AIG 2008 Annual Report Download - page 146

Gross Transaction
Notional Amount
Percent
of Total AAA Aa A Baa Ba ⬍Ba NR
Ratings
(Dollars in millions)
Total Non-United States ...... 25,505 41.0% 0.2% 2.0% 15.1% 17.1% 2.5% 1.0% 3.1%
Total ...................... $62,226 100.0% 0.6% 3.0% 30.7% 43.7% 8.8% 6.8% 6.4%
Subordination ............... $13,242
Net Notional Amount ......... $48,984
Fair Value of Derivative
Liability ................. $ 2,147
Triggers and Settlement Alternatives
At December 31, 2008, all outstanding CDS transactions for regulatory capital purposes and the majority of the
arbitrage portfolio (comprising $56.7 billion or 90 percent of the net notional amount for the arbitrage portfolio at
December 31, 2008) have cash-settled structures in respect of a basket of reference obligations, where AIGFP’s
payment obligations may be triggered by payment shortfalls, bankruptcy and certain other events such as write-
downs of the value of underlying assets (see Cash Settlement below). For the remainder of the CDS transactions in
respect of the arbitrage portfolio (comprising $6.4 billion or 10 percent of the net notional amount for the arbitrage
portfolio at December 31, 2008), AIGFP’s payment obligations are triggered by the occurrence of a credit event
under a single reference security, and performance is limited to a single payment by AIGFP in return for physical
delivery by the counterparty of the reference security (see Physical Settlement below). By contrast, at December 31,
2007, under the large majority of CDS transactions in respect of multi-sector CDOs (comprising $65.6 billion or
44.1 percent of the net notional amount for the arbitrage portfolio at December 31, 2007) AIGFP’s payment
obligations were triggered by the occurrence of a non-payment event under a single reference CDO security, and
performance was limited to a single payment by AIGFP in return for physical delivery by the counterparty of the
reference security.
Cash Settlement. Transactions requiring cash settlement (principally on a “pay as you go” basis) are
generally in respect of baskets of reference credits (which may also include single-name CDS in addition to
securities and loans) rather than a single reference obligation as in the case of the physically settled transactions
described below. Under these credit default swap transactions:
• Each time a “triggering event” occurs a “loss amount” is calculated. A triggering event is generally a failure
by the relevant obligor to pay principal of or, in some cases, interest on one of the reference credits in the
underlying basket. Triggering events may also include bankruptcy of the obligors of the reference credits,
write-downs or payment postponements with respect to interest or to the principal amount of a reference
credit payable at maturity. The determination of the loss amount is specific to each triggering event. It can
represent the amount of a shortfall in ordinary course interest payments on the reference credit, a write-down
in the interest on or principal of such reference credit or payment postponed. It can also represent the
difference between the notional or par amount of such reference credit and its market value, as determined
by reference to market quotations. A “write-down” with respect to a referenced credit may arise as a result of
a reduction in the outstanding principal amount of such referenced credit (other than as a result of a
scheduled or unscheduled payment of principal), whether caused by a principal deficiency, realized loss or
forgiveness of principal. An implied write-down may also result from the existence of a shortfall between the
referenced credit’s pool principal balance and the aggregate balance of all pari passu obligations and senior
securities backed by the same pool.
• Triggering events can occur multiple times, either as a result of continuing shortfalls in interest or write-
downs or payment postponements on a single reference credit, or as a result of triggering events in respect of
different reference credits included in a protected basket. In connection with each triggering event, AIGFP is
required to make a cash payment to the buyer of protection under the related CDS only if the aggregate loss
amounts calculated in respect of such triggering event and all prior triggering events exceed a specified
threshold amount (reflecting AIGFP’s attachment point).
140 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries