AIG 2008 Annual Report Download - page 142

The following graph presents subordination level from highest to lowest and realized losses as a percent
of notional amount for each regulatory capital relief super senior CDS transaction written on a diversified
portfolio of residential mortgages as of December 31, 2008:
Given the current performance of the underlying portfolios, the level of subordination and the expectation that
counterparties will terminate these transactions prior to their maturity; AIG Financial Products Corp. does not
expect that it will be required to make payments pursuant to the contractual terms of these transactions.
Arbitrage Portfolio
A total of $63.1 billion in net notional exposure on AIG Financial Products Corp.’s super senior credit default
swaps as of December 31, 2008 are arbitrage-motivated transactions written on multi-sector CDOs or designated
pools of investment grade senior unsecured corporate debt or CLOs. While certain credit default swaps written on
corporate debt and multi-sector CDOs provide for cash settlement, $2.8 billion in net notional amount of CDS
transactions written on multi-sector CDOs and all the CDS transactions written on CLOs ($1.5 billion net notional)
require physical settlement (see Triggers and Settlement Alternatives below). The ML III transaction eliminated the
vast majority of the super senior multi-sector CDO credit default swap exposure.
ML III Transaction
On November 25, 2008, AIG entered into a Master Investment and Credit Agreement with the NY Fed, ML III,
and The Bank of New York Mellon which established arrangements for the purchase by ML III of the multi-sector
CDOs referenced in certain CDS transactions between AIG Financial Products Corp. and its counterparties.
Concurrently, AIG Financial Products Corp.’s counterparties to such CDS transactions agreed to terminate the CDS
transactions relating to the multi-sector CDOs purchased by ML III.
During 2008, AIG Financial Products Corp. terminated multi-sector CDO transactions with a net notional
amount of $62.1 billion with its counterparties, and concurrently, ML III purchased the underlying multi-sector
CDOs including $8.5 billion of multi-sector CDOs underlying 2a-7 Puts written by AIG Financial Products Corp.
The CDS transactions terminated in connection with ML III contained physical settlement provisions and were
denominated in U.S. dollars. The net payment made by ML III to the counterparties for the purchase of the multi-
sector CDOs was $26.8 billion, which was funded by AIG’s equity interest in ML III in the amount of $5 billion and
136 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries