AIG 2008 Annual Report Download - page 124

• Approximately $379 million relates to the decline in fair value of a transaction in the regulatory capital
portfolio where AIGFP no longer believes the credit default swap is used by the counterparty to obtain
regulatory capital relief.
See Critical Accounting Estimates — Valuation of Level 3 Assets and Liabilities and Note 5 to the Consol-
idated Financial Statements for a discussion of AIGFP’s super senior credit default swap portfolio.
During 2008, AIGFP recognized a loss of $888 million on credit derivatives which are not included in the super
senior credit default swap portfolio, compared to a net gain of $370 million in 2007.
The following table presents AIGFP’s credit valuation adjustment gains (losses) for the year ended
December 31, 2008 (excluding intercompany transactions):
Counterparty Credit Valuation Adjustment on Assets AIG’s Own Credit Valuation Adjustment on Liabilities
(In millions)
Trading securities ................... $ (8,928) Term notes . . . ..................... $ 248
Loans and other assets ............... (61) Hybrid term notes .................. 646
Derivative assets.................... (1,667) GIAs ............................ (415)
Other liabilities .................... 55
Derivative liabilities* ................ 860
Decrease in assets .................. $(10,656) Decrease in liabilities ................ $1,394
Net pre-tax decrease to other income .... $ (9,262)
* Includes super senior credit default swap portfolio
Capital Markets’ operating loss for 2008 includes a loss of $9.3 billion representing the effect of changes in
credit spreads on the valuation of AIGFP’s assets and liabilities, including $185 million of gains reflected in the
unrealized market valuation loss on super senior credit default swaps. Historically, AIG’s credit spreads and those
on AIGFP’s assets moved in a similar fashion. This relationship began to diverge during second quarter of 2008 and
continued to diverge through the end of the year. While AIG’s credit spreads widened significantly during 2008, the
credit spreads on the ABS and CDO products, which represent a significant portion of AIGFP’s investment
portfolio, widened even more. The losses on AIGFP’s assets more than offset the net gain on its liabilities that was
driven by the significant widening in AIG’s credit spreads. The net gain on AIGFP’s liabilities was reduced by the
effect of posting collateral and the early terminations of GIAs, term notes and hybrid term notes. Included in the
2008 operating loss is the transition amount of $291 million related to the adoption of FAS 157 and FAS 159.
The most significant component of Capital Markets operating expenses is compensation. Due to the significant
losses recognized by AIGFP during 2008, the entire amount of $563 million accrued under AIGFP’s various
deferred compensation plans and special incentive plan was reversed in 2008. Total compensation expense in 2008
was $426 million including retention awards.
2007 and 2006 Comparison
Capital Markets reported an operating loss in 2007 compared to operating income in 2006, primarily due to
fourth quarter 2007 unrealized market valuation losses related to AIGFP’s super senior credit default swap portfolio
principally written on multi-sector CDOs and an other-than-temporary impairment charge on AIGFP’s investment
portfolio of CDOs of ABS. These losses were partially offset by the effect of applying hedge accounting to certain
hedging activities beginning in 2007, as described below, and net unrealized market gains related to certain credit
default swaps purchased against the AAA to BBB-rated risk layers on portfolios of reference obligations. AIGFP
experienced higher transaction flow in 2007 in its rate and currency products which contributed to its revenues.
Included in AIGFP’s net operating loss was a net unrealized market valuation gain of $401 million on certain
credit default swaps and embedded credit derivatives in credit-linked notes in 2007. In these transactions, AIGFP
purchased protection at the AAA - to BBB-rated risk layers on portfolios of reference obligations that include multi-
sector CDO obligations.
118 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries