AIG 2011 Annual Report Download - page 204

Regulatory Capital Portfolio
During 2011, $26.0 billion in net notional amount of regulatory capital CDSs were terminated or matured at no
cost to AIGFP. AIGFP continues to reassess the expected maturity of this portfolio. As of December 31, 2011,
AIGFP estimated that the weighted average expected maturity of the portfolio was 0.86 years. AIGFP has not
been required to make any payments as part of terminations of super senior regulatory capital CDSs initiated by
counterparties. However, during 2011, AIGFP terminated mezzanine tranches and the hedge transactions related
to those mezzanine tranches, all of which related to certain super senior regulatory capital trades and made
payments which approximated their values at the time of termination. The regulatory benefit of these transactions
for AIGFP’s financial institution counterparties was generally derived from Basel I. In December 2010, the Basel
Committee on Banking Supervision finalized Basel III, which, when fully implemented, may reduce or eliminate
the regulatory benefits to certain counterparties for these transactions, and this may reduce the period of time that
such counterparties are expected to hold the positions. In prior years, it had been expected that financial
institution counterparties would complete a transition from Basel I to an intermediate standard known as Basel II,
which could have had similar effects on the benefits of these transactions, at the end of 2009. Basel III has now
superseded Basel II, but the details of its implementation by the various European Central Banking districts have
not been finalized. Should certain counterparties continue to receive favorable regulatory capital benefits from
these transactions, those counterparties may not exercise their options to terminate the transactions in the
expected time frame.
The weighted average expected maturity of the Regulatory Capital Portfolio decreased as of December 31, 2011
by approximately 2.3 years from December 31, 2010 due to the termination of two transactions that had a longer
than average weighted average maturity. Because the remaining counterparties continue to have a right to
terminate the transaction early, AIGFP has extended the expected maturity dates by one year, which is based on
how long AIGFP believes the relevant rules under Basel I will remain effective. These counterparties in the
Corporate Loan and Prime Residential Mortgage portfolios continue to receive favorable regulatory capital
benefits under Basel I rules and, thus, AIG continues to categorize them as Regulatory Capital transactions.
During 2011, AIGFP terminated two super senior prime residential mortgage transactions, with a combined net
notional amount of $24.1 billion, that had previously been the subject of a collateral dispute. In addition, AIGFP
terminated all of the related mezzanine tranches and hedge transactions related to those mezzanine tranches, with
a combined net notional amount of $2.2 billion. These transactions were terminated at values that approximated
their collective fair value at the time of termination.
In light of early termination experience to date and after analyses of other market data, to the extent deemed
relevant and available, AIG determined that there was no unrealized market valuation adjustment for any of the
transactions in this regulatory capital relief portfolio for 2011 other than for transactions where AIGFP believes
the counterparty is no longer using the transaction to obtain regulatory capital relief as discussed above. Although
AIGFP believes the value of contractual fees receivable on these transactions through maturity exceeds the
economic benefits of any potential payments to the counterparties, the counterparties’ early termination rights,
and AIGFP’s expectation that such rights will be exercised, preclude the recognition of a derivative asset for these
transactions.
Arbitrage Portfolio
A portion of the AIGFP super senior credit default swaps as of December 31, 2011 are arbitrage-motivated
transactions written on multi-sector CDOs or designated pools of investment grade senior unsecured corporate
debt or CLOs.
190 AIG 2011 Form 10-K