, 2009:
Domestic: $268.
Q1, 2007:
Foreign: $1,519.
Q2, 2007:
Foreign: $1,636.
Q3, 2007:
Foreign: $1,598.
Q4, 2007:
Foreign: $1,631.
Q1, 2008:
Foreign: $1,457.
Q2, 2008:
Foreign: $1,682.
Q3, 2008:
Foreign: $962.
Q4, 2008:
Foreign: $1,347.
Q1, 2009:
Foreign: $1,363.
Q2, 2009:
Foreign: $1,253.
Net realized capital losses or gains:
Q1, 2007:
Domestic: -$21.
Q2, 2007:
Domestic: -$297.
Q3, 2007:
Domestic: -$629.
Q4, 2007:
Domestic: -$1,264.
Q1, 2008:
Domestic: -$3,647.
Q2, 2008:
Domestic: -$4,101.
Q3, 2008:
Domestic: -$12,886.
Q4, 2008:
Domestic: -$11,928.
Q1, 2009:
Domestic: -$2,079.
Q2, 2009:
Domestic: $189.
Q1, 2007:
Foreign: -$235.
Q2, 2007:
Foreign: $18.
Q3, 2007:
Foreign: $138.
Q4, 2007:
Foreign: -$108.
Q1, 2008:
Foreign: -$722.
Q2, 2008:
Foreign: -$909.
Q3, 2008:
Foreign: -$3,455.
Q4, 2008:
Foreign: -$6,699.
Q1, 2009:
Foreign: -$1,029.
Q2, 2009:
Foreign: $108.
Operating income or loss:
Q1, 2007:
Domestic: $997.
Q2, 2007:
Domestic: $966.
Q3, 2007:
Domestic: $263.
Q4, 2007:
Domestic: -$237.
Q1, 2008:
Domestic: -$2,566.
Q2, 2008:
Domestic: -$3,174.
Q3, 2008:
Domestic: -$12,836.
Q4, 2008:
Domestic: -$12,533.
Q1, 2009:
Domestic: -$2,207.
Q2, 2009:
Domestic: $457.
Q1, 2007:
Foreign: $1,284.
Q2, 2007:
Foreign: $1,654.
Q3, 2007:
Foreign: $1,736.
Q4, 2007:
Foreign: $1,523.
Q1, 2008:
Foreign: $735.
Q2, 2008:
Foreign: $773.
Q3, 2008:
Foreign: -$2,493.
Q4, 2008:
Foreign: -$5,352.
Q1, 2009:
Foreign: $334.
Q2, 2009:
Foreign: $1,361.
Source: AIG quarterly financial statements.
[End of figure]
AIG General Insurance: Premiums Written by Division. The purpose of
this indicator is to monitor business retention and new business
activity of AIG's property/casualty businesses (see figure 15).
"Premiums written" is the dollar volume of business in a particular
period. Multiple factors, including industry-wide factors such as
softening or hardening markets, can affect premiums written. Changes in
premiums written can also provide some indication of the success of
AIG's efforts to retain and attract business, such as the formation of
Chartis, Inc. and rebranding. According to the Fourth Quarter 2008
Survey of the Council of Independent Agents and Brokers, the
approximately five-year continued decline in average premium rates for
accounts of all sizes is leveling off, perhaps signaling the end of the
current soft market.
Through 2007, 2008 and the first quarter of 2009, premiums written by
AIG's property/casualty subsidiaries trended downward, which closely
followed the general industry trend. AIG noted that in the fourth
quarter of 2008 and the first quarter of 2009 general insurance net
premiums written were also adversely affected by negative AIG
publicity. The current data are not clear as to whether this trend is
leveling off.
Figure 15: AIG General Insurance: Premiums Written by Division, First
Quarter of 2007 through Second Quarter of 2009:
[Refer to PDF for image: multiple line graph]
Q1 2007:
Commercial insurance: $6,009;
Foreign general: $3,618;
Transatlantic personal lines: $1,229;
Transatlantic personal lines: $984;
Mortgage guarantee: $266.
Q2 2007:
Commercial insurance: $6,439;
Foreign general: $3,242;
Transatlantic personal lines: $1,203;
Transatlantic personal lines: $983;
Mortgage guarantee: $272.
Q3 2007:
Commercial insurance: $6,012;
Foreign general: $3,270;
Transatlantic personal lines: $1,253;
Transatlantic personal lines: $985;
Mortgage guarantee: $303.
Q4 2007:
Commercial insurance: $5,652;
Foreign general: $2,921;
Transatlantic personal lines: $1,123;
Transatlantic personal lines: $1,001;
Mortgage guarantee: $302.
Q1 2008:
Commercial insurance: $5,113;
Foreign general: $4,339;
Transatlantic personal lines: $1,288;
Transatlantic personal lines: $1,036;
Mortgage guarantee: $304.
Q2 2008:
Commercial insurance: $5,988;
Foreign general: $3,726;
Transatlantic personal lines: $1,230;
Transatlantic personal lines: $988;
Mortgage guarantee: $288.
Q3 2008:
Commercial insurance: $5,597;
Foreign general: $3,647;
Transatlantic personal lines: $1,108;
Transatlantic personal lines: $1,094;
Mortgage guarantee: $280.
Q4 2008:
Commercial insurance: $4,401;
Foreign general: $2,678;
Transatlantic personal lines: $888;
Transatlantic personal lines: $990;
Mortgage guarantee: $251.
Q1 2009:
Commercial insurance: $4,175;
Foreign general: $3,552;
Transatlantic personal lines: $924;
Transatlantic personal lines: $1,047;
Mortgage guarantee: $269.
Q2 2009:
Commercial insurance: $4,968;
Foreign general: $2,954.
Source: AIG SEC filings.
Note: AIG intends to buy United Guaranty Corporation, AIG's mortgage
guaranty operations, from the recently established AIU Holdings
(Chartis, Inc.). Common shares of Transatlantic were sold during the
second quarter of 2009, reducing the aggregate ownership interest in
Transatlantic to 14 percent; the remaining shares are expected to be
sold before the end of 2009. The Personal Lines companies were sold to
a third party on July 1, 2009. Commercial Insurance will retain the
Private Client business historically written by the Personal Lines
segment.
[End of figure]
AIG Property/Casualty Insurance: AIG Commercial Insurance Operating
Ratios and AIG Foreign General Insurance Operating Ratios. The purpose
of this indicator is to monitor operating performance of major domestic
and foreign AIG property/casualty businesses (see figure 16). The
indicator includes three ratios that provide information on an
insurer's operating profitability. Increased loss ratios indicate
higher losses relative to premiums, due to either increased losses or
decreased premiums. Expense ratios are a measure of underwriting
efficiency, and increases represent increased expenses relative to
premiums. For example,
Loss ratio = claims + claims adjustment expenses incurred; net earned
premiums; A 77.3 loss ratio indicates that 77.3 cents out of every
dollar in premiums earned are used to adjust and pay claims..
