AIG 2008 Annual Report Download - page 138

Net Notional
Amount
December 31,
2007
Terminations
and
Maturities
ML III
Transaction(a)
Effect of
Foreign
Exchange
Rates(b)
Amortization/
Reclassification
Net Notional
Amount
December 31,
2008
(In millions)
Arbitrage:
Multi-sector
CDOs ........ 78,205 (2,146) (62,130) (227) (1,146) 12,556
Corporate
debt/CLOs ..... 70,425 (17,147) — (943) (1,840) 50,495
Total ........... 148,630 (19,293) (62,130) (1,170) (2,986) 63,051
Mezzanine tranches . . 5,770 (358) — (529) (182) 4,701
Total ............. $533,143 $(119,353) $(62,130) $(11,999) $(37,460) $302,201
(a) Includes $8.5 billion of multi-sector CDOs underlying 2a-7 Puts written by AIG Financial Products Corp.
(b) Relates to the strengthening of the U.S. dollar, primarily against the Euro and the British Pound.
(c) During 2008, a European RMBS regulatory capital relief transaction was not terminated as expected when it
no longer provided regulatory capital relief to the counterparty as a result of arbitrage opportunities arising
from its unique attributes and the counterparty’s access to a particular funding source.
General Contractual Terms
AIGFP entered into CDS transactions in the ordinary course of its business. In the majority of AIGFP’s credit
derivative transactions, AIGFP sold credit protection on a designated portfolio of loans or debt securities. Generally,
AIGFP provides such credit protection on a “second loss” basis, meaning that AIGFP will incur credit losses only
after a shortfall of principal and/or interest, or other credit events, in respect of the protected loans and debt
securities, exceeds a specified threshold amount or level of “first loss.”
Typically, the credit risk associated with a designated portfolio of loans or debt securities has been tranched
into different layers of risk, which are then analyzed and rated by the credit rating agencies. At origination, there is
usually an equity layer covering the first credit losses in respect of the portfolio up to a specified percentage of the
total portfolio, and then successive layers ranging generally from a BBB-rated layer to one or more AAA-rated
layers. A significant majority of transactions that are rated by rating agencies have risk layers or tranches that were
rated AAA at origination and are immediately junior to the threshold level above which AIGFP’s payment
obligation would generally arise. In transactions that were not rated, AIGFP applied equivalent risk criteria for
setting the threshold level for its payment obligations. Therefore, the risk layer assumed by AIGFP with respect to
the designated portfolio of loans or debt securities in these transactions is often called the “super senior” risk layer,
defined as a layer of credit risk senior to one or more risk layers that have been rated AAA by the credit rating
agencies, or if the transaction is not rated, structured to the equivalent thereto.
132 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries