Liquidity - AIG - FCIC

  • AIG found itself unable to obtain short-term or long-term financing in the public debt markets.
  • This, coupled with its inability to roll over commercial paper coming due, posed the most significant immediate threat to the company‟s solvency.201 (p61)

201 AIG Form 10-K for FY08, supra note 47, at 201.

2010 0610 - COP - The AIG Rescue, Its Impact on Markets, and the Government’s Exit Strategy - 337p

  • 2008 0814 - FCIC - FRB (Kevin Coffey/NY/FRS) - FCIC-AIG0021211 - 3p
    • Capital Raise & Liquidity Management
      • OTS confirmed that the primary reason for the $20 billion capital raise in May was for liquidity purposes.
      • Since that time, approximately $6-7 billion has been used to support AIGFP (via repos) and another $1 billion was infused directly into AIG SunAmerica to support its growth.
      • Given the remaining $12-13 billion, they seemed generally comfortable with the firm's current liquidity.
      • They were also confident that the firm could
        access the capital markets with no problem if it had to.
      • From a capital standpoint, AIG now has $3-5 billion in "excess capital" down from $15-20 billion.
  • Until six or seven months ago, liquidity management was not a holding company activity and things were managed in "fiefdoms" (i.e" AIGFP, Domestic Life, ILFC etc).
    • The firm is now implementing common stress testing across major businesses and is also starting to require the businesses to run liquidity scenario analysis where there is no external financing for 1 year.
      • (We tried to clarify if this meant no unsecured
        borrowings and/or no secured borrowings and they seemed to indicate it covered both but this will need to be clarified in the future).
  • (Note: CSG's CPC team indicated today that in its relationship with AIG, CSG does not need the securities it borrows but instead AIG is using the deals to raise cash. As such, CSG is looking to take a haircut on AIG's securities as opposed to posting cash to AIG in excess of the securities value which is the market standard).
  • In order to expand liquidity capacity, the firm's insurance companies were setting up repo lines which they had never done before (it was unclear if this had already been implemented or if it is on the to do list).
    • They are also setting up another $2 billion inter-company LOC.
  • 2008 0902 - FCIC - FRB (Danielle Vicente) - AIG Liquidity and Access to the PDCF - 4p
    • Volatile funding
    • AlG is vulnerable to "runs" on a portion of its liabilities.
      • This funding is generally susceptible to run-off risk; risk that these liabilities would not be rolled over.
      • Although they total nearly $100 billion, these liabilities represent less than 10% of assets.
      • As of second quarter 2008, volatile funding consists of:
        o repurchase transactions- $9.7 billion
        o securities lending- $75 billion
        o commercial paper and extendable notes- $15 billion
    • Off-balance sheet commitments
    • The primary concern for the insurance company's liquidity position is not volatile funding but rather its off-balance sheet commitments.
    • Unlike liabilities on-balance sheet,
      the effect of these commitments on the firm's liquidity can be difficult to forecast. In the
      near term, possible commitments that could strain liquidity are
      o Collateral calls in the event of a downgrade - minimum of $10.5 billion
      o Contract terminations in the event of a downgrade- minimum of $4.6 billion
      o Put options exercised but not yet funded- $1.5 billion
      o Other commitments (such as private equity, ect.)- $17 billion
    • These commitments that could require funding at any moment, and if events trigger margin calls and contract terminations, it is less likely that the volatile funding will be rolled over.
    • Other noteworthy aspects of their liquidity
      Additionally, the following short term liabilities come due within the next year:
      o Guaranteed investment contracts <GICS>- $9.4 billion
      o Current portion of long term debt- $28 billion
    • What are the main concerns of AIG's current liquidity position?
      • Liability runs: not just a banking problem
      • Collateral calls: in the long run, we're all dead
      • Contract terminations: downgrades hinder liquidity