Expense ratio = underwriting expenses net premiums earned; A 22.4
expense ratio indicates that 22.4 cents out of every dollar in premiums
earned are used for underwriting expenses..
Combined ratio = loss ratio + expense ratio; A combined ratio of less/
more than 100 indicates underwriting profitability/loss..
[End of table]
As shown in figure 16, AIG's expense ratio for AIG commercial insurance
spiked in the fourth quarter of 2008. This spike was largely due to an
accounting charge associated with an impairment to goodwill resulting
from the acquisitions.[Footnote 74] The increased loss ratio for AIG
commercial insurance can largely be attributed to increased claims
associated with Hurricane Ike and other major catastrophes in 2008. The
loss ratio and the combined ratio dropped back down to levels similar
to the third quarter of 2008. The combined ratio is still high at
around 100.
Figure 16: AIG Property/Casualty Insurance: AIG Commercial Insurance
Operating Ratios and AIG Foreign General Insurance Operating Ratios,
Second Quarter of 2007 through Second Quarter of 2009:
[Refer to PDF for image: two multiple line graphs]
AIG commercial insurance operating ratios:
Q2 2007:
Combined ratio: 83.57;
Loss ratio: 66.29;
Expense ratio: 17.28.
Q3 2007:
Combined ratio: 82.84;
Loss ratio: 64.16;
Expense ratio: 18.68.
Q4 2007:
Combined ratio: 91.23;
Loss ratio: 73.47;
Expense ratio: 17.76.
Q1 2008:
Combined ratio: 96.32;
Loss ratio: 74.38;
Expense ratio: 21.94.
Q2 2008:
Combined ratio: 93.94;
Loss ratio: 74.63;
Expense ratio: 19.31.
Q3 2008:
Combined ratio: 108.96;
Loss ratio: 87.04;
Expense ratio: 21.92.
Q4 2008:
Combined ratio: 133.33;
Loss ratio: 90.2;
Expense ratio: 43.13.
Q1 2009:
Combined ratio: 100.4;
Loss ratio: 78.32;
Expense ratio: 22.08.
Q2 2009:
Combined ratio: 99.82;
Loss ratio: 79.83;
Expense ratio: 19.99.
AIG foreign general insurance operating ratios:
Q2 2007:
Combined ratio: 86.05;
Loss ratio: 52.13;
Expense ratio: 33.92.
Q3 2007:
Combined ratio: 90.17;
Loss ratio: 52.4;
Expense ratio: 37.77.
Q4 2007:
Combined ratio: 85.23;
Loss ratio: 47.31;
Expense ratio: 37.92.
Q1 2008:
Combined ratio: 83.41;
Loss ratio: 51.78;
Expense ratio: 31.63.
Q2 2008:
Combined ratio: 89.36;
Loss ratio: 53.65;
Expense ratio: 35.71.
Q3 2008:
Combined ratio: 97.19;
Loss ratio: 59.31;
Expense ratio: 37.88.
Q4 2008:
Combined ratio: 100.74;
Loss ratio: 57.99;
Expense ratio: 42.75.
Q1 2009:
Combined ratio: 90.25;
Loss ratio: 55.57;
Expense ratio: 34.68.
Q2 2009:
Combined ratio: 95.48;
Loss ratio: 54.91;
Expense ratio: 40.57.
Source: AIG quarterly financial supplements.
Note: The underwriting expense for the fourth quarter of 2008 includes
a $1.2 billion charge for impairment to goodwill, increasing the
expense ratio by 22.62 points. Claims related to major catastrophes
were $1.4 billion in 2008, including hurricane claims of $1.1 billion
in the third quarter of 2008. Conversely, claims related to major
catastrophes were $100 million in 2007.
[End of figure]
Indicators of the Status of the Government's Exposure to AIG:
Composition of U.S. Government Efforts to Assist AIG and the
Government's Remaining Exposure. This indicator identifies the various
components of federal assistance to AIG (see table 5). Included are (1)
the assistance provided directly by the federal government, either as
debt to the government or as government equity; (2) other federal
efforts to assist AIG, including debt that the government has incurred
or as government equity; and (3) remaining government exposures to AIG,
whether financial or legal. The table also shows that while most of the
$120.9 billion in assistance provided has been the $83.8 billion in
direct assistance to AIG in the form of FRBNY's Revolving Credit
Facility and Treasury's purchase of preferred shares and creation of
the Equity Facility, the government has also provided about $37 billion
in indirect assistance by creating and making loans to Maiden Lanes II
and III for the purchase of mortgage-backed securities from AIG's
insurance subsidiaries and for the purchase of CDOs from AIG's
counterparties.
Also reflected in table 5 are plans to further modify the assistance
provided to AIG. For example, on March 2, 2009, the Federal Reserve and
AIG announced their intent to enter into a transaction in which FRBNY
will purchase securitization notes in the amount of up to $8.5 billion
issued by special purpose vehicles (SPV) that will be established by
certain AIG domestic life insurance subsidiaries. The SPVs are to repay
the notes from the net cash flows they received from the designated
blocks of existing life insurance policies issued by the insurance
companies. AIG is to use the proceeds of the FRBNY loan to pay down an
equivalent amount of outstanding debt under the Revolving Credit
Facility. In addition, on June 25, 2009, the Federal Reserve and AIG
entered into agreements under which AIG will transfer its preferred
equity interest in two SPVs created by AIG to hold the common stock of
two foreign life insurance subsidiaries, American International
Assurance (AIA) and American Life Insurance Company (ALICO), to FRBNY,
as previously discussed. When this transaction is completed, the amount
outstanding and the maximum available to borrow on the facility is to
be reduced by $25 billion.[Footnote 75]
Table 5: Composition of U.S. Government Efforts to Assist AIG and the
Government's Remaining Exposure, as of September 2, 2009 (Dollars in
Millions):
Federal Reserve: Revolving Credit Facility;
Amount authorized: $60,000;
Direct AIG assistance: AIG Debt owed to government: $38,792.5[A];
Direct AIG assistance: Government equity: [Empty];
Other efforts to assist AIG: Other debt owed to government: [Empty];
Other efforts to assist AIG: Government equity: [Empty];
Total: $38,792.5[A].
Federal Reserve: Maiden Lane II;
Amount authorized: $22,500;
Direct AIG assistance: AIG Debt owed to government: [Empty];
Direct AIG assistance: Government equity: [Empty];
Other efforts to assist AIG: Other debt owed to government: $16,899;
Other efforts to assist AIG: Government equity: [Empty];
Total: $16,899.
Federal Reserve: Maiden Lane III;
Amount authorized: $30,000;
Direct AIG assistance: AIG Debt owed to government: [Empty];
Direct AIG assistance: Government equity: [Empty];
Other efforts to assist AIG: Debt incurred by the government: $20,196;
Other efforts to assist AIG: Government equity: [Empty];
Total: $20,196.
Federal Reserve: Securitization Note;
Amount authorized: [$8,500][B];
Direct AIG assistance: AIG Debt owed to government: [Empty];
Direct AIG assistance: Government equity: [Empty];
Other efforts to assist AIG: Other debt owed to government: 0;
Other efforts to assist AIG: Government equity: $0; [Empty];
Total: 0.
Federal Reserve: American International Assurance/American Life
Insurance Company;
Amount authorized: [$25,000][B]
Direct AIG assistance: AIG Debt owed to government: [Empty];
Direct AIG assistance: Government equity: [Empty];
Other efforts to assist AIG: Other debt owed to government: [Empty];
Other efforts to assist AIG: Government equity: [Empty];
Total: [Empty].
Treasury: Series D/E;
Amount authorized: $40,000;
Direct AIG assistance: AIG Debt owed to government: [Empty];
Direct AIG assistance: Government equity: $41,605[C];
Other efforts to assist AIG: Other debt owed to government: [Empty];
Other efforts to assist AIG: Government equity: [Empty];
Total: $41,605[C].
Treasury: Series F;
Amount authorized: $29,835;
Direct AIG assistance: AIG Debt owed to government: [Empty];
Direct AIG assistance: Government equity: $3,206[D];
Other efforts to assist AIG: Other debt owed to government: [Empty];
Other efforts to assist AIG: Government equity: [Empty];
Total: $3,206[D].
Total direct assistance:
Direct AIG assistance: Other debt owed to government: $38,792.5;
Direct AIG assistance: Government equity: $44,811;
Total: $83,603.5.
Total indirect assistance:
Indirect AIG assistance: Other debt owed to government: $37,095;
Total: $37,095.
Total direct and indirect assistance provided to benefit AIG;
Amount authorized: $182,335;
Direct AIG assistance: AIG Debt owed to government: $38,792.5;
Direct AIG assistance: Government equity: $44,811;
Other efforts to assist AIG: Other debt owed to government: $37,095;
Other efforts to assist AIG: Government equity: [Empty];
Total: $120,698.5.
Source: AIG SEC filings.
Note: When all transactions regarding the placement of AIA, ALICO, and
domestic life insurance companies into SPVs are completed, they will
again change the composition of the federal assistance. The debt owed
by AIG-related entities will increase by $8.5 billion, government
equity in AIG-related entities will increase by $25 billion, and debt
owed by AIG will decrease by $33.5 billion.
[A] The $500,000 cash paid for the Series C stock came from the
Revolving Credit Facility trust through the FRBNY.
[B] AIG's financial exposure shows where AIG stands to achieve gains or
sustain losses. For example, AIG may sustain a loss if Maiden Lane III
does not pay AIG on its equity interest.
[C] Legal control refers to the authority that AIG has to make
decisions regarding the business or SPV involved, such as appointing
directors or making decisions regarding initial public offerings.
[D] These dollar amounts will not count toward the amount authorized
until the transactions are completed.
[E] When the Series E preferred shares were exchanged for Series D
preferred shares, $1.605 billion of accrued but unpaid dividends was
included in the liquidation preference the government received.
[F] $3.2 billion represents the amount that AIG has drawn on the
authorized $29.8 billion facility.
[End of table]
FRBNY Revolving Credit Facility Balance Owed and Total Amount
Available. This indicator is intended to monitor AIG's outstanding
balance owed to the Revolving Credit Facility established by the FRBNY
(see figure 17). Outstanding loans are the weekly balance of credit
extended to AIG under the Revolving Credit Facility, as reported by the
FRBNY. Amounts reported include loan principal, all capitalized
interest and fees, and the amortized portion of the initial commitment
fee. AIG is able to borrow up to $60 billion from this facility,
excluding interest and fees.
As shown in figure 17, in November 2008 the outstanding balance on the
credit facility was reduced when the proceeds from the issuance of
Series D preferred stock to Treasury were used to pay down the balance
owed and the ceiling on the credit facility was reduced from $85
billion to $60 billion. Since December 2008 the outstanding balance on
the facility has remained fairly steady at around $40 billion. Changes
in amounts owed on the facility fluctuate weekly and could indicate
increased liquidity needs related to restructuring decisions. Lower
balances could indicate decreased liquidity needs and payments to the
facility including payments in the form of preferred equity stakes in
AIG assets.
Figure 17: FRBNY Revolving Credit Facility Balance Owed and Total
Amount Available, October 2008 through September 2009 (Dollars in
millions):
[Refer to PDF for image: multiple line graph]
Date: October 2008;
Balance owed: $62,000;
Total amount available: $85,000.
Date: October 2008;
Balance owed: $70,299;
Total amount available: $85,000.
Date: October 2008;
Balance owed: $69,816;
Total amount available: $85,000.
Date: October 2008;
Balance owed: $72,332;
Total amount available: $85,000.
Date: October 2008;
Balance owed: $65,848;
Total amount available: $85,000.
Date: November 2008;
Balance owed: $61,365;
Total amount available: $85,000.
Date: November 2008;
Balance owed: $63,381;
Total amount available: $85,000.
Date: November 2008;
Balance owed: $66,897;
Total amount available: $85,000.
Date: November 2008;
Balance owed: $35,430;
Total amount available: $60,000.
Date: December 2008;
Balance owed: $35,437;
Total amount available: $60,000.
Date: December 2008;
Balance owed: $36,643;
Total amount available: $60,000.
Date: December 2008;
Balance owed: $44,347;
Total amount available: $60,000.
Date: December 2008;
Balance owed: $40,018;
Total amount available: $60,000.
Date: December 2008;
Balance owed: $38,924;
Total amount available: $60,000.
Date: January 2009;
Balance owed: $39,003;
Total amount available: $60,000.
Date: January 2009;
Balance owed: $39,124;
Total amount available: $60,000.
Date: January 2009;
Balance owed: $38,445;
Total amount available: $60,000.
Date: January 2009;
Balance owed: $38,336;
Total amount available: $60,000.
Date: February 2009;
Balance owed: $39,013;
Total amount available: $60,000.
Date: February 2009;
Balance owed: $37,677;
Total amount available: $60,000.
Date: February 2009;
Balance owed: $37,355;
Total amount available: $60,000.
Date: February 2009;
Balance owed: $38,046;
Total amount available: $60,000.
Date: March 2009;
Balance owed: $41,652;
Total amount available: $60,000.
Date: March 2009;
Balance owed: $42,344;
Total amount available: $60,000.
Date: March 2009;
Balance owed: $43,579;
Total amount available: $60,000.
Date: March 2009;
Balance owed: $43,614;
Total amount available: $60,000.
Date: April 2009;
Balance owed: $44,712;
Total amount available: $60,000.
Date: April 2009;
Balance owed: $45,571;
Total amount available: $60,000.
Date: April 2009;
Balance owed: $45,106;
Total amount available: $60,000.
Date: April 2009;
Balance owed: $44,983;
Total amount available: $60,000.
Date: April 2009;
Balance owed: $44,489;
Total amount available: $60,000.
Date: May 2009;
Balance owed: $45,496;
Total amount available: $60,000.
Date: May 2009;
Balance owed: $45,702;
Total amount available: $60,000.
Date: May 2009;
Balance owed: $45,708;
Total amount available: $60,000.
Date: May 2009;
Balance owed: $44,157;
Total amount available: $60,000.
Date: June 2009;
Balance owed: $43,578;
Total amount available: $60,000.
Date: June 2009;
Balance owed: $43,498;
Total amount available: $60,000.
Date: June 2009;
Balance owed: $42,904;
Total amount available: $60,000.
Date: June 2009;
Balance owed: $42,596;
Total amount available: $60,000.
Date: July 2009;
Balance owed: $42,834;
Total amount available: $60,000.
Date: July 2009;
Balance owed: $43,762;
Total amount available: $60,000.
Date: July 2009;
Balance owed: $42,871;
Total amount available: $60,000.
Date: July 2009;
Balance owed: $43,277;
Total amount available: $60,000.
Date: July 2009;
Balance owed: $42,196;
Total amount available: $60,000.
Date: August 2009;
Balance owed: $41,335;
Total amount available: $60,000.
Date: August 2009;
Balance owed: $40,675;
Total amount available: $60,000.
Date: August 2009;
Balance owed: $39,214;
Total amount available: $60,000.
Date: August 2009;
Balance owed: $39,153;
Total amount available: $60,000.
Date: September 2009;
Balance owed: $38,792;
Total amount available: $60,000.
Source: Federal Reserve Statistical Release H.4.1 and Federal Reserve.
[End of figure]
Principal Owed and Portfolio Values of Maiden Lane Facilities. The
purpose of this indicator is to monitor Maiden Lane II and Maiden III
repayment of FRBNY loans to purchase AIG and the counterparty assets
and the portfolio values of these assets (see figure 18). FRBNY
extended credit to each Maiden Lane facility, which then purchased
assets from AIG domestic life insurance companies and, in the case of
Maiden Lane II, its counterparties. The Maiden Lane II LLC portfolio
includes residential mortgage-backed securities and the Maiden Lane III
LLC portfolio includes multi-sector collateralized debt obligations.
The FRBNY loans are to be repaid from the maturity or liquidation of
assets from each facility. Payments from the net portfolio holdings of
these facilities are to be made in the following order: operating
expenses of the LLC, principal due to FRBNY, interest due to FRBNY,
principal due to AIG and interest due to AIG. Any remaining funds are
to be shared by FRBNY and AIG. AIG made investments of $1 billion to
Maiden Lane II and $5 billion to Maiden Lane III.
As shown in figure 18, the principal balance of the loans to Maiden
Lanes and the value of their portfolios peaked in December 2008 and
have subsequently trended downward.[Footnote 76] The Federal Reserve
said that it plans to hold on to the Maiden Lane assets until they
mature or increase in value to a point where the Federal Reserve can
maximize the amount of money recovered through a sale of assets. While
the portfolio value has declined slightly, the Federal Reserve
continues to believe that the assets held in the Maiden Lanes will
appreciate over time.
Figure 18: Principal Owed and Portfolio Values of Maiden Lane
Facilities (Dollars in billions):
[Refer to PDF for image: two vertical bar graphs]
Maiden Lane II LLC:
Date: 12/17/08;
Principal and interest owed to FRBNY: $19.502;
Portfolio value: $20.031;
Principal and interest owed to AIG: $1.001.
Date: 12/24/09;
Principal and interest owed to FRBNY: $19.514;
Portfolio value: $20.049;
Principal and interest owed to AIG: $1.002.
Date: 3/25/09;
Principal and interest owed to FRBNY: $18.634;
Portfolio value: $18.449;
Principal and interest owed to AIG: $1.01.
Date: 7/1/09;
Principal and interest owed to FRBNY: $17.713;
Portfolio value: $16.061;
Principal and interest owed to AIG: $1.02.
Date: 9/2/09;
Principal and interest owed to FRBNY: $17.098;
Portfolio value: $14.947;
Principal and interest owed to AIG: $1.026.
Maiden Lane III LLC:
Date: 12/17/08;
Principal and interest owed to FRBNY: $15.157;
Portfolio value: $19.656;
Principal and interest owed to AIG: $5.014.
Date: 12/24/09;
Principal and interest owed to FRBNY: $24.375;
Portfolio value: $28.191;
Principal and interest owed to AIG: $5.019.
Date: 3/25/09;
Principal and interest owed to FRBNY: $24.163;
Portfolio value: $27.645;
Principal and interest owed to AIG: $5.062.
Date: 7/1/09;
Principal and interest owed to FRBNY: $22.615;
Portfolio value: $20.172;
Principal and interest owed to AIG: $5.109.
Date: 9/2/09;
Principal and interest owed to FRBNY: $20.458;
Portfolio value: $20.935;
Principal and interest owed to AIG: $5.138.
Source: Federal Reserve System Monthly Report on Credit and Liquidity
Programs and the Balance Sheet, June 2009.
[End of figure]
AIG Business Unit Divestitures by Quarter. The purpose of this
indicator is to monitor sales of AIG entities and net cash proceeds
from these sales (see figure 19 and table 6). Total sales amount
includes amount applied to repay AIG intercompany loan facilities.
Estimated net cash proceeds is the amount available to apply to the
Revolving Credit Facility balance. Asset sales are listed according to
the quarter in which the transaction closed. Sales in 2009 have far
surpassed those closed in 2008.
Figure 19: Proceeds of AIG Inc. Business Divestitures, Second Quarter
of 2008 through Second Quarter of 2009 (Dollars in millions):
[Refer to PDF for image: vertical bar graph]
Date: 9/30/08;
Proceeds with cash portion not disclosed: $0.
Date: 12/31/08;
Proceeds with cash portion not disclosed: $820.
Date: 3/31/09;
Noncash proceeds: $76;
Cash proceeds: $800;
Proceeds with cash portion not disclosed: $43.
Date: 6/30/09;
Noncash proceeds: $550;
Cash proceeds: $1,737;
Proceeds with cash portion not disclosed: $41.
Date: 9/5/09;
Noncash proceeds: $200;
Cash proceeds: $2,441;
Proceeds with cash portion not disclosed: $1,900.
Source: AIG SEC filings.
[End of figure]
Table 6: Dispositions Closed and Agreements Announced but not yet
Closed, Second Quarter of 2008 through September 5, 2009 (dollars in
millions):
Dispositions closed in quarter ending: September 30, 2008; not
applicable;
Total Proceeds: not applicable.
Dispositions closed in quarter ending: December 31, 2008; Unibanco JV;
Total Proceeds: $820.
Dispositions closed in quarter ending: December 31, 2008; Taiwan
Finance;
Total Proceeds: N/D.
Dispositions closed in quarter ending: March 31, 2009; AIGFP Energy
Commodity Hedges (all cash);
Total Proceeds: $61.
Dispositions closed in quarter ending: March 31, 2009; Philam Savings
Bank;
Total Proceeds: $43.
Dispositions closed in quarter ending: March 31, 2009; HSB ($739
million cash);
Total Proceeds: $815.
Dispositions closed in quarter ending: June 30, 2009; AIG Life
Insurance Company of Canada (all cash);
Total Proceeds: $263.
Dispositions closed in quarter ending: June 30, 2009; Commodity
Business (all cash);
Total Proceeds: $15.
Dispositions closed in quarter ending: June 30, 2009; AIG Retail Bank
and AIG Card (Thailand) ($45 million cash);
Total Proceeds: $540.
Dispositions closed in quarter ending: June 30, 2009; AIG Private Bank
($250 million cash);
Total Proceeds: $305.
Dispositions closed in quarter ending: June 30, 2009; Darag;
Total Proceeds: $26.
Dispositions closed in quarter ending: June 30, 2009; Real estate in
Tokyo (all cash);
Total Proceeds: $1,179.
Dispositions closed in quarter ending: September 5, 2009; 21st Century
Insurance Group ($1,700 million cash);
Total Proceeds: $1,900.
Dispositions closed in quarter ending: September 5, 2009; CFG China;
Total Proceeds: N/D.
Dispositions closed in quarter ending: September 5, 2009; Consumer
finance operations in Mexico;
Total Proceeds: N/D.
Dispositions closed in quarter ending: September 5, 2009; A.I. Credit
Life (all cash);
Total Proceeds: $741.
Dispositions closed in quarter ending: September 5, 2009; Investment
assets--energy & infrastructure;
Total Proceeds: $1,900.
Total proceeds on dispositions closed;
Total Proceeds: $8,608.
Total cash proceeds on closed dispositions with terms disclosed;
Total Proceeds: $4,993.
Disposition agreements announced but not yet closed:
AIG Finance-Hong Kong;
Total Proceeds: $627.
Consumer finance operations in Russia;
Total Proceeds: $9.
AIG Credit Card Co (Taiwan);
Total Proceeds: $117.
Consumer finance operations in Argentina;
Total Proceeds: $69.
Dispositions closed in quarter ending: Colombia;
Total Proceeds: N/D.
CFG Thailand: CFGS;
Total Proceeds: N/D.
UGC-Campus Partners;
Total Proceeds: N/D.
Consumer finance business in Poland;
Total Proceeds: N/D.
Portion of investment management advisory business;
Total Proceeds: $500.
Transatlantic Holdings;
Total Proceeds: $1,096.
Source: AIG.
Note: N/D means not disclosed:
[End of table]
[End of section]
Appendix VI: GAO Contact and Staff Acknowledgments:
GAO Contact:
Orice Williams Brown, (202) 512-8678 or williamso@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Karen Tremba and Patrick Ward
(Assistant Directors); Silvia Arbelaez-Ellis, Tania Calhoun, Rachel
DeMarcus, John Forrester, Dana Hopings, Matthew McDonald, Marc Molino,
Barbara Roesmann, Christopher Ross, Jennifer Schwartz, Ellery C. Scott,
Cynthia S. Taylor, and Melvin Thomas made important contributions to
this report.
[End of section]
Related GAO Products:
Troubled Asset Relief Program: Treasury Actions Needed to Make the Home
Affordable Modification Program More Transparent and Accountable.
[hyperlink, http://www.gao.gov/products/GAO-09-837]. Washington, D.C.:
July 23, 2009.
Troubled Asset Relief Program: Capital Purchase Program Transactions
for October 28, 2008, through May 29, 2009, and Information on
Financial Agency Agreements, Contracts, Blanket Purchase Agreements,
and Interagency Agreements Awarded as of June 1, 2009. [hyperlink,
http://www.gao.gov/products/GAO-09-707SP], an e-supplement to GO-09-
837. Washington, D.C.: June 17, 2009.
Troubled Asset Relief Program: June 2009 Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-658]. Washington, D.C.: June 17,
2009.
Auto Industry: Summary of Government Efforts and Automakers'
Restructuring to Date. [hyperlink,
http://www.gao.gov/products/GAO-09-553]. Washington, D.C.: April 23,
2009.
Small Business Administration's Implementation of Administrative
Provisions in the American Recovery and Reinvesment Act. [hyperlink,
http://www.gao.gov/products/GAO-09-507R]. Washington, D.C.: April 16,
2009.
Troubled Asset Relief Program: March 2009 Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-504]. Washington, D.C.: March 31,
2009.
Troubled Asset Relief Program: Capital Purchase Program Transactions
for the Period October 28, 2008 through March 20, 2009 and Information
on Financial Agency Agreements, Contracts, and Blanket Purchase
Agreements Awarded as of March 13, 2009. [hyperlink,
http://www.gao.gov/products/GAO-09-522SP]. Washington, D.C.: March 31,
2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-539T]. Washington, D.C.: March 31,
2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-484T]. Washington, D.C.: March 19,
2009.
Federal Financial Assistance: Preliminary Observations on Assistance
Provided to AIG. [hyperlink, http://www.gao.gov/products/GAO-09-490T].
Washington, D.C.: March 18, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-474T]. Washington, D.C.: March, 11,
2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-417T]. Washington, D.C.: February
24, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-359T]. Washington, D.C.: February 5,
2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-296]. Washington, D.C.: January 30,
2009.
High-Risk Series: An Update. [hyperlink,
http://www.gao.gov/products/GAO-09-271]. Washington, D.C.: January 22,
2009.
Troubled Asset Relief Program: Additional Actions Needed to Better
Ensure Integrity, Accountability, and Transparency. [hyperlink,
http://www.gao.gov/products/GAO-09-266T]. Washington, D.C.: December
10, 2008.
