AIG 2007 Annual Report Download - page 150

American International Group, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
(ii) receives a majority of the VIE’s expected residual returns; or
Arrangements with Variable Interest Entities
(iii) both. For a further discussion of AIG’s involvement with VIEs,
AIG enters into various off-balance-sheet (unconsolidated) arrange- see Note 7 of Notes to Consolidated Financial Statements.
ments with variable interest entities (VIEs) in the normal course of A significant portion of AIG’s overall exposure to VIEs results
business. AIG’s involvement with VIEs ranges from being a from AIG Investment’s real estate and investment funds.
passive investor to designing and structuring, warehousing and In certain instances, AIG Investments acts as the collateral
managing the collateral of VIEs. AIG engages in transactions with manager or general partner of an investment fund, private equity
VIEs as part of its investment activities to obtain funding and to fund or hedge fund. Such entities are typically registered invest-
facilitate client needs. AIG purchases debt securities (rated and ment companies or qualify for the specialized investment company
unrated) and equity interests issued by VIEs, makes loans and accounting in accordance with the AICPA Investment Company
provides other credit support to VIEs, enters into insurance, Audit and Accounting Guide. For investment partnerships, hedge
reinsurance and derivative transactions and leasing arrangements funds and private equity funds, AIG acts as the general partner or
with VIEs, and acts as the warehouse agent and collateral manager of the fund and is responsible for carrying out the
manager for VIEs. investment mandate of the VIE. Often, AIG’s insurance operations
Under FIN 46(R), AIG consolidates a VIE when it is the primary participate in these AIG managed structures as a passive investor
beneficiary of the entity. The primary beneficiary is the party that in the debt or equity issued by the VIE. Typically, AIG does not
either (i) absorbs a majority of the VIE’s expected losses; provide any guarantees to the investors in the VIE.
The following table summarizes, by investment activity, AIG’s involvement with VIEs. Maximum exposure to loss, as detailed in the
table below, is considered to be the notional amount of credit lines, guarantees and other credit support, and liquidity facilities,
notional amounts of credit default swaps and certain total return swaps, and the amount invested in the debt or equity issued by the
VIEs.
Primary Significant Variable
Beneficiary Interest Holder*
Maximum
Total Exposure
Total Assets Assets to Loss
As of December 31,
(in billions) 2007 2006 2007 2007
Description
Real estate and investment funds $21.7 $6.1 $139.0 $18.5
Tax planning VIEs 0.5 1.4 12.1 6.3
CLOs/CDOs/CBOs 0.4 —107.8 9.7
Affordable housing partnerships 2.7 —0.9 0.9
Other 1.7 1.6 15.3 9.2
Total $27.0 $9.1 $275.1 $44.6
* Includes $2.4 billion of assets held in an unconsolidated SIV sponsored by AIGFP in 2007. As of December 31, 2007, AIGFP’s invested assets included
$1.7 billion of securities purchased under agreements to resell, commercial paper and medium-term and capital notes issued by this entity.
Following is additional information concerning AIG’s involve- ranging from AAA to unrated. AIGFP’s portfolio of multi-sector
ment with collateralized debt obligations and its structured CDOs and, to a lesser extent, certain AIG insurance subsidiaries’
investment vehicle. direct investments in CDOs, have experienced some downgrades
within their asset portfolios. AIG does not expect that it will have
to consolidate any of these structures.
Collateralized Debt Obligations
These CDOs typically are funded with commercial paper,
In the normal course of its asset management operations, AIG medium and long-term financing and equity with ratings that range
manages or sponsors CDOs which issue debt and equity interests from AAA to unrated. AIG has no obligation to purchase, and has
sold to third party investors. AIG’s subsidiaries also invest in the not purchased, any commercial paper issued by these CDOs or
debt and equity securities issued by these CDOs as part of their provided any support to these CDOs in obtaining financing, and
normal investment activities. AIG also invests in and manages does not intend to do so. However, AIGFP has written the 2a-7
CDOs sponsored by third parties, warehouses assets prior to the Puts which are included as part of its multi-sector credit default
establishment of and sale of the warehoused assets to a CDO, swap portfolio. Under the terms of these securities the holders
enters into derivative contracts with CDOs, including credit default are permitted or required, in certain circumstances, on a regular
swaps, and acts as an asset manager to CDOs. basis to tender their securities to the issuers at par. If an issuer’s
Categories of assets owned by these CDOs include residential remarketing agent is unable to resell the securities so tendered
and commercial mortgage and other asset-backed securities, within the maximum interest rate spread range specified in the
corporate loans, high-yield and high-grade loans and bonds, and terms of the securities, AIGFP must purchase the securities at par
credit default contracts, among other assets, that have ratings as long as the securities have not experienced a default. During
96 AIG 2007 Form 10-K