AIG Federal Savings Bank or AIG Bank is a Member FDIC, and a member company of American International Group, Inc. (AIG). AIG Bank is regulated by the Office of Thrift Supervision. AIG’s common stock is listed on the New York Stock Exchange, as well as the stock exchanges in Ireland and Tokyo. The company was founded in 1967 and is based in New York, New York. AIG Bank engages in various banking service and offers standard bank products such as fixed and adjustable-rate mortgages, home equity loans and lines of credit, money market savings accounts as well as certificates of deposit.
American International Group, Inc. principal activities are to provide general and life insurance operations, financial services, retirement savings and asset management. The Group is a holding company, which operates through its subsidiaries in the United States and other countries. The general insurance includes writing of all lines of property and casualty insurance. Life insurance includes individual and group life, annuity, endowment and accident and health policies, single premium annuity, variable annuities, guaranteed investment contracts, universal life and pensions. The financing services include aircraft leasing, consumer and premium financing and banking services. Retirement savings and asset management includes variable annuities, mutual funds and investment asset management.
AIG has four principal business segments: General Insurance, Life Insurance & Retirement Services, Financial Services and Asset Management.
The General Insurance segment underwrites various business insurance products, including large commercial or industrial property insurance, excess liability, inland marine, environmental, workers compensation, and excess and umbrella coverages. This segment also offers various specialized forms of insurance, such as aviation, accident and health, equipment breakdown, directors and officers liability, difference-in-conditions, kidnap-ransom, export credit and political risk, and professional errors and omissions coverages. In addition, it provides property and casualty reinsurance products to insurers; automobile insurance products; residential mortgage guaranty insurance products; and second-lien and private student loan guaranty insurance products.
The Life Insurance and Retirement Services segment offers individual and group life, payout annuities, endowment, and accident and health policies, as well as retirement savings products consisting of fixed and variable annuities.
The Financial Services segment provides aircraft and equipment leasing, capital market transactions, consumer finance, and insurance premium financing. AIG Bank is a part of the Financial Services Group of AIG.
The Asset Management segment operations comprise investment-related services and investment products, including institutional and retail asset management, broker-dealer services, and spread-based investment products.
In September of 2008, AIG was in the midst of major upheaval after suffering a severe liquidity crisis. The Federal Reserve extended a loan to AIG to prevent the company’s failure and help the company meet its obligations and post additional collateral for various busineses inclduing credit default swaps. The Federal Reserve announced the creation of a secured credit facility of up to $85 billion. AIG will be permitted to draw up to $85 billion in meeting its obligations as they come due. The Federal Reserve had stated that a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.
The $85 billion line of credit extended to AIG by the U.S. Government is to be secured by substantially all of AIG’s assets in exchange for warrants for a 79.9% equity stake. The company now has access to the line of credit. The action taken by the U.S. Government allows AIG to satisfy its short-term liquidity pressures and to ensure that its business units remain well capitalized and highly competitive. The intention is to have the company continue to operate its businesses without interruption. AIG is not to become a government entity and will continue as a publicly held company, with the U.S. Government as a majority shareholder. The loan to AIG is expected to be repaid from the proceeds of the sale of AIG’s assets.
On Nov. 10, 2008 American International Group, Inc. (AIG) reported a net loss for the third quarter of 2008 of $24.47 billion compared to 2007 third quarter net income of $3.09 billion. AIG’s results in the third quarter were negatively affected by financial dislocation in global markets, as well as catastrophe losses and charges related to ongoing restructuring-related activities. Insurance premiums and other considerations grew nearly 7 percent.
Included in the third quarter 2008 net loss and adjusted net loss was a pre-tax charge of approximately $7.05 billion ($4.59 billion after tax) for a net unrealized market valuation loss related to the AIG Financial Products Corp. (AIGFP) super senior credit default swap portfolio and a pre-tax net loss of $1.09 billion ($705 million after tax) for a credit valuation adjustment on AIGFP’s assets and liabilities in accordance with FAS 157 and FAS 159.
Additionally, third quarter 2008 results included pre-tax net realized capital losses of $18.31 billion ($15.06 billion after tax) arising primarily from other-than-temporary impairment charges on AIG’s investment portfolio. The Securities Lending program accounted for $11.7 billion of these losses, of which $6.9 billion resulted from AIG’s change in intent to hold these securities to recovery as the program winds down. The other-than-temporary impairment charges also included $3.9 billion resulting from the severe, rapid decline in fair value of securities outside of the Securities Lending program, for which AIG concluded it could not reasonably assert that the impairment period would be temporary.
Also contributing to the loss in the third quarter were losses on partnership and mutual fund investments of $1.7 billion before tax ($1.1 billion after tax) compared to $454 million of income ($295 million after tax) in the third quarter last year.
Included in charges related to restructuring activities, are $3.6 billion of additional deferred tax expense for the reversal of historical permanent reinvestment assertions related primarily to AIG’s foreign life businesses.
On November 10, 2008, the U.S. Treasury announced it would purchase $40 billion in newly issued AIG senior preferred stock, under the authority of the Emergency Economic Stabilization Act’s Troubled Asset Relief Program. The Federal Reserve Bank of New York (FRBNY) announced that it would modify the September 16th secured credit facility; the Treasury investment would permit a reduction in its size from $85 billion to $60 billion, and that the FRBNY would extend the life of the facility from three to five years, and change the interest rate from 8.5% plus the three-month London interbank offered rate for the total credit facility, to 3% plus LIBOR for funds drawn down, and 0.75% plus LIBOR for funds not drawn, and that AIG would create two off- balance-sheet Limited Liability Companies (LLC) to hold AIG assets: one will act as an AIG Residential Mortgage-Backed Securities Facility and the second to act as an AIG Collateralized Debt Obligations Facility. Federal officials said the $40 billion investment would ultimately permit the government to reduce the total exposure to AIG exposure to $112 billion from $152 billion.
The following press release was made regarding AIG business and restructuring of the loan from the U.S. Government to AIG.
NEW YORK–Nov. 10, 2008–American International Group, Inc. (AIG) today announced agreements with the U.S. Treasury and the Federal Reserve to establish a durable capital structure for AIG, and facilities designed to resolve the liquidity issues AIG has experienced in its credit default swap portfolio and its U.S. securities lending program.
Edward M. Liddy, AIG Chairman and CEO, said these agreements are a dramatic step forward for AIG and all of its stakeholders: “Today’s actions send a strong signal to our policyholders, business partners and counterparties that AIG is on the road to recovery. Our comprehensive plan addresses the liquidity issues that threatened AIG, and gives us the financial flexibility to complete our restructuring process successfully for the benefit of all of our constituencies.”
Liddy continued, “The $85 billion emergency bridge loan was essential to prevent an AIG bankruptcy, which would have caused incalculable damage to AIG, our economy and the global financial system. Thanks to decisive action by Congress, Treasury and the Federal Reserve, there are now additional tools available to create a durable capital structure that will make possible an orderly disposition of certain of AIG’s assets and a successful future for the company. Our goal is to repay taxpayers in full with interest, and emerge as a focused global insurer that will create meaningful value for taxpayers and other stakeholders.”
The actions announced today include both ongoing financing facilities and one-time transactions designed to address AIG’s liquidity issues. The ongoing financing facilities include:
Preferred Equity Investment: The U.S. Treasury will purchase, through TARP, $40 billion of newly issued AIG perpetual preferred shares and warrants to purchase a number of shares of common stock of AIG equal to 2% of the issued and outstanding shares as of the purchase date. All of the proceeds will be used to pay down a portion of the Federal Reserve Bank of New York (FRBNY) credit facility. The perpetual preferred shares will carry a 10% coupon with cumulative dividends.
Revised Credit Facility: The existing FRBNY credit facility will be revised to reflect, among other things, the following: (a) the total commitment following the issuance of the perpetual preferred shares will be $60 billion; (b) the interest rate will be reduced to LIBOR plus 3.0% per annum from the current rate of LIBOR plus 8.5% per annum; (c) the fee on undrawn commitments will be reduced to 0.75% from the current fee of 8.5%; and (d) the term of the loan will be extended from two to five years. The extension of the term of the loan will give AIG time to complete its planned asset sales in an orderly manner. Proceeds from these asset sales will be used to repay the credit facility. In connection with the amendment to the FRBNY credit facility, the equity interest that taxpayers will hold in AIG, coupled with the warrants described above, will total 79.9%.
The one-time transactions involve the creation of two financing entities capitalized with loans from AIG and the FRBNY. These entities will purchase assets related to AIG’s U.S. securities lending program and Multi-Sector Collateralized Debt Obligations (CDOs) on which AIG has written credit default swap (CDS) contracts. The entities will collect cash flows from the assets and pay interest on the debt. FRBNY and AIG will share in any recoveries in the market prices of the assets.
