2008-09-12_Federal_Reserve_Bank_AIG_Meeting_Notes

AIG Meeting Notes - 2p
September 12, 2008
AIG- Jacob Frenkel (Vice Chairman), Steve Bensinger (CFO), David Herzog (SVP & Comptroller), Robert Gender (VP & Treasurer), Alan Pryor (EVP - Financial Services Division)
FRBNY - Trish Mosser, Jim Mahoney, Bill Dudley

  • AIG is facing serious liquidity issues that threaten its survival viability.
  • Rating triggers:
    GICs are issued out of AlG-Financial Products (AlG-FP), insured by the holding company.

    • downgrade by 1 rating agency leads to $10B in collateral calls, plus an additional $4B-$5B in portfolio obligations that are puttable if downgraded (total of $15B in liquidity needs)
    • downgrade by 2 rating agencies - additional $3B in liquidity needs
    • If downgraded, they must post half of the additional collateral within 2 days, and the other half in 10 days.
  • Securities lending (mostly out of the insurance companies) - about $69B in liabilities,
    • and the holding company has only enough cash to fundĀ½ of that, if the sec lending counterparties turn away from the AIG name.
  • Unwinding in event of bankruptcy is likely to be very messy, because derivatives book is large and complex $2. 7 Trillion, largely of very long-term structure products. $1 Trillion is concentrated in 12 large counterparties.
    • Book is very far from balanced, although they could not give a MTM value.
    • One of the challenges they are already facing is very aggressive marks from counterparties and strategic unwinding of "in the money" positions, and this will likely accelerate in coming days adding to the cash drain. Their super senior CDO book is about $80 bn and at present they have approximately $19 billion in collateral posted against it.