American International Group vs Transatlantic Holdings

  • Transatlantic Holdings, Inc., et al. v. American International Group, Inc., et al., American Arbitration Association Case No. 50 148 T 00376 10:
  • Supreme Court of New York
  • 2010 0629 - LC - American International Group vs Transatlantic Holdings - Affirmation of Anthony J. Albanese in Support of American International Group, Inc.’s Verified Petition and Application for Temporary Restraining Order - 116p
  • (p50) - SECURITIES LENDING AGENCY AGREEMENT
  • (p64) - AIG Global Securities Lending Corp. ("AIGGSL") - as its lending agent
    • Delegate
      • "AIGESC" - AIG Equity Sales Corp.
      • Mellon Bank.
      • AIG Global Investment Corp.
      • AIG Capital Management Corp.
  • Affiliate Services Agreement dated March 2, 1998 with AIG Global Investment Corp. (Europe) Ltd.
  • Services Agreement dated October 8, 1998 with Aig Global Investment Trust Service Ltd.
  • Affiliate Services Agreement dated February 5, 1999 withAIG Equity Sales Corp. Services Agreement dated March 31, 1999 with AIG Investment Corperation (Asia) Ltd.
  • Custody Agreement dated July 30, 1999 with Mellon Bank, N.A.
  • Investment Advisory Agreement dated October 6, 1999 with AIG Capital Management Corp.
  • Investment Advisory Agreement dated October 6, 1999 with AIG Global investment Corp.

1999 SECURITIES LENDING AGENCY AGREEMENT

The undersigned Lender under the Securities Lending Agency Agreement (the "Agreement") identified below, hereby consents, for the purposes of Section 1.4 of the Agreement, to the delegation, if any, effected by AIG Global Securities Lending Corp. under each of its agreements identified below:

  • Affiliate Services Agreement dated March 2, 1998 with AIG Global Investment Corp. (Europe) Ltd.
  • Services Agreement dated October 8, 1998 with AIG Global Investment Trust Service Ltd.
  • Affiliate Services Agreement dated February 5, 1999 with AIG Equity Sales Corp.
  • Services Agreement dated March 31, 1999 with AIG Investment Corporation (Asia) Ltd. (p63/117)
  • Win Neuger
    • Transatlantic v AIG, 1999 SECURITIES LENDING AGENCY AGREEMENT
    • American Home Assurance Company, National Union Fire Insurance Company of Pittsburgh, Pennsylvania - Vice President
  • Rich (Richard) Mercante
    • Transatlantic v AIG, 1999 SECURITIES LENDING AGENCY AGREEMENT
    • American International Life Ass-urance Company of New York, Delaware American Life insurance Company, AIG Life insurance Company - Vice President of all
  • Peter Adamczyk - AIG GLOBAL SECURITIES LENDING CORP. - Vice President
  • Ms Aisling Gill - AIG Global Securities Lending (Ireland) Ltd
  • 81. AIG also chased higher yields by investing heavily in bonds of lengthy maturity
    • As a consequence, AIG grossly mismatched the maturity dates of the collateral investments and the underlying securities loans, which rarely had terms exceeding thirty days.
    • A June 27, 2008 Bloomberg article reported that, state officials said AlG invested more than half the collateral in debt securities that on average would pay off in three to ten years.
    • Because AIG loaned bonds for periods ranging from overnight to 60 days, the insurance units could be exposed to a cash crunch if borrowers suddenly returned securities and demanded their collateral back. 
    • "We were surprised at the length of the paper,' said Joseph Fritsch, director of insurance-accounting policy at the New York State Insurance Department in Manhattan."  (p22-23)

2010 0629 - LC - Transatlantic vs AIG - Affirmation of Anthony J. Albanese - 116p

<June 28, 2008 - Bloomberg - Miles Weiss>

4. Wholly owned AIG subsidiaries receive over $5 billion in capital contributions from AIG to offset losses in the Program, but TRH receives nothing

  • 121. In 2008, AIG contributed approximately $5 billion to the Program's non-TRH collateral pools to cover losses allocable to its wholly-owned subsidiaries.

F. Illiquidity of GSL Collateral Investments on a Massive Scale Contributes to a Near-Collapse of AIG

  • 126. Approximately one month before AlG's cresting liquidity crisis prompted a rescue by the federal government, on AIG's August 7, 2008 earnings call for the second quarter of 2008, AIG's then-chairman and CEO, Robert Willumstad, admitted that much of the problems that have come about have been a concentration of risk in the U.S. housing market both in the investment portfolio and the credit default swap book."
  • 127. The government rescue of AIG launched in September 2008 involved substantial components dedicated to ending the GSL domestic program and extinguishing the massive collateral shortfalls faced by AIG's wholly-owned insurance subsidiaries therein.
  • 128. The most significant element of the rescue with respect to GSL was the creation of Maiden Lane II, a limited liability company whose sole member is the Federal Reserve Bank of New York.
  • 129. The Federal Reserve created Maiden Lane for one reason:
  • 132. As summarized by former New York state insurance commissioner Eric Dinallo in his testimony before the U.S. Senate in March 2009:
    As with some other holding company activities, [securities lending at AIG] was pursued aggressively rather than prudently.... [AIG] had invested the borrowers' cash collateral in mortgage-backed securities that had become hard to sell. To avoid massive losses from sudden forced sales, the federal government, as part of its rescue, provided liquidity [sic] the securities lending program. In the early weeks of the rescue, holding company rescue funds were used to meet the collateral needs of the program. Eventually the Federal Reserve Bank of New York created Maiden Lane II, a fund that purchased the life insurance companies' collateral at market value for cash.
  • 133. TRH is not a participant in Maiden Lane II, which still exists, nor was it a direct beneficiary of any governmental support through the AIG rescue.

G. Post-Rescue Events: AIG Divests of TRH and AIG Investments, and Winds Down GSL

173. Claimants would not have continued to participate in AIG's securities lending program except for their reliance upon the representations made by AIG regarding the design and risk parameters of the program, and would not have done so had they been aware of the material omissions and concealment by AIG that AIG was actually investing a significant majority of the collateral for TRH's lent securities in longterm,
risky MBS and ABS.

174. At the time of these statements, misrepresentations and omissions, Respondents knew or should have known them to be false and intended to deceive TRH by making such statements, misrepresentations and omissions.
175. At the time of these statements, misrepresentations and omissions, Respondents intended that TRH would rely on the basis of the statements, misrepresentations and omissions in determining whether to continue to participate in AIG's securities lending program. Claimants reasonably relied thereon to their detriment in making such decisions.
176. Had Claimants known of the material facts that AIG wrongfully concealed and misrepresented, and of the falsity of AIG's representations, Claimants would not have continued to participate in the Program.

  • 110. Also, in the fourth quarter of 2008, GSL began accepting initial collateral from borrowers at less than 100% of the value of the loaned security, in a desperate effort to keep the Program afloat beneath the weight of its illiquid, long-term collateral investments. TRH was required to account for such exchanges as sales.
  • 113. TRH terminated '1RH Domestic as of September 30, 2008.
  • 114. TRH also terminated TRH Foreign by December 31, 2008. Thus, TRH's participation in the Program was effectively ended by the close of 2008.
  • 115. In endeavoring to wind down its participation in the Program in 2008, TRH was required to take losses in the hundreds of millions of dollars. The losses took several forms:
  • 116. In sum, TRH's losses to date as a consequence of AIG's and GSL's contractual breaches exceed $350 million, of which more than two-thirds represent realized losses.
  • 69. The Securities Lending Agreements made GSL subject to investment guidelines, (Id., § 1.3), which in practice were promulgated by AIGs Credit Risk Committee and applicable to all GSL participants. While the Agreements allowed GSL to delegate any of its prescribed duties and responsibilities, they subjected any company to which GSL delegated its duties to the same investment guidelines.  (p19)
  • 70. The Program's collateral investment guidelines were developed by AIG and explicitly stated that TRH's cash collateral was safe because the investment parameters were prudent and risk averse.  (p19)

D. AIG's Ten-Cubed Strategy—an III-Conceived Quest for Profits— Results in a Breach of the Securities Lending Agreements

  • 71. For several years, the Program served its intended purpose - i.e., it provided a low-risk source of yield enhancement. No party to the Securities Lending Agreements made a lot of money but no money was lost.
  • 72. While far from exciting, the mundane way the Program operated from 1999 until 2005 was by design, in accordance with its stated objectives and consistent with how a securities lending program should operate. 
  • 73. But starting in late 2005, AIG and GSL breached the Securities Lending Agreements by embarking on a bold and risky strategy that ultimately proved catastrophic.

AIG Adopts More Aggressive Investment Guidelines for the
Securities Lending Program and Pursues Investments in Long-Term Securities, MBS and ABS

  • 74. In December 2005, senior executives from AIG Investments proposed to the AIG Credit Risk Committee an amendment to the Program's collateral investment guidelines that would allow the investment of up to 75% of collateral in MBS and ABS.
  • 78. AIG Investments senior executive and then-AIG Chief Investment Officer Win Neuger was instrumental in the decision. As reported by the Wall Street .Journal on February 5, 2009, "Mr. Neuger and Kevin McGinn, who has been AIG's chief credit officer since 2004, signed off on the proposal, agreeing in a memo that the guidelines didn't subject the [Program] portfolio to undue risk."  (p21)
  • 81. As a consequence, AIG grossly mismatched the maturity dates of the collateral investments and the underlying securities loans, which rarely had terms exceeding thirty days. (p22)
  • 82. In 2006 and 2007, Respondents applied the new Guidelines and invested over 60% of all Program domestic cash collateral in RMBS backed by subprime and Alt-A mortgages, home equity loans and lines of credit.  (p23)