Resolution of U.S. Securities Lending Program: AIG will transfer residential mortgage-backed securities (RMBS) from its securities lending collateral portfolio to a newly-created financing entity that will be capitalized with $1 billion in subordinated funding from AIG, and senior funding from the FRBNY up to $22.5 billion. After both amounts have been repaid in full by the financing entity, the parties will participate in any further returns on RMBS. As a result of this transaction, AIG’s remaining exposure to losses from its U.S. securities lending program will be limited to declines in market value prior to closing and its $1 billion of funding.
This financing entity, together with other AIG funds, will eliminate the need for the U.S. securities lending liquidity facility established by AIG and FRBNY in October, which had $19.9 billion outstanding as of November 5th. Upon repayment to all participants, AIG will terminate its U.S. securities lending program.
Reduction of Exposure to Multi-Sector Credit Default Swaps: AIG and FRBNY will create a second financing entity that will purchase up to approximately $70 billion of Multi-Sector CDO exposure on which AIG has written CDS contracts. Approximately 95% of the write-downs AIG Financial Products has taken to date in its CDS portfolio were related to Multi-Sector CDOs.
In connection with this transaction, CDS contracts on purchased Multi-Sector CDOs will be terminated. AIG will provide up to $5 billion in subordinated funding and FRBNY will provide up to $30 billion in senior funding to the financing entity. As a result of this transaction, AIG’s remaining exposure to losses on the Multi-Sector CDOs underlying the terminated CDS’s will be limited to declines in market value prior to closing and its up to $5 billion funding to the financing entity. As with the securities lending program, FRBNY and AIG will share in any recoveries in the market prices of assets.
AIG will continue to have exposure to CDS contracts on Multi-Sector CDOs that are not terminated. As AIG winds down its Financial Products division, it will also have exposure to other types of remaining CDS contracts, which have generated substantially smaller total collateral demands than the CDS contracts on Multi-Sector CDOs.
Taxpayers will benefit from the transactions with AIG as follows: fees, interest and repayment of the FRBNY loan in full, payment of a 10% coupon on the newly issued preferred shares, cash payments from the assets purchased by the two financing entities and potential asset appreciation in the underlying securities held by those entities. Taxpayers will own 77.9% of the equity of AIG and will hold warrants to purchase an additional 2% equity interest, and so will benefit from any future appreciation in AIG shares.
AIG will also continue to participate in the recent government program being utilized by many companies for the sale of commercial paper. The Commercial Paper Funding Facility (CPFF) has allowed AIG to reenter the commercial paper market. AIG is authorized to issue up to $20.9 billion to the CPFF and has currently issued approximately $15.3 billion as of November 5, 2008.
Mr. Liddy continued, “All of these steps, which would not have been possible in September, will benefit AIG, its stakeholders and the American taxpayers. This plan contributes to stabilizing the financial system and provides the opportunity for the public to realize gains on its AIG investment in the future. These measures will also put AIG on track to emerge as a nimble competitor with good long-term growth prospects.”
“This innovative solution enhances AIG’s liquidity position. At the same time, American taxpayers will be fairly compensated for funds lent to AIG, and they will capture the majority of any appreciation in the value of the securities involved in the program in the years ahead.”
Liddy added, “Today’s announcement would not have been possible without the vision and extraordinary hard work, dedication and cooperation of officials from the U.S. Treasury, the Federal Reserve Bank of New York, the Federal Reserve Board and the state insurance departments. On behalf of AIG, I would like to extend sincere thanks to all of those involved in crafting this mutually beneficial solution.”
It should be noted that the remarks made in this press release may contain projections concerning financial information and statements concerning future economic performance and events, plans and objectives relating to special purpose vehicles formed with the Federal Reserve Bank of New York, asset dispositions, liquidity, collateral posting requirements, management, operations, products and services, and assumptions underlying these projections and statements. It is possible that AIG’s actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these projections and statements. Factors that could cause AIG’s actual results to differ, possibly materially, from those in the specific projections and statements include developments in global credit markets and such other factors as are discussed in Item 1A. Risk Factors of AIG’s Annual Report on Form 10-K for the year ended December 31, 2007, and in Item 1A. Risk Factors and Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of AIG’s Quarterly Report on Form 10-Q for the period ended September 30, 2008. AIG is not under any obligation (and expressly disclaims any such obligation) to update or alter its projections and other statements whether as a result of new information, future events or otherwise.
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