GAO
United States Government Accountabilit
y
Office
Report to Congressional Committees
TROUBLED ASSET
RELIEF PROGRAM
Status of Government
Assistance Provided
to AIG
September 2009
GAO-09-975
What GAO Found
United States Government Accountability Office
Why GAO Did This Study
Highlights
Accountability Integrity Reliability
September 2009
TROUBLED ASSET RELIEF PROGRAM
Status of Government Assistance Provided to AIG
Highlights of GAO-09-975, a report to
congressional committees
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
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 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.
View GAO-09-975 or key components.
For more information, contact Orice Williams
Brown at (202) 512-8678 or
United States Government Accountability Office
Highlights of GAO-09-975 (continued)
Overview of Federal Assistance Provided to AIG as of September 2, 2009
Dollar in millions
Amount of assistance
authorized
Description of the federal assistance
Debt Equity
Outstanding
balance Sources to repay the government
Implemented
Federal
Reserve
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, for $0.5 million, a
Treasury trust received Series C preferred stock
for the benefit of the Treasury, which gave
Treasury a 77.9 percent voting interest in AIG.
$60,000
a
$38,792.5 Proceeds from dispositions of AIG
businesses, internal cash flows, and
restructuring part of the Revolving Credit
Facility from debt into equity. The initial fee
paid by AIG was reduced by $0.5 million to
pay for the Series C shares and will not be
repaid.
FRBNY created SPV—Maiden Lane II—to
provide AIG liquidity by purchasing residential
mortgage-backed securities from AIG life
insurance companies. FRBNY provided a loan to
the SPV for the purchases. It also terminated a
previously established securities lending
program with AIG.
22,500 16,899 Proceeds from the assets in Maiden Lane II
will be used to repay the FRBNY loan to
Maiden Lane II.
FRBNY created a SPV called Maiden Lane III to
provide AIG liquidity by purchasing CDOs from
AIG Financial Products’ counterparties in
connection with termination of credit default
swaps. FRBNY again provided a loan to the SPV
for the purchases.
30,000 20,196 Proceeds from the assets in Maiden Lane
III will be used to repay the FRBNY loan.
Treasury
Treasury purchased Series D cumulative
preferred stock from AIG. AIG used the proceeds
to pay down the Revolving Credit Facility. These
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.
40,000 41,605 Proceeds from dispositions of AIG
businesses and internal cash flows of AIG.
Treasury purchased Series F noncumulative
preferred shares of AIG and is allowing AIG to
draw up to $29,835 million through an equity
facility to meet its liquidity and capital needs.
Amounts drawn by AIG represent the cost of the
federal equity interest in these shares.
29,835 3,206
b
Proceeds from dispositions of AIG
businesses and internal cash flows of AIG.
Subtotals $112,500 $69,835
Total authorized and outstanding assistance
c
$182,335 $120,698.5
Pending
AIG created two SPVs to hold the shares of two
of its foreign life insurance businesses to
enhance AIG’s capital and liquidity, and to
facilitate an orderly restructuring of AIG. The
Revolving Credit Facility will be reduced by the
amount of preferred equity interest in the SPVs
to be received by FRBNY.
0 (25,000
d
) 0 Proceeds from the public sale of the SPVs’
common stock could be used to buy out the
federal preferred equity and pay down part
of the Revolving Credit Facility.
AIG will create SPVs that will issue up to $8,500
million in notes to FRBNY, which will be funded
with a loan from FRBNY. AIG will use the
proceeds to pay down part of the Revolving
Credit Facility.
(8,500
d
) 0 FRBNY’s loan to the SPVs will be repaid
from net 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
These transactions have not been completed and are not included in the total assistance provided to AIG. The
amount of the Revolving Credit Facility will be decreased by an equal amount upon completion.
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.
Page i GAO-09-975
Contents
Letter 1
Background 4
The Federal Reserve and Treasury Provided Assistance to AIG to
Limit Systemic Risk to the Financial Markets 10
The Federal Reserve, FRBNY, and Treasury Have Taken a Variety
of Steps to Stabilize AIG 27
In Providing Assistance to AIG, the Federal Reserve and Treasury
Have Taken Steps to Protect the Government’s Interest, but
Risks Still Remain 36
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 43
Agency Comments and Our Evaluation 51
Appendix I Comments from the Department of the Treasury 55
Appendix II Overview of the American International
Assurance and American Life Insurance Company
Transactions
56
Appendix III Overview of the Executive Compensation
Restrictions 59
Appendix IV Summary of Rating Agencies’ Ratings 61
Appendix V Overview of the AIG Risk and Repayment
Indicators 62
Appendix VI GAO Contact and Staff Acknowledgments 91
Troubled Asset Relief Program
Related GAO Products 92
Tables
Table 1: U.S. Government Efforts to Assist AIG and the
Government’s Remaining Exposure, as of September 2,
2009 28
Table 2: Overview of Indicators of AIG’s Financial Risk and
Repayment of Federal Assistance 62
Table 3: Credit Ratings, as of March 31, 2009, and May 15, 2009 64
Table 4: Sources and Amounts of Available Corporate Liquidity at
November 5, 2008; February 18, 2009; April 29, 2009; and
July 29, 2009 67
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) 84
Table 6: Dispositions Closed and Agreements Announced but not
yet Closed, Second Quarter of 2008 through September 5,
2009 (dollars in millions) 89
Figures
Figure 1: AIG Organizational Structure, as of December 31, 2008 6
Figure 2: Timeline of AIG’s Financial Difficulties and Government
Actions in Response to Market Turmoil, Fall 2007 to
September 30, 2008 14
Figure 3: Timeline of the Restructuring of AIG’s Assistance, Market
Events, and Related Government Actions, October 1,
2008, to April 30, 2009 24
Figure 4: AIG Restructuring and SPV Sale 57
Figure 5: AIG: Corporate Available Liquidity and Company-Wide
Debt Projections (dollars in millions), Third Quarter of
2008 through Second Quarter of 2009 66
Figure 6: AIG: Trends in and Main Components of Consolidated
Shareholders’ Equity, Fourth Quarter of 2007 through
Second Quarter of 2009 68
Figure 7: AIG’s Operations by Major Segment: Operating
Income/Loss Before Taxes, First Quarter of 2008 through
Second Quarter of 2009 70
Page ii GAO-09-975 Troubled Asset Relief Program
Figure 8: Status of the Winding Down of AIG’s Financial Products
Corporation, as of September 30, 2008; December 31,
2008; and March 31, 2009 71
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 73
Figure 10: AIGFP: Gross Notional Value of Underlying Multi-Sector
Collateralized Debt Obligations That Are Rated Less Than
BBB, Third Quarter of 2008 through Second Quarter of
2009 75
Figure 11: AIG Credit Default Swap Premiums, January 2007
through July 2009 76
Figure 12: AIG Insurance Subsidiaries: Regulatory Capital at
December 31, 2007, and December 31, 2008, and Primary
Activities That Affected Regulatory Capital During 2008
(dollars in millions) 77
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 79
Figure 14: AIG Life Insurance and Retirement Services: Key
Quarterly Revenues and Expenses, First Quarter of 2007
through Second Quarter of 2009 80
Figure 15: AIG General Insurance: Premiums Written by Division,
First Quarter of 2007 through Second Quarter of 2009 81
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 83
Figure 17: FRBNY Revolving Credit Facility Balance Owed and
Total Amount Available, October 2008 through September
2009 86
Figure 18: Principal Owed and Portfolio Values of Maiden Lane
Facilities 87
Figure 19: Proceeds from Dispositions by Quarter, Second Quarter
of 2008 through September 5, 2009 88
Page iii GAO-09-975 Troubled Asset Relief Program
Abbreviations
AGF American General Finance, Inc.
AIA American International Assurance Company, Ltd.
AIG American International Group, Inc.
AIGFP AIG Financial Products Corporation
ALICO American Life Insurance Company
ARRA American Recovery and Reinvestment Act or 2009
CDO collateralized debt obligation
CDS credit default swaps
CPFF Commercial Paper Funding Facility
FDIC Federal Deposit Insurance Corporation
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 Systemically Significant Failing Institutions
TARP Troubled Asset Relief Program
the act Emergency Economic Stabilization Act of 2008
TLGP Temporary Liquidity Guarantee Program
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Page iv GAO-09-975 Troubled Asset Relief Program
Page 1 GAO-09-975
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.
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 has an almost 80 percent
interest in AIG.
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.
Troubled Asset Relief Program
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 (SSFI) Program.
2
We testified on the status
of this government effort in March 2009.
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 for “a single and specific partnership or corporation.”
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 authority to access 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.
5
This 60-day report provides an overview of (1) the
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, 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, GAO-09-161
(Washington, D.C.: Dec. 2, 2008); Troubled Asset Relief Program: Status of Efforts to
Address Transparency and Accountability Issues, GAO-09-296 (Washington, D.C.: Jan. 30,
2009); Troubled Asset Relief Program: March 2009 Status of Efforts to Address
Transparency and Accountability Issues, GAO-09-504 (Washington, D.C.: Mar. 31, 2009);
Auto Industry: Summary of Government Efforts and Automakers’ Restructuring to Date,
GAO-09-553 (Washington, D.C.: Apr. 23, 2009); Troubled Asset Relief Program: June 2009
Status of Efforts to Address Transparency and Accountability Issues, 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, GAO-09-837 (Washington D.C.: July 23, 2009).
Page 2 GAO-09-975 Troubled Asset Relief Program
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 the
Federal Reserve, FRBNY, 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 and 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.
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
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.
Page 3 GAO-09-975 Troubled Asset Relief Program
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
(CDOs), 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 its 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
Page 4 GAO-09-975 Troubled Asset Relief Program
comprises at least 223 companies and has operations in over 130 countries
and jurisdictions worldwide (see fig. 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 insurer in the United
States, and it has a large foreign general insurance business. Figure 1
illustrates the complexity of AIG and its subsidiaries.
Page 5 GAO-09-975 Troubled Asset Relief Program
Figure 1: AIG Organizational Structure, as of December 31, 2008
98.5%
AIG
Pol ska
Towarzystwo
Ubezpi eczen
Spol ka
Akcyyjna
100%
National Uni on Fire I nsurance Company
of Pi ttsburgh, Pa.
100%
National Uni on Fire I nsurance
Company of L ouisiana
National Uni on Fire I nsurance
Company of V ermont
AIG Domestic Claims, I nc.
50%
JI
Accident & Fire Insurance
Company, Ltd.
70%
Lexington Insurance Company
N
100%
AIG Auto Insurance Company
of New Jersey
AI G Preferred I nsurance
Company
100%
AIG Indemnity Insurance
Company
100%
AIG Centenni al Insurance
Company
100%
AIG Premier Insurance Company
70%
American International Speci alty
Lines Insurance Company
N
100%
AIG Lodgi ng Opportunities, Inc.
100%
AIG
Excess Liability Insurance International
Limited
75%
American I nternational Insurance Company
100%
AIG Advantage Insurance Company
American I nternational Insurance Company
of California, Inc.
American I nternational Insurance Company
of New Jersey
B
C
American International Group, Inc.
100%
21st
Century Casualty Company
21st
Century Insurance Company
21st
Century Insurance Company of the
Southwest
100%
AIG Excess Liability Insurance
Company Ltd.
100%
Global Standards,
LLC
100%
The Hartford Steam Boiler Inspection
and Insurance Company
of Connecticut
100%
EIG
, Co.
100%
HSB
Engineeri ng Insurance Li mited
100%
The Boiler Inspection and Insurance
Company of Canada
100%
United Gua ranty Commercial
Insurance Company of North Carolina
United Gua ranty Credit
Insurance Company
United Gua ranty Mortgage
Indemnity Company
100%
A.I.G.
Mortgage Holdings Israel, Ltd.
45.88%
United Gua ranty Corporation
P
100%
E.M.I .
-
Ezer
Mortgage Insurance
Company Ltd.
100%
AIG
Centre
Capital Group, Inc.
AIG Mortgage Risk Sol utions
Pt y
Ltd.
AIG United Guaranty
Agenzia
di
Assicurazione
S.R.L.
AIG United Guaranty Insurance
(Asia) Limited
AIG United Guaranty Mortgage
Insurance Company Canada
AIG United Guaranty Re, Ltd.
AIG United Guaranty,
Soci edad
Limitada
United Gua ranty Direct Insurance
Ser v i ces, Inc.
United Gua ranty Services, Inc.
United Gua ranty Insurance Company
United Gua ranty Mortgage Insurance
Company
United Gua ranty Mortgage Insurance
Company of North Carolina
United Gua ranty Partners Insurance
Company
United Gua ranty Residential
Insurance Company of North Carolina
65.93%
Educational Loan Ser v i ci ng ,
LLC
100%
Ra-Hart Investment Company
100%
HSB
Prof essional Loss Control , Inc.
75.03%
United Gua ranty Residential Insurance
Company
100%
Transatlantic Reinsurance Company
33.24%
Transatlantic Holdings, Inc.
100%
Putnam
Reinsurance Company
Trans Re Zurich
100%
American Home A ssurance Company
100%
American Pacific Insurance Company,
Inc.
93.33%
AIG Hawai i Technol ogy Solutions,
LLC
D
99.88%
AIG Hawaii
LTC
Solutions,
LLC
E
100%
AIG Hawaii Insurance Company, Inc.
100%
AIG Non-Life Holding Company (Japan),
Inc.
19.8%
Fuji Fire & Marine Insurance Company
Limited
100%
American Fuji Fire & Marine Insurance
Company
Fuji Life Insurance Company, Li mited
Fuji International Insurance Company,
Limited
100%
New Hampshi re Insurance Company
100%
New Hampshi re Indemnity Company, Inc.
100%
AIG National Insurance
Company, Inc.
100%
AI Network of Nevada, Inc.
American International Pacif ic
Insurance Company
American International South
Insurance Company
Granite State Insurance Company
Illinois National Insurance Co.
New Hampshi re Insurance Ser vi c es, Inc.
G
100%
Audubon Insurance Company
100%
Agency Management Corporation
100%
Audubon Indemnity Company
100%
The Gulf Agency, Inc.
F
100%
AIG General Insurance (Malaysia)
Berhad
100%
LSP
Holdings
LLC
100%
A100
LLC
100%
HSB
Group, Inc.
100%
The Hartford Steam Boiler Inspection and
Insurance Company
100%
American International Insurance Company of
Delaware
A.I.G.
Managi ng General Agency, I nc.
AIG Marketing, Inc.
100%
AIG Commercial Insurance Group, Inc.
100%
AIG Property Casualty Group, Inc.
100%
The Insurance Company of the
State of Pennsylvania
Landmark Insurance Company
AIG Casualty Company
AIG Commercial Insurance
Company of Canada
32.09%
21st
Century Insurance Group
O
100%
Commerce and Industry Insurance Company
13.76%
Eastgreen
, Inc.
99.96%
United Gua ranty
Ser v i ci os
Administrativos
, S. de
R.L.
de
C.V.
R
H
100%
AIG Aviation, Inc.
31.5%
American International Realty
Corp
.
I
100%
AIG
LS
Holdings
LLC
100%
AIG Life Set t l ement s
LLC
31.47%
Pi ne Street Real Estate Holdings
Corp
.
J
Q
40%
Kuwait
Reinsurance Company
(
K.S.C
)
99.999%
AIG United Guaranty Mexico,
S.A.
100%
AIG Hawaii Technologies, Inc.
19.72%
AIG
Metropol itana
Compani a
de
Seg uros
y
Reaseguros
S.A.
100%
A.I.
Risk Specialists Insurance, Inc.
100%
Risk Specialists Compani es, Inc.
K
S
60.96%
P.T.
Asuransi
AIU
Indonesia
100%
Morefar
Marketing, Inc.
80%
P.T.
AIG Life
100%
Union Excess Reinsurance Company, Ltd.
100%
American Life Insurance Company
100%
AIG
Hayat
Sigorta
A.S.
AIG Life (Ireland) Limited
AIG Life (Bulgaria)
ZZD
,
EAD
AIG Life
Asigurari
Romania
SA
AHICO
Elso
Amerikai
Magyar
Biztosito
Zrt
..
American Life Insurance Company
Gestora
de
Fondos
y
Pl anos
de
Pensiones
S.A.
ALICO
S.A.
ALICO
Compania
de
Seguros
de
Vida
S.A.
ALICO
Properties Inc., II
AIG Management (UK) Limited
Fondos
y
Pl anos
de
Pensiones
S.A.
First American Czech Insurance Company,
A.S.
International Investment Holding
Company Li mited (Russ ia)
Zeus Administration Ser vi c es Limited
AMSLICO
AIG Life
poist'ovna
a.s.
61.84%
American Life Insurance Company (Pakistan)
Limited
80.92%
American L ife and General Insurance Company
(Trinidad and Tobago) Ltd.
92.7853%
Seguros
Venezuel a,
C.A.
50%
Inversiones
Inverseg ven
,
C.A.
99.99%
Inversi ones
Interameri cana
S.A.
BB
100%
La
Interameri cana
Compania
de
Seguros
de
Vida
S.A.
90%
Alico
Compania
de
Seguros
de
Retiros
ALICO
Compania
de
Seguros
S.A.
100%
First American Polish Life Insurance and
Reinsurance Company
S.A.
74.875%
Pharaoni c
American L ife Insurance Company
27.5%
Hellenic
ALICO
Life Insurance Company Ltd.
99.99%
CJSC
American L ife Insurance
Company AIG Life
GG
100%
AIG Financi al Assurance Japan
K.K.
40%
UBB
-AIG Life Insurance Company
JSC
60%
IBCO
Gestao
de
Patrimonios
,
S.A.
100%
Phi l am
Insurance Company, Inc.
Phi l am
Plans, Inc.
Pacific Union Assurance Company
99.78%
The
Philippine
American L ife &
General Insurance Company
95%
Phi l am
Equitable Life Assurance Company, Inc.
W
100%
American I nternational Reinsurance Company,
Ltd.
100%
American International Assurance Company
Ltd.
60.96%
P.T.
Asuransi
AIA
Indonesia
100%
AIG Life Holdings (International)
LLC
49%
AIG Mexico
Seguros
Interameri cana
,
S.A.
de
C.V.
100%
AIG-
Cuidando
tu
Salud
,
S.A.
de
C.V.
100%
American I nternational Assurance
Company (Bermuda) Ltd.
100%
AIG Life Insurance (Vietnam)
Company Limi ted
AIG Globa l Investment Corporation
(Asia) Ltd.
AIA
(Bermuda) Ser vi c es, Inc.
Grand Design Development Limited
26%
Tata
AIG Life Insurance
Company Ltd.
100%
AIG Star Life Insurance Co., Ltd.
50%
AIG
Pow szechne
Towarzystwo
Emerytalne
S.A.
100%
Equitable Investment Co. (Hong Kong) Ltd.
100%
SEA Insurance Co. Limited
SEA Insurance
Sendi r i an
Berhad
50.01%
AIG Israel Insurance Company Ltd.
99.99%
La
Interameri cana
Compania
de
Seguros
Generales
S.A.
(Chile)
100%
Caravan Investment Inc.
51%
AIG Caspi an Insurance Company
49%
AIG Ukraine
100%
AIG Globa l Serv i ces, Inc.
100%
American I nternational Group
KK
15%
Rus s ian Reinsurance Company
OAO
51%
Uzbek
American I nsurance Company
100%
AIG Life International
Ltd.
American I nternational Assurance
Company (Australia) Ltd.
AIRCO
Finance Co. Ltd.
26%
Prime Property
Y.K.
100%
Gemini Property
Y.K.
NN
100%
AIU
North America, Inc.
AIG Federal Savings Bank
AIG Funding, Inc.
AIG Castle Holdings
LLC
AIG Castle Holdings II
LLC
AIG Life Insurance Company (Switzerland), Ltd.
American Security Life Insurance Company, Ltd.
Delaware American Life Insurance Company
100%
AIG
Pr i vat
Bank
AG
100%
AIG Trading Group, Inc.
100%
AIG International, Inc.
Y
MM
95.27%
Nan
Shan
Life Insurance Company, Ltd.