2. AIG knew of risks presented by MBS investments

  • <AIGGSL vs AIGFP>

3. Despite the warning signs, AIG deliberately placed TRH and other securities lending participants at risk

  • 90. AIG began ramping up collateral investments in MBS at GSL in 2006 despite the fact that at the same time AIG Financial Products had stopped offering as too risky—credit default swap contracts related to subprime-backed securities, which in effect insured investors in such MBS against loss.
  • 91. Assets shunned as too risky to insure at AIG Financial Products were embraced at GSL because GSL and its parent AIG Asset Management were greedily chasing a goal of "Ten-Cubed"

E. TRH Learns of its Broad Exposure to Imprudent Investments When It Discovers That AIG Has Exposed 80% of the Domestic Pool to Subprime Mortgage Backed Securities

54. AIG and GSL controlled all aspects of TRH's participation in the Program. Pursuant to the Securities Lending Agreements and at AIG's direction, GSL loaned TRH's securities and managed the investment of TRH's cash collateral from 1999 to 2008. GSL deposited TRH's cash collateral into two separate cash collateral pools: (1) a "domestic" pool which consisted of cash collateral received from lending U.S dollar denominated securities; and (2) a "foreign" pool which consisted of cash collateral received from lending Euro or Sterling denominated securities. GSL delegated the function of reinvesting TRH's collateral to AIG Investments Corp. ("AIG Investments"). The AIG Investment Accounting division was responsible for accounting for TRH's participation in the securities lending program.  (p16)

  • 55. GSL commingled TRH's cash collateral with the cash collateral of other participants in the Program, including AIG's wholly-owned insurance subsidiaries.  (p17)
  • 56. A unit of AIG called the AlG Credit Risk Committee determined the guidelines that governed the investment of cash collateral in the various accounts in which TRH participated.  (p17)
  • 63. The Securities Lending Agreements authorized GSL to take a wide variety of action on TRH's behalf, including to:  (p18)
  • 65. The Securities Lending Agreements established a fiduciary relationship between GSL and TRH with respect to securities lending.  (p18)

2010 0629 - LC - Transatlantic vs AIG - Affirmation of Anthony J. Albanese - 116p

  • ....pending the hearing on the veriried petition on the ground that AIG is not a party to the Securities Lending Agency Agreements ("SLAAs") under which Respondents have asserted their claims and right to arbitrate.
  • 6. Incredibly, AIG had surreptitiously abandoned one of the stated objectives in the 2002 Securities Lending Investment Policy by eliminating the following sentence: "..."
    • Not only did AIG modify these key elements of the objectives, it did so without informing TRH of the significance of this radical departure from prudent securities lending practices. (p4)
  • This durational mismatch meant that TRH had to repay cash collateral (as when loans came due or a lender returned a borrowed security) before the securities purchased with the corresponding cash collateral had matured.  (p4)
  • 9. Win Neuger, AIG's Chief Investment Officer and architect of GSL's new approach to investment risk, dubbed the plan "Ten-Cubed" (short for one billion dollars).  (p4)
  • 13. Risky collateral investment practices were acceptable to AIG because the parameters of the securities lending agreements provided that AIG shared equally in the income earned through the reinvestment of cash collateral but bore none of the risk of loss.  (p5)
  • The second facet of AIG's Ten-Cubed plan was to substantially increase the volume of securities it lent to borrowers. Accordingly, AIG nearly tripled the size of TRH's exposure in the Program. (p6)
  • For example, in an October 2006 tetter responding
    to a TRH executive, Adamczyk represented that, as of December 31, 2004, AIG's approach to securities lending was especially safe, relative to the already conservative industry standard: (p7)
  • ...in a December 4, 2006 presentation to the Finance Committee of the THI Board of Directors, Adamczyk assured the committee members that the Program was -rigorous and risk controlled." (p7)
  • 19. Unfortunately, beginning in the summer of 2007, the risks associated with AIG's imprudent strategy of concentrating TRH's cash collateral in longterm instruments, including MBS and ABS, began to materialize.  (p8)
  • Incredibly, AIG's response to this was to -double down" and further increase the volume of securities being lent out to generate cash to meet cash shortfalls, thereby exacerbating the risk to which Claimants were exposed.
  • 48. Thus, Hank Greenberg was the THI board chairman between 1999 and April 2005, and Martin J. Sullivan was the THI board chairman between May 2006 and June 2008.  (p14)