AIG 2008 Annual Report Download - page 125

During the fourth quarter of 2007, certain of AIGFP’s available for sale investments in super senior and
AAA-rated bonds issued by multi-sector CDOs experienced severe declines in their fair value. As a result, AIGFP
recorded an other-than-temporary impairment charge in other income of $643 million. Notwithstanding AIG’s
intent and ability to hold such securities at such time until they recover in value, and despite structures which
indicated that a substantial amount of the securities should continue to perform in accordance with their original
terms, AIG concluded that it could not reasonably assert that the recovery period would be temporary. See also
Investments — Financial Services Invested Assets and Note 5 to the Consolidated Financial Statements.
The change in fair value of AIGFP’s credit default swaps that reference CDOs and the decline in fair value of
its investments in CDOs were caused by the significant widening in spreads in the fourth quarter on asset-backed
securities, principally those related to U.S. residential mortgages, the severe liquidity crisis affecting the structured
finance markets and the effects of rating agency downgrades on those securities.
In addition, in 2007 AIGFP recognized a net gain of $211 million related to hedging activities that did not
qualify for hedge accounting treatment under FAS 133, compared to a net loss of $1.82 billion in 2006.
The year ended December 31, 2007 included an out-of-period charge of $380 million to reverse net gains
recognized in previous periods on transfers of available for sale securities among legal entities consolidated within
AIGFP, and a $166 million reduction in fair value at March 31, 2007 of certain derivatives that were an integral part
of, and economically hedge, the structured transactions that were affected by the proposed regulations issued by the
United States Department of the Treasury. The net loss on AIGFP’s derivatives recognized in 2006 included an out-
of-period charge of $223 million related to the remediation of the material weakness in internal control over
accounting for certain derivative transactions under FAS 133. The net loss also reflects the effect of increases in
U.S. interest rates and a weakening of the U.S. dollar on derivatives hedging AIGFP’s assets and liabilities.
Financial market conditions in 2007 were characterized by increases in global interest rates, widening of credit
spreads, higher equity valuations and a slightly weaker U.S. dollar.
The most significant component of Capital Markets operating expenses is compensation, which was
approximately $423 million and $544 million in 2007 and 2006, respectively. The amount of compensation
was not affected by gains and losses arising from derivatives not qualifying for hedge accounting treatment under
FAS 133.
Asset Management Operations
AIG’s Asset Management operations comprise a wide variety of investment-related services and investment
products. These services and products are offered to individuals, pension funds and institutions (including AIG
subsidiaries) globally through AIG’s Spread-Based Investment business, Institutional Asset Management, and
Brokerage Services and Mutual Funds businesses. Also included in Asset Management operations are the results of
certain SunAmerica sponsored partnership investments.
The revenues and operating income (loss) for this segment are affected by the general conditions in the equity
and credit markets. In addition, net realized gains and carried interest are contingent upon various fund closings,
maturity levels and market conditions. In the Institutional Asset Management business, carried interest, computed
in accordance with each fund’s governing agreement, is based on the investment’s performance over the life of each
fund. Unrealized carried interest is recognized based on each fund’s performance as of the balance sheet date.
Future fund performance may negatively affect previously recognized carried interest.
AIG 2008 Form 10-K 119
American International Group, Inc., and Subsidiaries