Auto Industry: A Framework for Considering Federal Financial
Assistance. [hyperlink, http://www.gao.gov/products/GAO-09-247T].
Washington, D.C.: December, 5, 2008.
Auto Industry: A Framework for Considering Federal Financial
Assistance. [hyperlink, http://www.gao.gov/products/GAO-09-242T].
Washington, D.C.: December 4, 2008.
Troubled Asset Relief Program: Status of Efforts to Address Defaults
and Foreclosures on Home Mortgages. [hyperlink,
http://www.gao.gov/products/GAO-09-231T]. Washington, D.C.: December 4,
2008.
Troubled Asset Relief Program: Additional Actions Needed to Better
Ensure Integrity, Accountability, and Transparency. [hyperlink,
http://www.gao.gov/products/GAO-09-161]. Washington, D.C.: December 2,
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[End of section]
Footnotes:
[1] The Emergency Economic Stabilization Act of 2008 (the act), Pub. L.
No. 110-343, 122 Stat. 3765 (2008), codified at 12 U.S.C. §§ 5201 et
seq. The act originally authorized Treasury to purchase or guarantee up
to $700 billion in troubled assets. The Helping Families Save Their
Homes Act of 2009, Pub. L. No. 111-22, Div. A, 123 Stat. 1632 (2009),
amended the act to reduce the maximum allowable amount of outstanding
troubled assets under the act by almost $1.3 billion, from $700 billion
to $698.741 billion.
[2] Treasury created SSFI to provide capital to institutions on a case-
by-case basis to provide stability and prevent disruption to financial
markets caused by the failure of a systemically significant
institution.
[3] See GAO, Federal Financial Assistance: Preliminary Observations on
Assistance Provided to AIG, [hyperlink, http://www.gao.gov/products/GAO-
09-490T] (Washington, D.C.: Mar. 18, 2009).
[4] Section 801 of The Helping Families Save Their Homes Act of 2009,
Pub. L. No. 111-22, Div. A, 123 Stat. 1632, 1662 (2009), amended the
Federal Banking Agency Audit Act, §2, 31 U.S.C. § 714 (2006), which
limits GAO's authority to audit certain Federal Reserve activities.
Specifically, GAO's audits of the Federal Reserve generally may not
include monetary policy matters, including discount window operations
and open market operations.
[5] For our past 60-day reports, see GAO, Troubled Asset Relief
Program: Additional Actions Needed to Better Ensure Integrity,
Accountability, and Transparency, [hyperlink,
http://www.gao.gov/products/GAO-09-161] (Washington, D.C.: Dec. 2,
2008); Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-296] (Washington, D.C.: Jan. 30,
2009); Troubled Asset Relief Program: March 2009 Status of Efforts to
Address Transparency and Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-504] (Washington, D.C.: Mar. 31,
2009); Auto Industry: Summary of Government Efforts and Automakers'
Restructuring to Date, [hyperlink,
http://www.gao.gov/products/GAO-09-553] (Washington, D.C.: Apr. 23,
2009); Troubled Asset Relief Program: June 2009 Status of Efforts to
Address Transparency and Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-658] (Washington, D.C.: June 17,
2009); and Troubled Asset Relief Program: Treasury Actions Needed to
Make the Home Affordable Modification Program More Transparent and
Accountable, [hyperlink, http://www.gao.gov/products/GAO-09-837]
(Washington D.C.: July 23, 2009).
[6] Companies such as AIG that have publicly traded stock listed on the
domestic stock exchanges are required to timely file reports with SEC
under the Securities Exchange Act of 1934. The annual Form 10K gives a
comprehensive overview of the company‘s business and financial
condition and includes audited financial statements. The quarterly Form
10Q includes unaudited financial statements and provides a continuing
view of the company's financial position during the year. The Form 8K
is the current report companies use to report certain material
corporate events as they occur.
[7] Corporations primarily issue commercial paper, which are short-term
promissory notes.
[8] CDS are bilateral contracts that are sold over the counter and
transfer credit risks from one party to another. The seller, who is
offering credit protection, agrees, in return for a periodic fee, to
compensate the buyer if a specified credit event, such as default,
occurs. CDOs are securities backed by a pool of bonds, loans, or other
assets.
[9] GAO, Financial Market Regulation: Agencies Engaged in Consolidated
Supervision Can Strengthen Performance Measurement and Collaboration,
GAO-07-154 (Washington, D.C.: Mar. 15, 2007).
[10] See testimony of Scott M. Polakoff, Acting Director, Office of
Thrift Supervision, before Subcommittee on Capital Markets, Insurance,
and Government Sponsored Enterprises, House Committee on Financial
Services, March 18, 2009.
[11] The primary state insurance regulators include New York,
Pennsylvania, and Texas.
[12] SIGTARP: Office of the Inspector General for the Troubled Asset
Relief Program, Quarterly Report to Congress, July 21, 2009; SIGTARP:
Office of the Inspector General for the Troubled Asset Relief Program,
Quarterly Report to Congress, April 21, 2009; SIGTARP: Office of the
Inspector General for the Troubled Asset Relief Program, Initial Report
to the Congress, February 6, 2009.
[13] Section 13(3) of the Federal Reserve Act, as amended, codified at
12 U.S.C. § 343 (2006).
[14] Pub. L. No. 110-343, 122 Stat. 3765 (2008).
[15] Pub. L. No. 111-5, Div. B, Title VII, 123 Stat. 115, 516 (2009).
[16] As we said in our March 2009 testimony on credit default swaps,
there is no single definition for systemic risk. Traditionally,
systemic risk was viewed as the risk that the failure of one large
institution would cause other institutions to fail. This micro-level
definition is one way to think about systemic risk. Recent events have
illustrated a more macro-level definition: the risk that an event could
broadly affect the financial system rather than just one or a few
institutions. See, GAO, Systemic Risk: Regulatory Oversight and Recent
Initiatives to Address Risk Posed by Credit Default Swaps, [hyperlink,
http://www.gao.gov/products/GAO-09-397T] (Washington, D.C.: Mar. 5,
2009).
[17] The credit facility is a revolving loan created by FRBNY for the
general corporate purposes of AIG and its subsidiaries, including
functioning as a source of liquidity to pay obligations as they come
due.
[18] Moody's Investors Service lowered AIG's rating to A2 from Aa3, or
by 2 notches. Standard & Poor's Ratings Services lowered its rating of
AIG to A-from AA-, or by 3 notches. Fitch Ratings reduced its rating of
AIG to A from AA-, or 2 notches (see app. IV for ratings definition).
[19] AIG's share price was quoted at $26.73 per share on the New York
Stock Exchange on July 1, 2008. The shares closed at $3.33 per share on
September 30, 2008.
[20] On March 25, 2009, Treasury announced a legislative proposal under
which, after a systemic risk determination by the Secretary of the
Treasury (in consultation with the President), FDIC would have the
authority to provide financial assistance to and to put into
receivership or conservatorship "systemically significant financial
companies" that are not subject to FDIC's existing resolution
authority. FDIC, with Treasury's approval, would be authorized to
provide financial assistance through loans or equity investments, or by
purchasing or guaranteeing assets. As a conservator or receiver, FDIC
would have additional powers to sell or transfer assets or liabilities
of the company, renegotiate or repudiate the company's contracts, and
replace the board of directors and senior officers of the company.
[21] See testimony of Ben S. Bernanke, Chairman of the Board of
Governors of the Federal Reserve System, before the House Financial
Services Committee, March 24, 2009.
[22] See testimony of Ben S. Bernanke, Chairman of the Board of
Governors of the Federal Reserve System, before the House Financial
Services Committee, March 24, 2009.
[23] Subprime mortgages are loans that are traditionally riskier and
extended to borrowers with lower credit standing, higher ratio of
borrower debt to income, or higher ratio of the value of the loan to
the collateral.
[24] Counterparties reportedly were unwilling to do business with AIG
because they did not want their assets tied up in bankruptcy, which
could have taken years to resolve.
[25] The large banks were identified as counterparties in AIG's CDS
contracts in the testimony of Edward M. Liddy, Chairman and Chief
Executive Officer, American International Group, Inc. before the House
Financial Services Committee, March 18, 2009.
[26] See testimony of Ben S. Bernanke, Chairman of the Board of
Governors of the Federal Reserve System, before the House Financial
Services Committee, March 24, 2009.
[27] The Temporary Liquidity Guarantee Program was created in November
2008 by FDIC to encourage liquidity in the banking system by
guaranteeing newly issued senior unsecured debt of banks, thrifts, and
certain holding companies, and by providing full coverage of non-
interest-bearing deposit transaction accounts. The Commercial Paper
Funding Facility was created in October 2008 under Section 13(3) of the
Federal Reserve Act by the Federal Reserve to help provide liquidity to
term funding markets. The Commercial Paper Funding Facility involves
the purchase, through a special purpose vehicle with financing from the
Federal Reserve, of 3-month unsecured and asset-backed commercial paper
directly from eligible issuers.
[28] Disclosed in Third Quarter 2008 financial reports issued by AIG
and restated in Addendum to Testimony by Mr. Edward M. Liddy on March
18, 2009, before the House Financial Services Committee.
[29] See testimony of Ben S. Bernanke, Chairman of the Board of
Governors of the Federal Reserve System, before the House Financial
Services Committee, March 24, 2009.
[30] Interest coverage ratio is a ratio used to determine how a company
can pay interest on outstanding debt and is calculated by dividing a
company's operating income by the company's interest expenses over a
period. The higher the ratio, the better positioned the company is to
service its debt expense. A ratio below 1 indicates the company is not
generating sufficient operating income to pay its interest.
[31] See March 2, 2009 Treasury press release at [hyperlink,
http://www.treas.gov/press/releases/tg44.htm].
[32] Special purpose vehicles are legal entities, such as limited
liability companies, created to carry out some specific financial
purpose or activity.
[33] See Federal Reserve, Report Pursuant to Section 129 of the
Emergency Economic Stabilization Act of 2008: Restructuring of the
Government's Financial Support to the American International Group,
Inc. (Washington, D.C., Nov. 10, 2008).
[34] See Testimony of Edward M. Liddy, Chairman and Chief Executive
Officer, American International Group, Inc. before the House Financial
Services Committee, March 18, 2009.
[35] As a condition of providing the loan, FRBNY took a number of steps
aimed at protecting the government's interest, including the creation
of a trust to hold the Series C preferred shares, which we discuss
later.
[36] In response to questions about the purchase prices paid for these
securities SIGTARP is reviewing how the purchase prices of the
securities were determined.
[37] AIG's domestic life insurance companies participated in a
securities lending program through which they would loan securities to
investors for cash collateral. In turn, AIG invested the cash
collateral in RMBS. When these investors returned the borrowed
securities and demanded their cash collateral, AIG was unable to sell
the securities at prices needed to meet their obligations under current
market conditions.
[38] AIGFP sold CDS on multi-sector CDOs. As a result, to unwind these
contracts, Maiden Lane III was created to purchase the CDOs from AIG's
CDS counterparties. In exchange for purchasing the underlying assets,
the counterparties agreed to terminate the CDS contracts thereby
eliminating the need for AIG to post additional collateral as the value
of the CDOs fell.
[39] The haircut is the difference between the value of the collateral
and the value of the loan. This haircut is calculated based on a
percentage of the collateral value and varies by asset class.
[40] Treasury also took a number of additional steps to protect the
government's interests, which we discuss later.
[41] Cumulative preferred stock is a form of capital stock in which
holders of preferred stock receive dividends before holders of common
stock receive dividends, and dividends that have been omitted in the
past must be paid to preferred shareholders before common shareholders
can receive dividends.
[42] The securities purchase agreement indicates that the amount of
$29.835 billion is equal to $30 billion minus $165 million in retention
payments made by AIGFP, AIG Trading Group, Inc., and their respective
subsidiaries to their employees in March 2009.
[43] GAO, Auto Industry: A Framework for Considering Federal Financial
Assistance, [hyperlink, http://www.gao.gov/products/GAO-09-242T]
(Washington, D.C.: Dec. 4, 2008); Auto Industry: A Framework for
Considering Federal Financial Assistance, [hyperlink,
http://www.gao.gov/products/GAO-09-247T] (Washington, D.C.: Dec. 5,
2008); and GAO-09-553.
[44] The Treasury's equity interest is managed by three trustees. The
trust agreement provides that the trust is for the sole benefit of the
Treasury, which means that any property distributable to the Treasury
as a beneficiary shall be paid to the Treasury for deposit into the
U.S. Treasury General Fund as miscellaneous receipts. See AIG Credit
Facility Trust Agreement, Section 1.01, January 16, 2009.
[45] See FRBNY press release announcing the establishment of the AIG
Credit Facility Trust, [hyperlink,
http://www.newyorkfed.org/newsevents/news/markets/2009/an090116.html].
[46] Under the terms of the Series C preferred stock issuance, the
preferred stock is convertible into AIG's common stock. The conversion
formula provides that the trust will receive 79.9 percent of AIG's
common stock on, less the percentage of common stock that may be
acquired by or for the benefit of Treasury as a result of warrants or
other convertible preferred stock held by Treasury. Treasury received a
warrant to purchase a number of shares equal to 2 percent of AIG's
common stock in connection with its purchase of Series D preferred
stock, and an additional warrant to purchase AIG common stock in
connection with its purchase of Series F preferred stock. Proceeds from
the sale of the trust stock will be deposited in the U.S. Treasury
General Fund.
[47] AIG only has to make dividend payments when it declares dividends.
[48] SIGTARP has an ongoing audit that will provide an in-depth
assessment of AIG's executive compensation programs and the adequacy of
federal oversight of these programs.
[49] A gross commitment fee normally is paid at the initiation of a
credit facility agreement and is a percentage of the total amount
committed by a lender to the borrower.
[50] An unused commitment fee is a percentage of the unused, or
undrawn, portion of a revolving credit facility or loan commitment.
[51] Under the agreements, AIG is to incur the first $1 billion in
losses under Maiden Lane II and the first $5 billion under Maiden Lane
III.
[52] See Securities Purchase Agreement, Nov. 25, 2008.
[53] See Securities Exchange Act, April 17, 2009.
[54] If the Secretary of the Treasury purchases troubled assets under
the act from a publicly traded financial institution, section
113(d)(1)(A) of the act, 12 U.S.C. § 5223(d), requires that it receive
a warrant giving the Secretary the right to receive nonvoting common
stock or preferred stock, or voting stock for which Treasury agrees not
to exercise voting power. The act requires that the warrant or senior
debt instrument be designed to provide for the reasonable participation
by the Secretary, for the benefit of taxpayers, in equity appreciation
(in the case of a warrant) or a reasonable interest rate (in the case
of a debt instrument). The warrant is also to provide additional
protection for the taxpayers against losses from the sale of assets by
the Secretary under the act and the administrative expenses of TARP.
[55] AIG's long-term debt was rated at A-/Negative (S&P) and A3/
Negative (Moody's), and its short-term debt was rated at A-1 (S&P) and
P-1 (Moody's).
[56] Paid-in capital is equity capital provided by investors in
exchange for common or preferred stock.
[57] A multi-sector CDO is a CDO is backed by a combination of
corporate bonds, loans, asset-backed securities, or mortgage-backed
securities.
[58] In its switch from growth and profit maximization to risk
mitigation and unwinding, AIGFP reorganized its business into 22
separate risk books determined in part by type of risk, which fall into
the following five groupings: (1) credit books, (2) investment
securities and liabilities books, (3) capital markets books, (4)
principal guaranty products, and (5) private equity and strategic
investment books. According to AIG, decreased means a book of business
that has reduced in size by at least 75 percent.
[59] The super senior CDS portfolio was written on the super senior
tranche of CDO. The super senior layer comprises assets that typically
receive a rating between BBB and AAA from rating agencies. For
additional information, see AIG 2008 10K p.132.
[60] The net notional amount represents the maximum dollar level
exposure for the portfolio.
[61] The fair value of derivative liability represents the fair market
valuation of AIGFP's liabilities in each portfolio and provides an
indicator of the dollar amount the market thinks AIGFP would need to
pay to eliminate its liabilities.
[62] A rating of BBB indicates a lower medium grade investment. See
appendix IV.
[63] This amount does not include AIG's use of the Federal Reserve's
Commercial Paper Funding Facility.
[64] As discussed earlier in the report, the Federal Reserve plans to
further modify the assistance provided to AIG. For example, on March 2,
2009, the Federal Reserve and AIG announced their intent to enter into
a transaction in which FRBNY will purchase up to $8.5 billion of
securitization notes issued by newly formed special purpose vehicles
that will receive the net cash flows from a block of life insurance
policies held by AIG's domestic life insurance subsidiaries. When this
transaction closes, AIG's outstanding balance and maximum available
amount to borrow on the facility is expected to be reduced by up to
$8.5 billion. In addition, on June 25, 2009, the Federal Reserve and
AIG entered into agreements in which AIG will transfer to FRBNY
preferred equity interest in special purpose vehicles formed to hold
AIA and ALICO. When this transaction is completed, the amount
outstanding and the maximum amount available to borrow on the facility
will be reduced by $25 billion. The maximum amount available under the
FRBNY facility will be $25 billion as a result of a reduction from the
AIA, ALICO, and securitization notes transactions.
[65] Outstanding loans are the average weekly balance of credit
extended to AIG under the Revolving Credit Facility, as reported by
FRBNY.
[66] The order in which payments will be made from the net portfolio
holdings of these facilities is described in section two of this
report.
[67] The portfolio value is based on the market value of the underlying
assets and will mirror the change in value of those assets.
[68] The ceiling on the Revolving Credit Facility was initially $85
billion but was subsequently lowered as part of the November 2008
restructuring.
[69] TARP Standards for Compensation and Corporate Governance, 74Fed.
Reg. 28, 394 (June 15, 2009) (to be codified at 31 C.F.R. Part 30).
Pursuant to section 101(c) of the act, the Secretary is authorized to
issue regulations and other guidance that the Secretary deems necessary
and appropriate to carry out the purposes of the act. The interim final
rule became effective on June 15, 2009, and the public comment period
ended on August 14, 2009.
[70] The senior executive officers are generally the principal
executive officer, the principal financial officer, and the three most
highly compensated executive officers (other than the principal
executive officer and the principal financial officer).
[71] Under TARP, firms needing more assistance than is allowed under a
widely available standard program are said to need "exceptional
assistance;" firms falling under this standard have firm-specific
negotiated agreements with Treasury.
[72] Paid-in capital is equity capital provided by investors in
exchange for common or preferred stock.
[73] This amount was based on the fair value of common shares into
which the Preferred Series C would be convertible on September 16,
2008, which was the date on which AIG received FRBNY's commitment. AIG
also recorded this amount as a prepaid commitment fee for the $85
billion credit facility to be treated as an asset to be amortized as
interest expense over the 5-year term of the FRBNY facility. The only
cash involved in this transaction was $500,000 that FRBNY paid for the
Series C preferred shares. Through June 30, 2009, $10.2 billion of this
asset was amortized through the accumulated deficit and thus reduced
shareholders equity.
[74] Goodwill is generally the value of a business that is not directly
attributable to the fair value of the assets and liabilities of the
business. If the fair value of the assets (present value of future cash
flows) is less than the carrying value (booked value of assets plus
goodwill less liabilities) then the impairment loss must be recognized
on the income statement. In the case of AIG an increase in expenses was
necessary to account for the impairment loss.
[75] The maximum amount available under the FRBNY facility will not be
less than $25 billion as a result of a reduction from the AIA, ALICO,
or securitization notes transactions.
[76] The portfolio value is based on the market value of the underlying
assets and will mirror the change in value of those assets.
[End of section]
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