100%
AIG Vita
S.p.A.
95%
Agenvita
S.r.l.
20%
Prime Ocean
YK
AA
100%
Borderland Investments Limited
100%
AIG Life
Hellas
Represen tation and Consulting
Ser vi c es
50%
ALICO
AIGE
,
A.I.E.
60%
AIG
Kazakhstan
Insurance Company,
S.A.
100%
ZAO
"Master D"
51%
CJSC
AIG Life Insurance Company (Russia)
100%
ALICO
European Holdings Limited (Ireland)
99.99%
AIG Mexico,
Compania
de
Seguros
de
Vida
,
S.A.
de
C.V.
94.99%
AIG Colombia
Seguros
de
Vida
,
S.A.
99.99%
AIG Life
Osiguranje
A.D.O.
Beograd
100%
American I nternational Assurance
Bhd
LC
Ventura (
Tampines
)
Pt e
Ltd
64.55%
Metropol itan Land Company, Limited
100%
Virgo Property
YK
49%
P.C.
-
AIA
Co. Ltd.
84%
American I nternational Data
Centre
Limited
100%
AIG Clearing Corporation
T
U
V
LL
90%
ALICO
AIG Mutua l Fund Management Company
S.A.
CC
DD
EE
FF
BB
HH
II
JJ
KK
10%
AIG Edison Life Insurance Company
X
40%
American International Company, Limited
Z
Page 6 GAO-09-975 Troubled Asset Relief Program
Troubled Asset Relief ProgramTroubled Asset Relief Program
Page 7 GAO-09-975
100%
HPIS
Limited
100%
AIG Gl oba l Real Estate Investment
Corp
.
2%
AIG Mexico Indus trial I,
L.L.C.
100%
AIG Capi tal Corporation
E
100%
AIG Central Europe &
CIS
Insurance Holdings
Corporation
100%
AIG Bulgaria Insurance Company
EAD
AIG Czech Republic
pojistovna
,
a.s.
AIG Romania Insurance Company
S.A.
100%
AIU
Africa Holdings, Inc.
80%
AIG
Hayleys
Investment Holdings
(Private) Ltd.
100%
AIG
MEMSA
Holdings, Inc.
26%
Tata
AIG General Insurance
Company Limited
100%
AIG Lebanon
S.A.L.
AIG
Sigorta
A.S.
66.67%
AIG Kenya Insurance Company, Li mited
100%
AIU
Holdings
LLC
40%
UBB
-AIG Insurance and Reinsurance
Company
JSC
100%
AIG Global Investment
Corp
.
AIG Ports America, Inc.
AIG Securities Lending
Corp
.
100%
AIG Gl oba l Asset M anagement
Holdings
Corp
.
100%
AIG Consumer Finance Group, Inc.
99.92%
AIG Bank
Pol ska
S.A.
99.15%
AIG Retail Bank
Public Company Li mited
100%
AIG Consumer Finance Group
(Asia) Limited
Compani a
Financiera
Argentina
S.A.
67.23%
International Lease Finance Corporation
100%
AIG Finance Holdings, Inc.
100%
AIG Finance (Hong Kong), Li mited
G
100%
A.I.
Credit
Corp
.
100%
AIG Credit
Corp
.
100%
AIG Equipment Finance Holdings, Inc.
100%
AIG Commercial Equipment Finance, Inc.
AIG Rail Services, Inc.
100%
AIG
Retirement Ser v i ces,
Inc.
100%
SunA merica
Life Insurance Company
100%
AIG
SunA merica
Life Assurance Company
100%
AIG
SunA merica
Asset M anagement
Corp
.
100%
SunA merica
(Cayman) Insurance
Company, Ltd.
100%
SunA merica
Investments, Inc.
100%
AIG Advisor Group, Inc.
100%
First
SunA merica
Life
Insurance Company
SA
Affordable Housing,
LLC
33%
New California Life Holdings, Inc.
100%
Advantage Capital Corporation
American General Sec urities
Incorporated
Financial Service Corporation
Royal Alliance Associ ates, Inc.
SagePoi nt
Financial Advisors, Inc.
100%
American International Underwriters Overseas,
Ltd.
100%
AIG
Ireland Limi ted
AIG General Insurance (Thailand) Ltd
AIG General Insurance (Vi etnam)
Company Limited
AIG
Memsa
Insurance Company Ltd.
AIG
ReInsurance
Ser vi c es Office
AIG
Takaful
-
Enaya
B.S.C.
AIG Uganda Limited
AIG Urugua y
Compania
de
Seguros
S.A.
American Asiatic Underwriters, Limited
Amer ican Inter nati
onal Insurance Company
of Puerto Rico
American International
Under writ
er s
Over seas,
I.I.
Ameri can Inte
rnational Underwriters de
Colombia,
Lt
da
.
A
meric
an International
Under w
rit
ers
(Phi lippines
),
Inc.
Arabian American Insurance
Company (Bahrain)
E.C.
Informatica
y
Servicios
LA
T
EC
,
S.A.
S.
J
.
Zevlaris
Insurance Agency Co. Limited
Underwriters Adj
ustment Company, Inc
[Panama]
99.93%
La
Meridional
Compani a
Argentina de
Seg uros
S.A.
100%
Hayleys
AIG Insurance Company Ltd.
100%
AIG European Insurance Investments Inc.
100%
Ascot Corporate Name Limited
100%
Joh annesburg Insurance Holdings (
Pt y
)
Limited
100%
AIG Life South Africa Limited
AIG South Africa Limited
50%
Hellas
Insurance Co.
S.A.
20%
Uzbek i nv est
International Insurance
Company Li mited
50%
Inversi ones
Seg ucasai
,
C.A.
93.38%
C.A.
de
Seg uros
American International
95.02%
AIG
Brasil
Companhi a
de
Seg uros
S.A.
100%
Richmond Insurance Company
(Barbados) Ltd.
100%
Richmond Insurance Company Li mited
20.1%
El
Pacif ico
-
Per ua no
Suiza
Compani a
de
Seg uros
S.A.
61.99%
El
Pacif ico
Vida
Compani a
y
Reaseguros
C
100%
AIG Realty, Inc.
AIG Gl oba l Real Estate Asia
Pacific, Inc.
100%
Sierra Leasing Ltd.
100%
Aircraft
SPC
-9, Inc.
100%
Aircraft
SPC
-12, I nc.
100%
Whitney Leasing Limited
100%
AIU
Latin America Investments,
LLC
85.02%
Garanpl us
S.A.
de
C.V.
61.75%
AIG UK Holdings Ltd.
100%
AIG UK Financi ng Limited
100%
AIG UK Sub Holdings Limited
100%
AIG (UK) Limited
100%
AIG UK Ser v i ces Limited
100%
AIG
Germany Holding
GmbH
100%
Wurttember ger i sche
und
Badi sche
Versicherungs
-
AG
100%
DARAG
Deutsche
Versicherungs
-
und
Ruckversicherungs
-
Aktiengesel l schaft
A
100%
American General Finance, Inc. [IN]
100%
American General Financi al Serv i ces
of America, Inc. [DE]
100%
American General Home
Equity, Inc. [DE]
100%
American General Consumer
Discount Company
American General Financi al
Ser v i ces of Illi nois, Inc.
American General Financi al
Ser v i ces, Inc. [DE]
American General Financi al
Ser v i ces, Inc. [IN]
American General Financi al
Ser v i ces, I nc.[NC]
American General Financi al
Ser v i ces, Inc. [OH]
American General Financi al Serv i ces,
Inc. [SC]
American General Financi al
Ser v i ces, Inc. [TX]
American General Financi al
Ser v i ces, Inc. [WA]
Merit Life Insurance Co.
Ocean Finance and Mortgages Limited
Yosemite Insurance Company
100%
American General Finance Corporation [IN]
100%
American General Finance Services of
Alabama, Inc.
100%
MorEquity
, Inc. [NV]
100%
Wilmington Finance, Inc.
100%
AIU
Far East Insurance Holdings, Inc.
100%
AIU
Far East Holdings,
KK
35%
AIP
KK
94%
A.I.G.
Colombia
Seg uros
Generales
S.A.
100%
AIU
Insurance Company
100%
AIG General Insurance Company
China Limited
AIG General Insurance (Taiwan) Co., Ltd.
100%
UNAT
Direct Insurance
Management Limited
10%
Inversora
Pi ch i nch a
S.A.
Compani a
de
Financiami ento
Comercial
100%
AIG Holding A ndes 1, Inc
50%
Globa l Information Ser v i ces Ltd.
100%
Hospital Plan Insurance Ser v i ces
100%
AIG Travel, Inc.
99.99%
AIG
Seg uros
de Personas,
S.A.
99.99%
AIG Union
y
Desarrollo
,
S.A.
94.98%
AIG Egypt Insurance Company
S.A.E.
100%
SunA merica
Capital Services, Inc.
100%
American International Underwriters Corporation
B
D
F
51%
AIG
Uzbek i nv est
Limited
50%
Latin American Investment Gua rantee
Company, Ltd.
100%
AIG Gl oba l Trade & Political Risk
Insurance Company
100%
La
Seg uridad
de
Centroamerica
,
Compani a
de
Seg uros
S.A.
98.33%
La
Seg uridad
de
Centroamerica
,
Compani a
de
Fianzas
,
S.A.
T
99%
AIG Insurance (Guer nsey )
PCC
Limited
U
100%
Pacif ico
S.A.
Empresa
Pr estadora
de
Salud
V
99%
AIG Insurance (Guer nsey )
PCC
Limited
67%
AIG
General Insurance (Malaysia)
Berhad
W
100%
ZAO
AIG Insurance &
Reinsurance Company
AIG Europe (Netherlands)
N.V.
91.32%
AIG Europe,
S.A.
2.72%
AIG Europe Holdings Limited
X
100.00%
AIG Luxembourg Financi ng Limited
.
Y
100%
AIG Life Holdings (US), Inc.
100%
AGC
Life Insurance Company
100%
American General Life and Acci dent
Insurance Company
100%
AIG Life of Bermuda, Ltd.
100%
AIG Worldwide Life Insurance of
Bermuda, Ltd.
