AIG 2008 Annual Report Download - page 10

implications and noted that upon completion of its review, the agency could affirm AIG parent’s current rating of
AA- or lower the rating by one to three notches. AIG understood that both S&P and Moody’s Investors Service
(Moody’s) would re-evaluate AIG’s ratings early in the week of September 15, 2008. Also on Friday, September 12,
2008, AIG’s subsidiaries, International Lease Finance Corporation (ILFC) and American General Finance, Inc.
(AGF), were unable to replace all of their maturing commercial paper with new issuances of commercial paper. As a
result, AIG advanced loans to these subsidiaries to meet their commercial paper obligations.
The Accelerated Capital Raise Attempt
As a result of S&P’s action, AIG accelerated the process of attempting to raise additional capital and over the
weekend of September 13 and 14, 2008 discussed potential capital injections and other liquidity measures with
private equity firms, sovereign wealth funds and other potential investors. AIG kept the United States Department of
the Treasury and the NY Fed informed of these efforts. AIG also engaged Blackstone Advisory Services LP to assist
in developing alternatives, including a potential additional capital raise. Despite offering a number of different
structures through this process, AIG did not receive a proposal it could act upon in a timely fashion. AIG’s difficulty
in this regard resulted in part from the dramatic decline in its common stock price from $22.76 on September 8,
2008 to $12.14 on September 12, 2008. This decrease in stock price made it unlikely that AIG would be able to raise
the large amounts of capital that would be necessary if AIG’s long-term debt ratings were downgraded.
AIG Attempts to Enter into a Syndicated Secured Lending Facility
On Monday, September 15, 2008, AIG was again unable to access the commercial paper market for its primary
commercial paper programs, AIG Funding, ILFC and AGF. Payments under the programs totaled $2.2 billion for
the day, and AIG advanced loans to ILFC and AGF to meet their funding obligations. In addition, AIG experienced
returns under its securities lending programs which led to cash payments of $5.2 billion to securities lending
counterparts on that day.
On Monday morning, September 15, 2008, AIG met with representatives of Goldman, Sachs & Co.,
J.P. Morgan and the NY Fed to discuss the creation of a $75 billion secured lending facility to be syndicated
among a number of large financial institutions. The facility was intended to act as a bridge loan to meet AIG parent’s
liquidity needs until AIG could sell sufficient assets to stabilize and enhance its liquidity position. Goldman,
Sachs & Co. and J.P. Morgan immediately commenced syndication efforts.
The Rating Agencies Downgrade AIG’s Long-Term Debt Rating
In the late afternoon of September 15, 2008, S&P downgraded AIG’s long-term debt rating by three notches,
Moody’s downgraded AIG’s long-term debt rating by two notches and Fitch Ratings (Fitch) downgraded AIG’s
long-term debt rating by two notches. As a consequence of the rating actions, AIGFP estimated that it would need in
excess of $20 billion in order to fund additional collateral demands and transaction termination payments in a short
period of time. Subsequently, in a period of approximately 15 days following the rating actions, AIGFP was
required to fund approximately $32 billion, reflecting not only the effect of the rating actions but also changes in
market values and other factors.
The Private Sector Solution Fails
By Tuesday morning, September 16, 2008, it had become apparent that Goldman, Sachs & Co. and J.P. Morgan
were unable to syndicate a lending facility. Moreover, the downgrades, combined with a steep drop in AIG’s
common stock price to $4.76 on September 15, 2008, had resulted in counterparties withholding payments from
AIG and refusing to transact with AIG even on a secured short-term basis. As a result, AIG was unable to borrow in
the short-term lending markets. To provide liquidity, on Tuesday, September 16, 2008 both ILFC and AGF drew
down on their existing revolving credit facilities, resulting in borrowings of approximately $6.5 billion and
$4.6 billion, respectively.
Also, on September 16, 2008, AIG was notified by its insurance regulators that it would no longer be permitted
to borrow funds from its insurance company subsidiaries under a revolving credit facility that AIG maintained with
certain of its insurance subsidiaries acting as lenders. Subsequently, the insurance regulators required AIG to repay
4 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries