8-KMaterial AgreementsExhibits & Filings

AMERICAN INTERNATIONAL GROUP, INC. 8-K Report, Material Agreement (Dec 24, 2008)

Filed December 24, 2008For Securities:AIG

Summary

This 8-K filing from American International Group (AIG) on December 24, 2008, details significant transactions undertaken by its subsidiary, AIG Financial Products Corp. (AIGFP), in conjunction with the Federal Reserve Bank of New York and Maiden Lane III LLC (ML III) to mitigate risks associated with credit default swaps (CDS). The core of this report involves ML III's purchase of approximately $16 billion in par amount of Multi-Sector Collateralized Debt Obligations (CDOs) that were previously referenced in CDS written by AIGFP. These transactions aim to terminate existing CDS contracts and transfer the underlying assets, thereby reducing AIGFP's exposure to these complex financial instruments. The company is actively seeking to eliminate its remaining CDS exposures, which currently amount to approximately $2.6 billion in physically-settled and $9.7 billion in cash-settled notional amounts.

Key Highlights

  • 1AIGFP, in conjunction with the Federal Reserve Bank of New York and Maiden Lane III LLC (ML III), is actively terminating credit default swaps (CDS) through the acquisition of underlying assets.
  • 2ML III purchased an additional $16 billion (par amount) of Multi-Sector Collateralized Debt Obligations (CDOs) on December 18 and December 22, 2008.
  • 3These CDO purchases were funded by a net payment to counterparties of approximately $6.7 billion and the surrender of $9.2 billion in collateral by AIGFP.
  • 4The Shortfall Agreement between ML III and AIGFP was amended to include approximately $9.4 billion of additional Multi-Sector CDO exposure.
  • 5AIGFP received approximately $2.5 billion from ML III related to these November and December CDO purchases.
  • 6AIGFP still holds approximately $2.6 billion in physically-settled CDS and $9.7 billion notional amount in cash-settled CDS, and is evaluating methods to eliminate these remaining exposures.
  • 7The company anticipates continued market risk and potential valuation losses on these remaining CDS until they are eliminated.

Frequently Asked Questions

The primary purpose is to reduce AIG's exposure to significant risks stemming from credit default swaps (CDS) written by its subsidiary, AIG Financial Products Corp. (AIGFP). This is being achieved through Maiden Lane III LLC (ML III), backed by the Federal Reserve Bank of New York, acquiring the underlying assets (Multi-Sector CDOs) and terminating these CDS contracts.

AIGFP has reduced its exposure through ML III's acquisition of approximately $16 billion in par amount of Multi-Sector CDOs. However, AIGFP still faces exposure to approximately $2.6 billion in physically-settled CDS and $9.7 billion notional amount in cash-settled CDS, for which it continues to seek elimination strategies.

The purchase of these Multi-Sector CDOs by ML III was funded by a net payment of approximately $6.7 billion to counterparties and the surrender of $9.2 billion in collateral by AIGFP. AIGFP also received approximately $2.5 billion from ML III related to these transactions, as per the amended Shortfall Agreement.

Despite these transactions, AIGFP remains exposed to market risk and the risk of adverse changes in collateral posting requirements for its remaining CDS. The company could incur additional unrealized valuation losses on these outstanding exposures until they are fully eliminated.