100%
American General Life Insurance
Company
100%
American General Property
Insurance Company of Florida
100%
AI Life Settlement, I nc.
American General
Bancassurance
Ser vi ces, Inc.
Knickerbocker
Corporation
100%
American General Property
Insurance Company
100%
AIG Life Holdings
(Canada),
ULC
100%
AIG Assurance Canada
100%
Rokl and
Limited
100%
American General Annuity Ser v i ce
Corporation
AIG Enterpri se Ser v i ces,
LLC
American General Equity Serv i ces
Corporation
American General Life Companies,
LLC
The Variable Annuity Life
Insurance Company
Pi ne Vermont Rei nsurance Company
100%
Volunteer Vermont Holdi ngs,
LLC
Volunteer Vermont Reassurance
Company
100%
AIG Financial Products
Corp
.
79%
Sorbier
Holding
Corp
.
90%
Banque
AIG
S.A.
100%
NF
One Hundred and Twenty-Three
Corp
.
100%
Applewood
Funding
Corp
.
AIG Energy, Inc
AIG Financi al Products (Australia) Ltd.
AIG Matched Fundi ng
Corp
.
AIG-
FP
Matched Funding
Corp
.
AIG-
FP
Private
Fudi ng
Corp
.
AIG-
FP
Private Funding (Cayman) L imited
Bi gnonne
Investments One
LLC
Bluew ood
Investment
LLC
DBY
One,
LLC
Hickory Holding
Corp
.
International Investment Company
(Bermuda) Limited
LSP
Senior Lendi ng
LLC
Orangewood
Investments
LLC
Yellowwood
Investment
LLC
100%
AIG-
FP
Pi nestead
Holidngs
Corp
.
100%
Albert i
Holding Company
Cedarstead
Investment
Corp
.
Pi nestead
Investment
Corp
.
Willowgrove
Finance Company L imited
100%
AIG-
FP
Pi nestead
Hol idng
III
Corp
.
100%
AIG-
FP
Investment Company (Bermuda) Limited
100%
AIG-
FP
Fundi ng (Cayman) Li mited
AIG-
FP
Special Finance (Cayman) L imited
NF
Thirteen (Cayman) L imited
100%
AIG-
FP
Capital Preserv ation
Corp
.
91%
Bullfinch Investments (Cayman) L imited
100%
Bittern Investments
Corp
.
100%
Flamebright
Investment Limited
100%
AIG Financial Products (Jersey) L imi ted
100%
Dukes
Corp
.
100%
Cloudview
(Cayman)
Limted
Skyview
(Cayman) Limi ted
Skyview3
(Cayman) Limi ted
100%
Stonel and
Limited
100%
Peachwood
Funding
Corp
.
100%
Peachwood
LLC
100%
Swallow Investments
LLC
100%
Brambling
Investments
LLC
100%
Pearwood
Fundi ng
Corp
100%
Pearwood
LLC
100%
Sorbier
Investment
Corp
.
79%
Lakevista
Holdings
Corp
.
21%
Lakevista
Corp
.
100%
AIG-
FP
Holdings
Corp
.
100%
TMS
Investments
LLC
100%
TMS
Sub
LLC
100%
Clarges
Fundi ng
LLC
79%
NF
Fifty-Eight
Corp
.
21%
Heathwood
Holding
Corp
.
100%
Heathwood
Corp
.
100%
AIG-
FP
Structured Finance (Cayman) Limi ted
H
I
J
M
O
P
Q
100%
AIG Life Insurance Company
of Canada
25.294%
Spi cer
Energy II
LLC
100%
Ambler Holding
Corp
.
R
100%
American General Assurance Company
100%
American General Indemnity Company
99%
AIGFP
NZ
Funding
LLC
100%
Avon Holdings
Corp
100%
Avon
LLC
100%
Avon Financi ng
Corp
.
10%
Elgibright
Investment Limited
100%
Nerine
Finance No. 3
100%
Highfield
Holding
Corp
.
100%
Highfield
LLC
99%
C
herrywood
Investments
LLC
K
100%
AIG Annuity Insurance Company
AIG Life Insurance Company
American International Life Assurance
Company of New York
The Uni ted States Life Insurance Company
in the City of New York
44%
Iris Energy,
LLC
L
S
N
Source: Schedule Y of the 2008 Annual Statements filed by AIG's insurance companies with NAIC.
Page 7 GAO-09-975
AIG was a large issuer of commercial paper, a mortgage lender, and
through AIG Financial Products Corporation (AIGFP)—a financial
products subsidiary that engaged in a variety of financial transactions,
including standard and customized financial products—a participant in the
derivatives market.
7
AIGFP has been a key source of AIG’s financial
difficulties. As of June 30, 2008, AIG’s business included an estimated $15
billion of outstanding commercial paper and the company sold CDS with
$447 billion gross notional exposure on CDOs.
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.
9
In recent testimony, OTS said that it supervised and
assessed AIG as a conglomerate and communicated with other functional
regulators and supervisors that share jurisdiction over portions of the
conglomerate.
10
AIG’s domestic and life and property/casualty insurance
companies are regulated by the state insurance regulators in which these
companies are domiciled.
11
These state agencies regulate the financial
solvency and market conduct of these companies within their states and
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.
Page 8 GAO-09-975 Troubled Asset Relief Program
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. For 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, Treasury’s purchase, management, and sale of assets under
TARP, including those associated with 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.
12
Recently, we and
SIGTARP have initiated a coordinated review of the federal 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.
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
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).
Page 9 GAO-09-975 Troubled Asset Relief Program
support of the government’s efforts to stabilize systemically significant
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 of 2008.
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 Chairman of the Federal Reserve, determines is
necessary to purchase to promote financial market stability.
• The American Recovery and Reinvestment Act of 2009 (ARRA).
15
Provisions of this act amend and restate the executive compensation and
corporate governance provisions of the act.
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.
16
Consequently, the Federal Reserve and Treasury took steps to ensure that
AIG obtained sufficient liquidity and could complete an orderly sale of its
operating assets, continue to meet its obligations, and close its 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
The Federal Reserve
and Treasury
Provided Assistance
to AIG to Limit
Systemic Risk to the
Financial Markets
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, GAO-09-397T
(Washington, D.C.: Mar. 5, 2009).
T
Page 10 GAO-09-975 Troubled Asset Relief Program
unprecedented strains resulting from the placing of Fannie Mae and
Freddie Mac under conservatorship; the failure of financial institutions,
including Lehman Brothers Holdings, Inc. (Lehman Brothers); 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 have placed considerable pressure on numerous
counterparties and triggered serious disruptions in the commercial paper
market. Moreover, counterparties of AIGFP would no longer have
protection or insurance against losses if AIGFP, a major seller of CDS
contracts, defaulted on its obligations and CDO tranche 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 noncore business units in order to raise
cash to repay the credit facility and other liabilities.
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 avoid a
disorderly failure and 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 fig. 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
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.
Page 11 GAO-09-975 Troubled Asset Relief Program
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.
18
In addition,
AIG’s share price fell from $22.76 on September 8 to $4.76 per share on
September 15.
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.
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.
Page 12 GAO-09-975 Troubled Asset Relief Program
[This page left intentionally blank.]
Page 13 GAO-09-975 Troubled Asset Relief Program
Figure 2: Timeline of AIG’s Financial Difficulties and Government Actions in Response to Market Turmoil, Fall 2007 to
September 30, 2008
Fall 2007: As conditions in the U.S.
housing market deteriorate, American
International Group Financial Products
Corporation (AIGFP) begins to lose
massive amounts of money on credit
default swaps (CDS) issued on
collaterized debt obligations (CDO).
Feb. 2008:
AIGFP
co-founder and
President
resigns after
the division
writes off $11.1
billion on CDS
.
Mar
.
2008: AIG
forms a compensa-
tion committee to
discuss AIGFP and
decides to offer
retention bonuses to
prevent defections
of key employees.
May 20:
AIG raises $20
billion in private
capital.
May 12:
Credit ratings
agencies
Standard &
Poor’s (S&P)
and Fitch
Ratings
(Fitch) each
downgrade
their ratings
on AIG.
May 23:
Credit ratings agency
Moody’s Investor
Service (Moody’s)
downgrades its
ratings on AIG.
Jan. - June 20: AIG experiences significant losses, primarily attributable to AIGFP and decreasing values in it
s
secur
itie
s, particularly in its securities lending portfolio, leading AIG’s need for large amounts of cash collateral. AIG
recognizes $8.9 billion in impairment charges in the first 6 months of the year, primarily related to residential
mortgage-backed securities (RMBS) and structured securities.
July - Aug 31: The super senior CDO
secur
itie
s protected by AIGFP’s super senior
CDS portfolio continue to decline and ratings
of CDO securities are downgraded, resulting
in AIGFP posting an additional $5.9 billion of
collateral. AIG does a strategic review of its
businesses and reviewing measures to
address the liquidity concerns in its securities
lending portfolio and address the ongoing
collateral calls on AIGFP’s super senior
multi-sector CDS por
tf
olio, which as of July
31, 2008, totals $16.1 billion.
Mar. 7:
Securities
and
Exchange
Commission
proposes a
ban on naked
short selling.
May 2:
Federal Reserve’s
Schedule 2 Term
Securities Lending
Facility-eligible collateral
expands to include
AAA-rated asset-backed
securities (ABS).
25201510530
Aug.
25201510530
July
25201510530
June
25201510530
May
25201510530
Apr.
25201510530
Mar.
25201510530
Feb.
25201510530
Jan.
AIG-related actions
Other market events
Page 14 GAO-09-975 Troubled Asset Relief Program
Sources: AIG, Federal Reserve, FRBNY, and Treasury.
Sept. 7: Fannie
Mae and Freddie
Mac are placed
in federal
conservatorship.
Early Sept.: Securities lending requirements and demands to return cash collateral to borrowers 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
.
S
ept. 8-12: 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.
Sept. 11 or 12: AIG approaches 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 counterp
arties. 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.
Sept. 12: S&P places AIG on CreditWatch with negative implications and notes that upon completion of its revie
w, 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.
Sept. 1
3-14: AIG accelerates the process of attempting to raise additional capital and discusses 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.
Sept. 15: 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 FRBNY to discuss the creation of a $75
billion secured lending facility. S&P, Moody’s, and Fitch 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 pr
ice falls to $4.76
per share.
Sept. 16: 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 re
volving credit fa
cility 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 prev
ent 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.
Sept. 22: 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.
Sept. 14: Ten banks create $70
billion liquidity fund. Eligible
collateral for the Federal Reserve’s
Ter m Securities Lending Facility
(TSLF) and Primary Dealer Credit
Facility (PDCF) broadened.
Sept. 15: Lehman files for bankruptcy.
Bank of America purchases Merrill Lynch.
Sept. 16: Reserve Management
Corporation’s money market fund “breaks
the buck”–net asset value drops belo
w $1.
S
ept. 19: 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. SEC bans
shortselling on 799
financial stocks.
Sept. 21: Goldman Sachs and Morgan Stanle
y
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 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 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.
Sept. 22: Based on consultation with the Depart-
ment of Justice regarding the applications of
Goldman Sachs and Morgan Stanley to become
bank holding companies, the Federal Reserve
announces on Monday that the transactions may be
consummated immediately without the application of
the 5-day antitrust waiting period.
Sept. 25:
Washington
Mutual
closed by
OTS.
Sept. 26: The swap lines
for the European Central
Bank and the Swiss
National Bank are
increased.
252015105 30
Sept.
Page 15 GAO-09-975 Troubled Asset Relief Program
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.
Page 16 GAO-09-975 Troubled Asset Relief Program
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.
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
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.
Page 17 GAO-09-975 Troubled Asset Relief Program
Reserve Board stated, “[a]t 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.”
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.
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.
Page 18 GAO-09-975 Troubled Asset Relief Program
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.
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.
22
The Federal Reserve
Determined That AIG and
Its Insurance Subsidiaries
Posed a Systemic Risk to
the Financial System Amid
Market Turmoil in
September 2008
Failure Would Have
Undermined Business and
Investor Confidence
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.
23
Furthermore, these defaults and declines in underlying mortgages
decreased the value of mortgage-backed securities and securitizations in
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.
Page 19 GAO-09-975 Troubled Asset Relief Program
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.
24
Therefore, market confidence
was further eroded in an environment already facing tightening of credit
and interbank lending activities.
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.
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.
26
Counterparty Risk Would Have
Negatively Affected Numerous
Financial Institutions and the
Financial System
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.
Page 20 GAO-09-975 Troubled Asset Relief Program
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.
27
Default on Commercial Paper
Would Have Negatively
Affected Money Markets
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
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.
Page 21 GAO-09-975 Troubled Asset Relief Program
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.
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.
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.
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.
Failure Would Have Disrupted
the Derivatives Markets and
Caused Liquidity Issues for
Holders of AIG Products
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.
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.
Page 22 GAO-09-975 Troubled Asset Relief Program
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 fig. 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.
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.
31
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 http://www.treas.gov/press/releases/tg44.htm.
Page 23 GAO-09-975 Troubled Asset Relief Program
Figure 3: Timeline of the Restructuring of AIG’s Assistance, Market Events, and Related Government Actions, October 1,
2008, to April 30, 2009
Sources: AIG, Federal Reserve, FRBNY, and Treasury.
Oct. 7:
Federal
Reserve
establishes
the
Commercial
Paper
Funding
Facility.
Oct. 21:
Money
Market
Investor
Funding
Facility is
established.
Oct. 28:
Consumer
confidence
hits lowest
point on
record.
Oct. 7: American
International Group
Inc. (AIG) makes
$18.7 billion in
payments tied to
credit default swaps
to counterpar
ties that
incl
ude Goldman
Sachs and Société
Générale SA.
Nov. 10: The Department of the Treasury
(Treasury) announces plans to use its
Systemically Significant Failing Institutions
program, under TARP, to purchase $40
billion in AIG preferred shares.
Nov. 25: AIG enters into an agreement
with Treasury, whereby Treasury agrees
to purchase $40 billion of fix
ed-ra
te
cumulative preferred stock of AIG
(Series D) and a warrant to purchase
approximately 2 percent of the shares
of AIG’s common stock to Treasury.
March 2: The March restructuring includes AIG, FRBNY, and
Tre asury 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
American International Assurance Company, Ltd. and
American Life Insurance Company special purpose vehicle
(SPV) transactions; and AIG and FRBNY announcing their
intent to enter into a transaction for SPVs backed by in-force
blocks of life insurance policies and their agreement in
principle to amend the Federal Reserve Credit Agreement to
remove the interest rate floor. AIG announces $61.7 billion
four
th-q
uarter loss, the largest in U.S. corporate history.
March 1:
AIG enters into the Series
C Preferred Stock
Purchase Agreement.
Nov.: As part of the November restructuring, Federal Reserve Bank of New York (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 subsidiari
es,
and FRBNY extends credit
to Maiden Lane III to purchase multi-sector collateralized debt obligations on which AIGFP has
written credit default swaps. FRBNY terminates the $37.8 billion securities program.
April 17:
AIG and the Office of
Financial Stability (OFS) enter
into an agreement in which
OFS agrees to exchange the
$40 billion of Series D
cumulative preferred shares
f
or $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 pro
vide
immedi
ately available funds to
AIG up to about $29.8 billion.
Oct. 8: The Fed
pledges to AIG
for the $37.8
billion securities
lending program.
AIG-related actions
Other market events
25201510530
Oct.
25201510530
Nov.
25201510530
Dec.
25201510530
Jan.
25201510530
Feb.
25201510530
Mar.
25201510530
April
2008 2009
Page 24 GAO-09-975 Troubled Asset Relief Program
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.
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.
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.
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).
Page 25 GAO-09-975 Troubled Asset Relief Program
According to AIG’s financial reports and testimony by the AIG Chairman,
the company faced persistent difficult market conditions as it entered
2009.
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 pu
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 o
dollars of losses and a corresponding loss of taxpayer dollars invested
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
busine
t
f
in
sses 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
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.
Page 26 GAO-09-975 Troubled Asset Relief Program
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.
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.
The Federal Reserve,
FRBNY, and Treasury
Have Taken a Variety
of Steps to Stabilize
AIG
Page 27 GAO-09-975 Troubled Asset Relief Program
Table 1: U.S. Government Efforts to Assist AIG and the Government’s Remaining Exposure, as of September 2, 2009
Dollars in millions
Amount of assistance
authorized
Description of the federal
assistance
Debt Equity
Outstanding
balance
Sources to repay the
government
Implemented
Federal
Reserve
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
$0.5 million, a trust received
Series C preferred stock for the
benefit of the Treasury, which
gave Treasury a 77.9 percent
voting interest in AIG.
$60,000
a
$38,792.5 Proceeds from dispositions of
AIG businesses, internal cash
flows, and restructuring part of
the Revolving Credit Facility from
debt into equity. The initial fee
paid by AIG was reduced by $0.5
million to pay for the Series C
shares and will not be repaid.
FRBNY created an SPV—
Maiden Lane II—to provide
AIG liquidity by purchasing
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.
22,500 16,899 Proceeds from asset sales in
Maiden Lane II will be used to
repay the FRBNY loan.
FRBNY created a SPV called
Maiden Lane III to provide AIG
liquidity by purchasing CDO’s
from AIG Financial Products’
counterparties in connection
with the termination of credit
default swaps. FRBNY again
provided a loan to the SPV for
the purchases.
30,000 20,196 Proceeds from asset sales in
Maiden Lane III will be used to
repay the FRBNY loan.
Page 28 GAO-09-975 Troubled Asset Relief Program
Dollars in millions
Amount of assistance
authorized
Description of the federal
assistance
Debt Equity
Outstanding
balance
Sources to repay the
government
Treasury Treasury purchased Series D
cumulative preferred stock
from AIG. AIG used the
proceeds to pay down part of
the Revolving Credit Facility.
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.
40,000 41,605 Proceeds from dispositions of
AIG businesses and internal
cash flows of AIG.
Treasury purchased Series F
noncumulative preferred
shares of AIG and is allowing
AIG to draw up to $29,835
million through an equity facility
to meet its liquidity and capital
needs. Amounts drawn by AIG
represent the cost of the
federal equity interest in these
shares.
29,835 3,206
b
Proceeds from dispositions of
AIG businesses and internal
cash flows of AIG.
Subtotals $112,500 $69,835
Total authorized and
outstanding assistance
c
$182,335 $120,698.5
Pending AIG created two SPVs to hold
the shares of two of its foreign
life insurance businesses to
enhance AIG’s capital and
liquidity, and facilitate an
orderly restructuring of AIG.
The Revolving Credit Facility
will be reduced by the amount
of preferred equity interest in
the SPVs to be received by
FRBNY.
0 25,000
d
0 Proceeds from the public sale of
the common stock in the SPV
could be used to buy out the
federal preferred equity and/or
pay down part of the Revolving
Credit Facility.
AIG will create SPVs that will
issue up to $8,500 million in
notes to FRBNY which will be
funded with a loan from
FRBNY. AIG will use the
proceeds to pay down part of
the Revolving Credit Facility.
8,500
d
0 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.
Page 29 GAO-09-975 Troubled Asset Relief Program
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 Credit Facility will be decreased by an equal amount.
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.
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
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.
Page 30 GAO-09-975 Troubled Asset Relief Program
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).
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
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.
Page 31 GAO-09-975 Troubled Asset Relief Program
lending program, one of its major sources of liquidity problems.
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
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.
Page 32 GAO-09-975 Troubled Asset Relief Program
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.
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;
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.
Page 33 GAO-09-975 Troubled Asset Relief Program
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.
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.
39
Federal Reserve officials said that they are working to
complete the transactions with AIG.
FRBNY
A
lso Can Provide
Credit to AIG Subsidiaries but
Intends to Reduce the
Revolving Credit Facility by an
Equivalent Amount
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.
40
As
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.
Page 34 GAO-09-975 Troubled Asset Relief Program
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.
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.
42
As of September 8, 2009, AIG had drawn down
$3.2 billion of the commitment.
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.
Page 35 GAO-09-975 Troubled Asset Relief Program
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.
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 Providing
Assistance to AIG, the
Federal Reserve and
Treasury Have Taken
Steps to Protect the
Government’s
Interest, but Risks
Still Remain
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.
