AIG 2008 Annual Report Download - page 256

At December 31, 2008, AIG held 29,068 and 40,029 of individual bond and stock investments, respectively,
that were in an unrealized loss position, of which 7,736 individual investments were in an unrealized loss position
for a continuous 12 months or longer.
AIG did not consider these securities in an unrealized loss position to be other-than-temporarily impaired at
December 31, 2008, because management has the intent and ability to hold these investments until they recover
their cost basis within a recovery period deemed to be temporary. In performing this evaluation, management
considered the market recovery periods for securities in previous periods of broad market declines. In addition, for
certain securities with more significant declines, management performed extended fundamental credit analysis on a
security-by-security basis including consideration of credit enhancements, expected defaults on underlying
collateral, review of relevant industry analyst reports and forecasts and other market available data. In manage-
ment’s view this analysis provides persuasive evidence sufficient to conclude that such severe declines in fair value
below amortized cost should not be considered other than temporary.
(f) Maiden Lane II LLC
On December 12, 2008, AIG, certain wholly owned U.S. life insurance company subsidiaries of AIG (the life
insurance companies), and AIG Securities Lending Corp. (the AIG Agent), another AIG subsidiary, entered into an
Asset Purchase Agreement (the Asset Purchase Agreement) with Maiden Lane II LLC (ML II), a Delaware limited
liability company whose sole member is the NY Fed.
Pursuant to the Asset Purchase Agreement, the life insurance companies sold to ML II all of their undivided
interests in a pool of $39.3 billion face amount of residential mortgage-backed securities (the RMBS) held by the
AIG Agent, as agent of the life insurance companies, in connection with AIG’s U.S. securities lending program (the
Securities Lending Program). The AIG Agent had purchased the RMBS on behalf of the life insurance companies
with cash held as collateral for securities loaned by the life insurance companies in the U.S. Securities Lending
Program. In exchange for the RMBS, the life insurance companies received an initial purchase price of $19.8 billion
plus the right to receive deferred contingent portions of the total purchase price of $1 billion plus a participation in
the residual, each of which is subordinated to the repayment of the NY Fed loan to ML II. The amount of the initial
payment and the deferred contingent portions of the total purchase price, if any are realized, will be allocated among
the life insurance companies based on their respective ownership interests in the pool of RMBS as of September 30,
2008.
Pursuant to a credit agreement, the NY Fed, as senior lender, made a loan to ML II (the ML II Senior Loan) in
the aggregate amount of $19.5 billion (such amount being the cash purchase price of the RMBS payable by ML II on
the closing date after certain adjustments, including payments on RMBS for the period between the transaction
settlement date of October 31, 2008 and the closing date of December 12, 2008). The ML II Senior Loan is secured
by a first priority security interest in the RMBS and all property of ML II, bears interest at a rate per annum equal to
one-month LIBOR plus 1.00 percent and has a stated six-year term, subject to extension by the NY Fed at its sole
discretion. After the ML II Senior Loan has been repaid in full, to the extent there are sufficient net cash proceeds
from the RMBS, the life insurance companies will be entitled to receive from ML II a portion of the deferred
contingent purchase price in the amount of up to $1.0 billion plus interest that accrues from the closing date and is
capitalized monthly at the rate of one-month LIBOR plus 3.0 percent. In addition, after ML II has paid this fixed
portion of the deferred contingent purchase price plus interest, the life insurance companies will be entitled to
receive one-sixth of any net proceeds received by ML II in respect of the RMBS as the remaining deferred
contingent purchase price for the RMBS and the NY Fed will receive five-sixths of any net proceeds received by ML
II in respect of the RMBS as contingent interest on the ML II Senior Loan. The NY Fed will have sole control over
ML II and the sales of the RMBS by ML II so long as the NY Fed has any interest in the ML II Senior Loan.
AIG does not have any control rights over ML II. AIG has determined that ML II is a variable interest entity
(VIE) and AIG is not the primary beneficiary. The transfer of RMBS to ML II has been accounted for as a sale, in
accordance with FAS 140. AIG has elected to account for its $1 billion economic interest in ML II (including the
rights to the deferred contingent purchase price) at fair value under FAS 159. This interest is reported in Bonds —
250 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)