AIG 2008 Annual Report Download - page 207

Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of American International Group, Inc. (AIG), its
controlled subsidiaries, and variable interest entities in which AIG is the primary beneficiary. Entities that AIG does
not consolidate but in which it holds 20 percent to 50 percent of the voting rights and/or has the ability to exercise
significant influence are accounted for under the equity method.
Certain of AIG’s foreign subsidiaries included in the consolidated financial statements report on a fiscal year
ended November 30. The effect on AIG’s consolidated financial condition and results of operations of all material
events occurring between November 30 and December 31 for all periods presented has been recorded.
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally
accepted accounting principles (GAAP). All material intercompany accounts and transactions have been
eliminated.
Going Concern Considerations
Recent Events
During the third quarter of 2008, requirements (i) to post collateral in connection with AIG Financial Products
Corp. and AIG Trading Group Inc. and their respective subsidiaries’ (collectively, AIGFP) credit default swap
(CDS) portfolio and other AIGFP transactions and (ii) to fund returns of securities lending collateral placed stress
on AIG’s liquidity. AIG’s stock price declined from $22.76 on September 8, 2008 to $4.76 on September 15, 2008.
On that date, AIG’s long-term debt ratings were downgraded by Standard & Poor’s, a division of The McGraw-Hill
Companies, Inc. (S&P), Moody’s Investors Service (Moody’s) and Fitch Ratings (Fitch), which triggered additional
requirements for liquidity. These and other events severely limited AIG’s access to debt and equity markets.
On September 22, 2008, AIG entered into an $85 billion revolving credit agreement (the Fed Credit
Agreement) with the Federal Reserve Bank of New York (the NY Fed) and, pursuant to the Fed Credit Agreement,
AIG agreed to issue 100,000 shares of Series C Perpetual, Convertible, Participating Preferred Stock (the Series C
Preferred Stock) to a trust for the sole benefit of the United States Treasury (together with its trustees, the Trust). The
total commitment under the facility created pursuant to the Fed Credit Agreement (the Fed Facility) was reduced to
$60 billion effective November 25, 2008. The commitment fees and interest rate were reduced and the maturity was
extended by three years.
In addition, during the fourth quarter of 2008, AIG completed the following:
• Issued $40 billion of Series D Fixed Rate Cumulative Perpetual Preferred Stock;
• Sold $39.3 billion face amount of residential mortgage-backed securities (RMBS) to Maiden Lane II LLC
(ML II);
• Terminated approximately $62.1 billion notional amount of CDS on super senior multi-sector collateralized
debt obligations in connection with the Maiden Lane III LLC (ML III) transaction; and
• Participated in the NY Fed’s Commercial Paper Funding Facility.
See Notes 5,13 and 15 for details on these arrangements.
In the fourth quarter of 2008, the global financial crisis continued, characterized by a lack of liquidity, highly
volatile markets, a steep depreciation in asset values across many asset classes, an erosion of investor confidence, a
large widening of credit spreads in some sectors, a lack of price transparency in many markets and the collapse of
several prominent financial institutions.
AIG was materially and adversely affected by these conditions and events in a number of ways, including:
• severe and continued declines in the valuation and performance of its investment portfolio across many asset
classes, leading to decreased investment income, material unrealized and realized losses, including
AIG 2008 Form 10-K 201
American International Group, Inc., and Subsidiaries