43
GAO, Auto Industry: A Framework for Considering Federal Financial Assistance,
GAO-09-242T (Washington, D.C.: Dec. 4, 2008); Auto Industry: A Framework for
Considering Federal Financial Assistance, GAO-09-247T (Washington, D.C.: Dec. 5, 2008);
and GAO-09-553.
Page 36 GAO-09-975 Troubled Asset Relief Program
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.
44
This was achieved through the establishment of
an independent trust to manage Treasury’s equity interest in preferred
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.
Page 37 GAO-09-975 Troubled Asset Relief Program
shares (Series C) of AIG.
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.
46
Proceeds from the Credit Facility Trust are to go directly to the Treasur
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 c
y
ontrol 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.
45
See FRBNY press release announcing the establishment of the AIG Credit Facility Trust,
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.
Page 38 GAO-09-975 Troubled Asset Relief Program
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.
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.
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.
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.
Page 39 GAO-09-975 Troubled Asset Relief Program
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.
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.
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.
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
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.
51
Third, AIG is also required to pay dividends of 10 percent per annum on
Treasury’s cumulative preferred share investment.
52
While the March 2009
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.
Page 40 GAO-09-975 Troubled Asset Relief Program
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.
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.
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.
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.
Page 41 GAO-09-975 Troubled Asset Relief Program
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.
Page 42 GAO-09-975 Troubled Asset Relief Program
Troubled Asset Relief Program
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,
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
• 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
Page 43 GAO-09-975
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.
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.
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
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.
Page 44 GAO-09-975 Troubled Asset Relief Program
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.
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.”
58
Finally, the number of
employees or the staff size of AIGFP, which may change for several
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.
Page 45 GAO-09-975 Troubled Asset Relief Program
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:
59
• The net notional amount has decreased over the past year, potentially
indicating progress in unwinding AIGFP’s obligations.
60
• The fair value of derivative liability has also decreased, indicating that the
market views AIG’s liabilities as being less risky.
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.
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.
Page 46 GAO-09-975 Troubled Asset Relief Program
• The net notional and fair values of AIGFP’s CDS on multisector 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.
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
62
A rating of BBB indicates a lower medium grade investment. See appendix IV.
Page 47 GAO-09-975 Troubled Asset Relief Program
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.
Page 48 GAO-09-975 Troubled Asset Relief Program
The U.S. government has committed around $182 billion in its efforts to
prevent the failure of AIG.
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.
64
For
more detailed information, see appendix V.
With Restructured Federal
Assistance, AIG Has Begun
to Repay Its Debt to the
Government but the
Success of These
Repayment Efforts Is
Unclear
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.
65
Since December 2008, the outstanding
balance on the facility has remained fairly steady at around $40 billion.
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.
Page 49 GAO-09-975 Troubled Asset Relief Program
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.
66
The
amount owed on the loans and their portfolio values peaked in December
2008 and subsequently have trended downward.
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
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.
Page 50 GAO-09-975 Troubled Asset Relief Program
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.
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.
Agency Comments
and Our Evaluation
In its written comments Treasury noted that it had no substantive
comments on the report.
Page 51 GAO-09-975 Troubled Asset Relief Program
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
http:www.gao.gov.
Orice Williams Brown is our point of contact on this report. She can be
reached at (202) 512-8678 or willia[email protected]. 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
Gene L. Dodaro
report are listed in appendix VI.
Acting Comptroller General
tates of the United S
Page 52 GAO-09-975 Troubled Asset Relief Program
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
Page 53 GAO-09-975 Troubled Asset Relief Program
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
Page 54 GAO-09-975 Troubled Asset Relief Program
Appendix I: Comments from the Department
of the Treasury
Appendix I: Comments from the Department
of the Treasury
Page 55 GAO-09-975 Troubled Asset Relief Program
Appendix II: Overview of the American
International Assurance and American Life
Insurance Company Transactions
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).
1
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 fig. 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.
1
The ceiling on the Revolving Credit Facility was initially $85 billion but was subsequently
lowered as part of the November 2008 restructuring.
Page 56 GAO-09-975 Troubled Asset Relief Program
Appendix II: Overview of the American
International Assurance and American Life
Insurance Company Transactions
Figure 4: AIG Restructuring and SPV Sale
Source: GAO.
AIG
FRBNY
AIG
FRBNY
American International
Assurance Company (AIA)
SPV
American Life Insurance
Company (ALICO)
SPV
American Life Insurance
Company (ALICO)
SPV
American International
Assurance Company (AIA)
SPV
100%
common
interest
100%
common
interest
AIA preferred equity interest
(Liquidation preference: $16 billion)
-$16 billion on credit facility debt
-$9 billion on credit facility debt
ALICO preferred equity interest
(Liquidation preference: $9 billion)
100% common interest
• 100% voting power
• Right to appoint board of managers
Preferred interest
• Veto rights over certain
significant actions
• Right to compel
certain actions
Proceeds from sale or initial public offering
Minus cost of paying back Federal Reserve's preferred equity interest
Minus cost of paying back AIG's common equity interest
Restructuring
Sale or public offering
Remaining
proceeds
Remaining
proceeds
99%
1%
95%
5%
Page 57 GAO-09-975 Troubled Asset Relief Program
Appendix II: Overview of the American
International Assurance and American Life
Insurance Company Transactions
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 fig. 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.
Page 58 GAO-09-975 Troubled Asset Relief Program
Appendix III: Overview of the Executive
Compensation Restrictions
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.
1
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;
2
1
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.
2
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).
Page 59 GAO-09-975 Troubled Asset Relief Program
Appendix III: Overview of the Executive
Compensation Restrictions
• 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.
3
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.
3
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.
Page 60 GAO-09-975 Troubled Asset Relief Program
Appendix IV: Summary of Rating Agencies’
Ratings
Page 61 GAO-09-975
Appendix IV: Summary of Rating Agencies’
Ratings
Grade and Quality Definitions Moody’s
a
Standard &
Poor’s
b
Fitch
b
Highest grade and quality There is an extremely strong capacity to
meet financial commitments on the
obligation and bonds have little
investment risk.
Aaa AAA AAA
High grade and quality 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.
Aa AA AA
Upper medium grade and quality There is a strong capacity to meet
financial commitment on the obligation
and the principal and interest are
adequately secured, but the bonds are
more vulnerable to a changing economy.
A A A
Medium and lower medium grade 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.
Baa BBB BBB
Noninvestment and speculative
grades
There is little protection on these
obligations and the interest and principle
may be in danger, where default may be
likely.
Ba1 and below BB+ and below BB+ and below
Sources: Moody’s Investors Service, Standard & Poor’s Ratings Services, and Fitch Ratings.
Notes:
a
Moody’s Investors Service 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
Standard & Poor’s Ratings Services and Fitch Ratings: 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.
Troubled Asset Relief Program
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
Figure/
Table Indicator Purpose—to monitor:
AIG
Table 3 Credit Ratings Changes in key credit ratings
Figure 5 AIG Inc.: Corporate Available Liquidity and Company-Wide
Debt Projections
The timing of potential future demand on AIG’s liquidity
posed by its debt obligations
Table 4 Sources and Amount of Available Corporate Liquidity The timing of potential future demand on AIG’s liquidity
posed by its debt obligations
Figure 6 AIG Inc.: Trends in and Main Components of Consolidated
Shareholders’ Equity
The trends, level, and composition of AIG’s equity capital
as an indicator of solvency and capital adequacy
Figure 7 AIG Inc.’s Operations by Major Segment: Operating
Income/Losses Before Taxes
The contribution of AIG’s operating segments to overall
operating earnings or losses
AIG Financial Products Corporation
Figure 8 Status of the Winding Down of AIG’s Financial Products
Business
The status of the winding down of AIG Financial Product’s
business
Figure 9 AIGFP: Super Senior Credit Default Swap Portfolio Net
Notional Amount, Fair Value of Derivative Liability, and
Unrealized Market Valuation Gains and Loss
The wind down of the AIG Financial Products’ Super Senior
Credit Default Swap portfolio and value of corresponding
liabilities
Figure 10 AIGFP: Gross Notional Value of the Multi-Sector
Collateralized Debt Obligations that Are Rated Less than
BBB
The credit quality of the underlying assets of AIGFP’s
remaining Multi-Sector Collateralized Debt Obligation
portfolio
Figure 11 AIG Credit Default Swap Premiums 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 12 AIG Insurance Subsidiaries: Regulatory (Adjusted) Capital
and Primary Activities Affecting Stockholders’ Equity in 2008
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 13 AIG Life and Retirement Services: Additions to and
Withdrawals from Policyholder Contract Deposits Including
Annuities, Guaranteed Investment Contracts, and Life
Products
For potential redemption “runs” by AIG annuitants and
policyholders
Figure 14 AIG Life Insurance and Retirement Services: Key Quarterly
Revenues and Expenses
The profitability of AIG’s life insurance and retirement
services companies as AIG arranges their disposition
Figure 15 AIG General Insurance: Premiums Written by Division Business retention and new business activity of AIG
property/casualty insurance businesses
Appendix V: Overview of the AIG Risk and
Repayment Indicators
Page 62 GAO-09-975 Troubled Asset Relief Program
Appendix V: Overview of the AIG Risk and
Repayment Indicators
Figure/
Table
Indicator Purpose—to monitor:
Figure 16 AIG Property/Casualty Insurance: AIG Commercial
Insurance Operating Ratios and AIG Foreign General
Insurance Operating Ratios
Operating performance of major domestic and foreign AIG
property/casualty insurance businesses
Repayment of Federal Assistance
Table 5 Composition of U.S. Government Efforts to Assist AIG and
the Government’s Remaining Exposure
The changes to the composition of assistance and amount
that AIG is obligated to repay the government
Figure 17 FRBNY Revolving Credit Facility Balance Owed and Total
Amount Available
AIG’s outstanding balance owed to the Revolving Credit
Facility established by the Federal Reserve Bank of New
York
Figure 18 Principal Owed and Portfolio Values of Maiden Lane
Facilities
Repayment of Federal Reserve Bank of New York loans to
purchase AIG assets and the portfolio values of these
assets
Figure 19 Proceeds from Dispositions by Quarter To monitor proceeds including cash from dispositions,
which is part of AIG’s strategy to repay federal assistance.
