2008 0914- FRB (Adam B. Ashcraft) - FCIC-AIG0021566- 2p
The bottom line is that this downgrade action is about risk management and not capital, and reflects the unwillingness of AIG to sell or hedge some of its ABS COO risk, preferring to keep the upside of these exposures to to itself, and thus leave the bondholders vulnerable to a further deterioration in the housing market.
The threat to sell assets is a clear attempt to scare policymarkers into giving the access to the discount window, and avoid making otherwise hard but viable options: sell or hedge the COO risk (little to no impact on capital), sell subsidiaries, or raise capital.
Attached is a document that summarizes some of our discussion earlier.
The key takeaway is that AIG could be more systemic in nature than Lehman due to the retail dimension of its business.
Insolvency should be managed in a way that insulates the retail activity from contagion arising from the wholesale part.
Stating the obvious, intervention needs to insulate retail acitivities (inc. those in the parent, like stable value wraps) in a way that inspires confidence among the public to avoid a potential crisis of confidence.
Coordination issues among state regulators could make this difficult.