AIG 2011 Annual Report Download - page 205

Multi-Sector CDOs
The following table summarizes gross transaction notional amount of the multi-sector CDOs on which AIGFP
wrote protection on the super senior tranche, subordination below the super senior risk layer, net notional
amount and fair value of derivative liability by underlying collateral type:
December 31, 2011 Gross Subordination
Transaction Below the Net Fair Value
Notional Super Senior Notional of Derivative
(in millions) Amount(a) Risk Layer Amount Liability
High grade with subprime collateral $ 2,586 $ 1,325 $ 1,261 $ 550
High grade with no subprime collateral 3,158 1,223 1,935 760
Total high grade(b) 5,744 2,548 3,196 1,310
Mezzanine with subprime collateral 2,112 628 1,484 1,131
Mezzanine with no subprime collateral 1,483 687 796 636
Total mezzanine(c) 3,595 1,315 2,280 1,767
Total $ 9,339 $ 3,863 $ 5,476 $ 3,077
(a) Total outstanding principal amount of securities held by a CDO.
(b) ‘‘High grade’’ refers to transactions in which the underlying collateral credit ratings on a stand-alone basis were predominantly AA or higher at
origination.
(c) ‘‘Mezzanine’’ refers to transactions in which the underlying collateral credit ratings on a stand-alone basis were predominantly A or lower at
origination.
Corporate Debt/CLOs
The corporate arbitrage portfolio consists principally of CDS written on portfolios of corporate obligations that
were generally rated investment grade at the inception of the CDS. These CDS transactions require cash
settlement. This portfolio also includes CDS with a net notional amount of $1.2 billion written on the senior part
of the capital structure of CLOs, which require physical settlement.
Collateral
Most of the AIGFP credit default swaps are subject to collateral posting provisions. These provisions differ
among counterparties and asset classes. Although AIGFP has collateral posting obligations associated with both
regulatory capital relief transactions and arbitrage transactions, the large majority of these obligations to date have
been associated with arbitrage transactions in respect of multi-sector CDOs.
Collateral Calls
AIGFP has received collateral calls from counterparties in respect of certain super senior credit default swaps,
of which a large majority relate to multi-sector CDOs. To a lesser extent, AIGFP has also received collateral calls
in respect of certain super senior credit default swaps entered into by counterparties for regulatory capital relief
purposes and in respect of corporate arbitrage.
From time to time, valuation methodologies used and estimates made by counterparties with respect to certain
super senior credit default swaps or the underlying reference CDO securities, for purposes of determining the
amount of collateral required to be posted by AIGFP in connection with such instruments, have resulted in
estimates that differ, at times significantly, from AIGFP’s estimates. In almost all cases, AIGFP has been able to
successfully resolve the differences or otherwise reach an accommodation with respect to collateral posting levels,
including in certain cases by entering into compromise collateral arrangements. Due to the ongoing nature of
collateral arrangements, AIGFP regularly is engaged in discussions with one or more counterparties in respect of
these differences. Valuation estimates made by counterparties for collateral purposes are, like any other third-party
valuation, considered in the determination of the fair value estimates of the AIGFP super senior credit default
swap portfolio.
AIG 2011 Form 10-K 191