Table 6 Dispositions Closed and Agreements Announced but not yet
Closed
To monitor the status of dispositions, which part of AIG’s
strategy to repay federal assistance.
Source: GAO.
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.
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Table 3: Credit Ratings, as of March 31, 2009, and May 15, 2009
Credit rating
Rating agency Mar. 31, 2009 May 15, 2009 Potential consequences of future downgrade
Debt
Long-term
S&P A-/Negative
a
A-/Negative
a
Moody’s A3/Negative
a
A3/Negative
a
Fitch A BBB/Evolving
AIG Financial Products Corporation (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 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
S&P A-1 for AIG Funding,
Curzon, and
Nightingale
a
A-1 for AIG Funding,
Curzon, and
Nightingale
a
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.
Moody’s P-1 for AIG Funding
a
P-1 for AIG Funding
a
Fitch F1 F1
Financial strength
Life insurer
AM Best A/Negative
a
A/Negative
a
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.
S&P A+/Negative A+/Negative 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.
Moody’s A1/developing A1/developing
Fitch AA- A-/Evolving
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Credit rating
Rating agency Mar. 31, 2009 May 15, 2009 Potential consequences of future downgrade
P&C insurer
AM Best A/Negative
a
A/Negative
a
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
deteriorate significantly.
S&P A+/Negative A+/Negative
Moody’s Aa3/Negative Aa3/Negative
Fitch AA- A+/Evolving
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.
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 fig. 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.
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Figure 5: AIG: Corporate Available Liquidity and Company-Wide Debt Projections
(dollars in millions), Third Quarter of 2008 through Second Quarter of 2009
Source: AIG SEC filings.
Q3 - 2008
Corporate
available
liquidity
(as of date)
Company-wide debt maturing in:
2013
Thereafter
2012201120102009
$10,756
$13,230
$14,517
$21,690
$62,960
Federal
Reserve
facility
$28,057
$33,420
(11/5/08)
$61,882
Q4 - 2008
$8,861$9,865
$15,212
$17,492
$40,431
Federal
Reserve
facility
$21,581
$26,653
(2/18/09)
$58,193
Q1 - 2009
$15,080
$16,999
$47,405
Federal
Reserve
facility
$17,741
$49,620
(4/29/09)
$53,710
$9,598
$8,430
Q2 - 2009
$15,355
$17,204
$44,816
Federal
Reserve
facility
$13,809
$52,585
(7/29/09)
$53,783
$9,786
$8,575
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.
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Table 4: Sources and Amounts of Available Corporate Liquidity at November 5, 2008; February 18, 2009; April 29, 2009; and
July 29, 2009
Dollars in millions
Nov. 5, 2008 Feb. 18, 2009 Apr. 29, 2009 July 29, 2009
FRBNY Revolving Credit Facility $24,000 $24,800 $17,400 $20,000
Commercial paper under CPFF and syndicated & bilateral
facilities
5,600 753 1,940 3,493
Unused bank syndicated & bilateral facilities 3,820
AIG Cash and short-term investments 1,100 445 407
Treasury Equity Facility 29,83528,685
Total $33,420 $26,653 $49,620 $52,585
Sources: Sept. 30, 2008 10Q, Dec. 31, 2008 10K, Mar. 31, 2009 10Q, and June 30, 2009 10Q.
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 fig. 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.
1
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
1
Paid-in capital is equity capital provided by investors in exchange for common or
preferred stock.
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order to obtain AIG’s Revolving Credit Facility established by FRBNY.
2
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
-20,000
0
20,000
40,000
60,000
80,000
100,000
Q2Q1Q4Q3Q2Q1Q4
Dollars in millions
Source: AIG SEC filings.
2007 2008 2009
Retained earnings/accumulated deficits
Additional paid-in capital
Tot al shareholders’ equity
$89,029
$95,801
$79,703
$78,088
$71,182
$52,710
$45,759
$57,958
$79,732
$73,743
$49,291
$39,503
$79,468
$79,318
$80,259
-$16,706
-$3,073
-$12,368
$9,940
$16,448
$9,850
2
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.
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Note: Other components of total shareholders’ equity are preferred stock (Series C preferred stock),
Series D (preferred stock, which was exchanged in April 2009 for Series E preferred shares),
accumulated other comprehensive losses, and Treasury stock. Drawdowns from the approximately
$29 billion authorized under the Series F preferred stock transaction will increase paid-in capital in the
future by an equal amount.
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 fig. 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.
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Repayment Indicators
Figure 7: AIG’s Operations by Major Segment: Operating Income/Loss Before
Taxes, First Quarter of 2008 through Second Quarter of 2009
-65,000
-55,000
-45,000
-35,000
-25,000
-15,000
-5,000
5,000
Q2Q1Q4Q3Q2Q1
Dollars in millions
2008 2009
-$11,264
-$8,772
-$8,756
-$5,905
-$28,185
-$15,329
-$8,203
-$60,556
-$12,899
-$6,478
-$17,941
-$17,885
-$6,368
$1,319
Other
Asset management
Financial services
Life insurance and retirement services
General insurance
Source: AIG SEC filings.
0
Q1 2009
Q2 2009
-$2,739
-$633
General insurance: $-1
-$1,122
-$1,873
$971
$1,818
-$1,337
-$89
-$222
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.
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 fig. 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
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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 Corporation, as
of September 30, 2008; December 31, 2008; and March 31, 2009
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.
Approximate
number of
outstanding
trade
positions
September 30, 2008September 30, 2008 December 31, 2008 March 31, 2009
35,000
44,000
28,000
Gross notional of
long and short
derivatives
positions outstanding
(dollars in trillions)
$1.6
$1.8
$1.5
Number
of
businesses
(risk books)
21
22
17
Number of
employees
375
428
362
Note: These figures have not been publicly updated by AIG since they were released in the May 7,
2009 Restructuring Update. Due to Financial Accounting Standard 161, AIGFP changed its
methodology for computing the gross notional for March 2009 leading to a slight increase of
previously reported values. September and December notionals were estimated and restated
numbers were 2.0 and 1.8, respectively. The March number was 1.5.
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
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Repayment Indicators
intended to monitor the wind-down of the AIGFP Super Senior Credit
Default Swaps (CDS) portfolio and value of corresponding liabilities (see
fig. 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.
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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
0
50,000
100,000
150,000
200,000
250,000
Dollars in millions
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Source: AIG SEC filings and AIG.
0
50,000
100,000
Dollars in millions
0
25,000
50,000
Dollars in millions
Net
notional
amount
Fair
value
of
derivative
liability
Unrealized
market
valuation
gain/loss
Regulatory capital
a
Multi-sector
collateralized debt
obligations
b
Corporate collateralized
loan obligations
c
Mezzanine tranches
d
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Q3
2008
Q4
2008
Q1
2009
Q2
2009
$249,947
$234,449
$192,554
$177,473
$71,644
$12,556
$11,984
$9,151
$50,678 $50,495
$49,601
$40,941
$5,013 $4,701
$4,217
$3,501
$397 $379 $393
$30,207
$5,906
$6,715
$1,534 $2,554 $2,196 $153 $195 $182
$272 ($18) ($14)
$47
$23
$6,262 $5,832
($809)
$5,271
($284)
$538 $1,020 $358
$1,104
$792 ($18) $42 $13
$77
$105
Notes: The data for unrealized market valuation gain/loss correspond to the indicated 3-month
quarter. The unrealized market valuation loss (gain) tracks the increase (decrease) in this valuation
from quarter to 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 (CDOs) represent the CDS portfolio sold primarily for
arbitrage purposes and written on CDO transactions that generally had underlying collateral of
residential mortgage-backed securities, commercial mortgage-backed securities, and CDO tranche
securities.
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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 “A or lower” at origination.
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 fig. 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.
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Figure 10: AIGFP: Gross Notional Value of Underlying Multi-Sector Collateralized
Debt Obligations That Are Rated Less Than BBB, Third Quarter of 2008 through
Second Quarter of 2009
0
5,000
10,000
15,000
20,000
25,000
30,000
Q2 - 2009Q1 - 2009Q4 - 2008Q3 - 2008
Dollars in millions
Other
Commercial mortgage-backed securities
Prime residential mortgage-backed securities
CDOs
Alt-A residential mortgage-backed securities
Subprime residential mortgage-backed securities
Total of asset-backed securities
Total gross notional value (not pictured above)
$87
683
716
4,414
3,329
17,710
$26,939
$108,452
$100
666
128
1,547
651
4,910
$8,002
$25,036
$144
1,001
142
1,798
2,687
4,398
$10,170
$24,008
$182
1,224
1,183
1,383
2,661
3,753
$10,406
$19,813
Source: AIG SEC filings.
$26,939
(24.8% total
gross notional)
$8,002
(32% total
gross
notional)
$10,170
(42.4% total
gross
notional)
$10,406
(52.5% total
gross
notional)
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 fig. 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.
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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
0
1,000
2,000
3,000
4,000
5,000
Sept.Aug.JulyJuneMayApr.Mar.Feb.Jan.Dec.Nov.Oct.Sept.Aug.JulyJuneMayApr.Mar.Feb.Jan.Dec.Nov.Oct.Sept.Aug.JulyJuneMayApr.Mar.Feb.
Jan.
Basis points
Source: GAO analysis of Thomson Reuters Datastream.
3-year CDS
5-year CDS
2007 2008 2009
9.2
(1/2/07)
3,500
(9/16/08)
3,922
(9/16/08)
3,683
(5/4/09)
982
(9/8/09)
4,534
(5/4/09)
1,023
9/8/09)
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.
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 fig. 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
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Repayment Indicators
needs to be done by regulators.” On the other hand, NAIC states that
“Total Adjusted Capital of < 70 percent triggers a Mandatory Contro
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 companie
life companies had adjusted capital of 400 percent and 600 percen
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 offs
by capital contributions from the federal gov
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 offs
by capital contributions from the federal gov
l Level
s and
t,
et
ernment lines of credit in
order to maintain the desired capital ratios.
al
federal assistance and losses were from
securities lending activities.
t,
et
ernment lines of credit in
order to maintain the desired capital ratios.
al
federal assistance and losses were from
securities lending activities.
However, figure 12 also shows without capital contributions, adjusted
capital would not have been adequate to cover losses in 2008. The capit
contributions were part of the
However, figure 12 also shows without capital contributions, adjusted
capital would not have been adequate to cover losses in 2008. The capit
contributions were part of the
Figure 12: AIG Insurance Subsidiaries: Regulatory Capital at December 31, 2007, Figure 12: AIG Insurance Subsidiaries: Regulatory Capital at December 31, 2007,
and December 31, 2008, and Primary Activities That Affected Regulatory Capital
During 2008 (dollars in millions)
Source: Financial statements filed with the National Association of Insurance Commissioners.
AIG’s
largest
domestic
property/
casualty
companies
Primary activities affecting capital (2008)
Stock-
holder
dividends
b
Investor
capital
contri-
butions
Un-
realized
capital
losses
a
Net
income
or loss
12/31/0812/31/0712/31/08
Adusted capital
Control level
risk-based capital
12/31/07
$3,083
-$3,019
$5,966
$6,065
$2,327
$24,092
$26,598
-$4,623
AIG’s
largest
domestic
life insurance/
retirement
services
companies
$23,116
-$24,214
$2,474
$2,901
-$17,602
$15,653
$20,040
-$52
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Notes:
a
Includes dividends paid within AIG.
b
NAIC financial statements show unrealized capital losses separately.
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 fig. 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.
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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
Dollars in millions
0
5,000
10,000
15,000
20,000
25,000
30,000
Q2Q1
2009
Q4Q3Q2Q1
2008
Q4Q3Q2Q1
2007
$14,001
$15,309
$14,768
$14,070
$16,997
$14,195
$19,063
$15,101
$16,439
$15,600
$16,883
$12,326
$13,124
$14,455
$27,364
$6,988
$12,968
$10,546
$13,401
$850
Source: AIG SEC filings.
Additions to policyholder contract deposits
Withdrawals from policyholder contract deposits
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 fig. 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
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Repayment Indicators
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
-15,000
-12,000
-9,000
-6,000
-3,000
0
3,000
6,000
9,000
214321432121432143212143214321214321432121432143212143214321214321432121432143212143214321214321432121432143212143214321
Quarters
(2007 - 2009)
Quarters
(2007 - 2009)
Dollars in millions
Premium income and
other considerations
Key components of operating income
Interest and
dividend income
Operating income
before net realized
capital gains or losses
Net realized capital
losses or gains
Operating income
or loss
Policyholder benefits
and claims incurred
Source: AIG quarterly financial statements.
Domestic
Foreign
Quarter 4 - 2008
$1,282
$6,837
$-2,152 -$5,763
$2,057 $2,234 $189 $108 $457
$1,361
$268 $1,253
$1,616 $7,422
$-2,543 -$5,223
$2,110 $2,371
-$11,928 -$6,699 -$12,533 -$5,352
-$605 $1,347
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 fig. 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,
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Repayment Indicators
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
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Q2Q1
2009
Q4
Q3Q2Q1
2008
Q4Q3Q2Q1
2007
Dollars in millions
Source: AIG SEC filings.
Commercial
insurance
Foreign
general
Transatlantic
personal lines
Mortgage
guaranty
$5,971
$6,449
$5,986
$5,650
$5,124
$6,079
$5,630
$4,410
$2,678
$3,552
$4,184
$2,954
$4,968
$3,647
$3,726
$4,339
$2,921
$3,270
$3,242
$3,618
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.
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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 fig.
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.
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.
3
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.
3
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.
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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
0
20
40
60
80
100
120
140
Q2Q1
2009
Q4Q3Q2Q1
2008
Q4Q3Q2
2007
AIG commercial insurance operating ratios AIG foreign general insurance operating ratios
Ratio Ratio
Source: AIG quarterly financial supplements.
Expense ratio
Combined ratio
Combined ratio
Loss ratio
Expense ratio
Loss ratio
0
20
40
60
80
100
120
140
Q2Q1
2009
Q4Q3Q2Q1
2008
Q4Q3Q2
2007
83.57 82.84
91.23
96.32
93.94
108.96
90.20
133.33
99.82
79.83
19.99
100.40
78.32
22.08
43.13
87.04
21.92
74.63
19.31
74.38
21.94
73.47
17.76
64.16
18.68
86.05
90.17
85.23
83.41
89.36
59.31
97.19
100.74
57.99
42.75
40.57
54.91
95.48
34.68
55.57
90.25
37.88
53.65
35.71
51.78
31.63
47.31
37.92
52.40
37.77
52.13
33.92
66.29
17.28
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 22.50 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.
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.
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Repayment Indicators
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.
4
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)
Direct AIG
assistance
Indirect AIG Assistance
Amount
authorized
AIG debt owed to
government
Government
equity
Other debt owed
to government
Government
equity
Total
Federal Reserve
Revolving
Credit Facility
$60,000 $38,792.5
a
$38,792.5
a
Maiden Lane II $22,500 $16,899 $16,899
Maiden Lane III $30,000 $20,196 $20,196
Securitization
Note
[$8,500]
b
0 0
American
International
Assurance/
American Life
Insurance
Company
[$25,000]
b
4
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.
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Direct AIG
assistance
Indirect AIG Assistance
Amount
authorized
AIG debt owed to
government
Government
equity
Other debt owed
to government
Government
equity
Total
Treasury
Series D/E $40,000 $41,605
c
$41,605
c
Series F $29,835 $3,206
d
$3,206
d
Total
Total direct
assistance
$38,792.5 $44,811 $83,603.5
Total indirect
assistance $37,095 $37,095
Total direct and
indirect
assistance to
benefit AIG
$182,335 $38,792.5 $44,811 $37,095 120,698.5
Source: AIG SEC filings, Federal Reserve Statistical Release H.4.1, and Treasury transactions reports.
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
FRBNY reduced the amount of the commitment fee on the revolving credit facility by $500,000 to pay
for the Series C stock.
b
These transactions are still pending and therefore, were not included in the total government equity
exposure.
c
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.
d
$3.2 billion represents the amount that AIG has drawn on the authorized $29.8 billion facility.
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 fig. 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
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Repayment Indicators
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
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
Sept.Aug.JulyJuneMayApr.Mar.Feb.Jan.
2009
Dec.
Nov.Oct.
2008
Dollars in millions
Source: Federal Reserve Statistical Release H.4.1 and Federal Reserve.
Balance
Tot al amount available
$72,332
10/22/08
$38,792
9/2/09
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 fig. 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
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Repayment Indicators
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.
5
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.
assets held in
the Maiden Lanes will appreciate over time.
Figure 18: Principal Owed and Portfolio Values of Maiden Lane Facilities Figure 18: Principal Owed and Portfolio Values of Maiden Lane Facilities
Dollars in billions
Maiden Lane II LLC Maiden Lane III LLC
0
5
10
15
20
25
30
Dollars in billions
0
5
10
15
20
25
30
9/2/097/1/093/25/0912/24/0812/17/089/2/097/1/093/25/0912/24/0812/17/08
Source: Federal Reserve System Monthly Report on Credit and Liquidity Programs and the Balance Sheet, June 2009.
Principal and interest owed to FRBNY
Portfolio value
Principal and interest owed to AIG
$19.5
$20.0
$1.0 $1.0 $1.0 $1.0 $1.0
$19.5
$20.0
$18.6
$18.4
$17.1
$16.1
$17.7
$14.9
$15.2
$19.7
$5.0 $5.0
$5.1 $5.1 $5.1
$24.4
$28.2
$24.2
$27.6
$22.6
$20.5
$20.9
$20.2
5
The portfolio value is based on the market value of the underlying assets and will mirror
the change in value of those assets.
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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 fig. 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 from Dispositions by Quarter, Second Quarter of 2008 through
September 5, 2009
0
1,000
2,000
3,000
4,000
5,000
9/5/096/30/093/31/0912/31/089/30/08
Dollars in millions
Source: AIG SEC filings.
$820
$76
$1,900
$43
$41
$1,737
$550
$800
$2,441
$200
Proceeds with cash portion not disclosed
Cash proceeds
Noncash proceeds
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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 Total Proceeds
September 30, 2008
not applicable not applicable
December 31, 2008
Unibanco JV $820
Taiwan Finance N/D
March 31, 2009
AIGFP Energy Commodity Hedges (all cash) 61
Philam Savings Bank 43
HSB ($739 million cash) 815
June 30, 2009
AIG Life Insurance Company of Canada (all cash) 263
Commodity Business (all cash) 15
AIG Retail Bank and AIG Card (Thailand) ($45 million cash) 540
AIG Private Bank ($250 million cash) 305
Darag 26
Real estate in Tokyo (all cash) 1,179
September 5, 2009
21st Century Insurance Group ($1,700 million cash) $1,900
CFG China N/D
Consumer finance operations in Mexico N/D
A.I. Credit Life (all cash) 741
Investment assets—energy & infrastructure 1,900
Total proceeds on dispositions closed $8,608
Total cash proceeds on closed dispositions with terms
disclosed
$4,993
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Dispositions closed in quarter ending Total Proceeds
Disposition agreements announced but not yet closed
AIG Finance- Hong Kong 627
Consumer finance operations in Russia 9
AIG Credit Card Co (Taiwan) 117
Consumer finance operations in Argentina 69
Consumer finance operations in Colombia N/D
CFG Thailand: CFGS N/D
UGC-Campus Partners N/D
Consumer finance business in Poland N/D
Portion of investment management advisory business 500
Transatlantic Holdings 1,096
Source: AIG.
Note: N/D means not disclosed
Page 90 GAO-09-975 Troubled Asset Relief Program
Appendix VI:
A
GAO Contact and Staff
cknowledgments
Page 91 GAO-09-975
Appendix VI: GAO Contact and Staff
Acknowledgments
Orice Williams Brown, (202) 512-8678 or [email protected]
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.
GAO Contact
Staff
Acknowledgments
Troubled Asset Relief Program
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Page 93 GAO-09-975 Troubled Asset Relief Program
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