AIG 2008 Annual Report Download - page 136

Certain Residential Mortgage-Backed Securities (RMBS) and Commercial Mortgage-Backed Securities
(CMBS): These assets initially are valued at the transaction price. Subsequently, they may be valued by comparison
to transactions in instruments with similar collateral and risk profiles, remittances received and updated cumulative
loss data on underlying obligations, discounted cash flow techniques, and/or for RMBS option adjusted spread
analyses.
Certain Asset-Backed Securities — non-mortgage: These assets initially are valued at the transaction price.
Subsequently, they may be valued based on external price/spread data. When position-specific external price data
are not observable, the valuation is based on prices of comparable securities.
CDOs: These assets initially are valued at the transaction price. Subsequently, they are valued based on
external price/spread data from independent third parties, dealer quotations, matrix pricing, the BET model or a
combination thereof.
Interests in ML II and ML III: At their inception, AIG’s economic interest in ML II and membership interest
in ML III (Maiden Lane Interests) were valued at the transaction prices of $1 billion and $5 billion, respectively.
Subsequently, Maiden Lane Interests are valued using a discounted cash flow methodology that uses the estimated
future cash flows of the assets to which the Maiden Lane Interests are entitled and the discount rates applicable to
such interests as derived from the fair value of the entire asset pool. The implicit discount rates are calibrated to the
changes in the estimated asset values for the underlying assets commensurate with AIG’s interests in the capital
structure of the respective entities. Estimated cash flows and discount rates used in the valuations are validated, to
the extent possible, using market observable information for securities with similar asset pools, structure and terms.
See Note 4 to the Consolidated Financial Statements for further discussion.
AIGFP’s Super Senior Credit Default Swap Portfolio: AIGFP wrote credit protection on the super senior risk
layer of collateralized loan obligations (CLOs), multi-sector CDOs and diversified portfolios of corporate debt, and
prime residential mortgages. In these transactions, AIGFP is at risk of credit performance on the super senior risk
layer related to such assets. These transactions placed a significant demand on AIGFP’s liquidity during 2008,
primarily as a result of their collateral posting provisions (see General Contractual Terms below). To a lesser extent,
AIGFP also wrote protection on tranches below the super senior risk layer, primarily in respect of regulatory capital
relief transactions.
As discussed under Arbitrage Portfolio and ML III Transaction below, during the fourth quarter of 2008, AIG
Financial Products Corp. terminated the vast majority of the credit default swaps it had written on multi-sector
CDOs. See Note 5 to the Consolidated Financial Statements for further discussion.
The net notional amount, fair value of derivative liability and unrealized market valuation loss of the
AIGFP super senior credit default swap portfolio, including credit default swaps written on mezzanine
tranches of certain regulatory capital relief transactions, by asset class were as follows:
2008(b) 2007(b) 2008(c) 2007(c) 2008(d) 2007(d)
Net Notional Amount
December 31,
Fair Value
Of Derivative
Liability at December 31,
Unrealized Market
Valuation Loss
Year Ended December 31(a),
(In millions)
Regulatory Capital:
Corporate loans................. $125,628 $229,313 $— $—$— $—
Prime residential mortgages ........ 107,246 149,430 ————
Other(e) ...................... 1,575 —379 —379 —
Total. . . ...................... 234,449 378,743 379 —379 —
130 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries