AIG 2008 Annual Report Download - page 257

trading securities, with changes in fair value reported as a component of Net investment income. See Note 4 for
further discussion of AIG’s fair value methodology.
The life insurance companies applied the initial consideration from the RMBS sale, along with available cash
and $5.1 billion provided by AIG in the form of capital contributions, to settle outstanding securities lending
transactions under the U.S. Securities Lending Program, including those with the NY Fed, which totaled
approximately $20.5 billion at December 12, 2008, and the U.S. Securities Lending Program and the Securities
Lending Agreement with the NY Fed have been terminated.
(g) Maiden Lane III LLC
On November 25, 2008, AIG entered into a Master Investment and Credit Agreement (the ML III Agreement)
with the NY Fed, Maiden Lane III LLC (ML III), and The Bank of New York Mellon, which established
arrangements, through ML III, to fund the purchase of multi-sector collateralized debt obligations (multi-sector
CDOs) underlying or related to certain credit default swaps and other similar derivative instruments (CDS) written
by AIG Financial Products Corp. in connection with the termination of such CDS. Concurrently, AIG Financial
Products Corp.’s counterparties to such CDS transactions agreed to terminate those CDS transactions relating to the
multi-sector CDOs purchased from them.
Pursuant to the ML III Agreement, the NY Fed, as senior lender, made available to ML III a term loan facility
(the ML III Senior Loan) in an aggregate amount up to $30.0 billion. The ML III Senior Loan bears interest at one-
month LIBOR plus 1.0 percent and has a six-year expected term, subject to extension by the NY Fed at its sole
discretion.
AIG contributed $5.0 billion for an equity interest in ML III. The equity interest will accrue distributions at a
rate per annum equal to one-month LIBOR plus 3.0 percent. Accrued but unpaid distributions on the equity interest
will be compounded monthly. AIG’s rights to payment from ML III are fully subordinated and junior to all
payments of principal and interest on the ML III Senior Loan. The creditors of ML III do not have recourse to AIG
for ML III’s obligations, although AIG is exposed to losses up to the full amount of AIG’s equity interest in ML III.
Upon payment in full of the ML III Senior Loan and the accrued distributions on AIG’s equity interest in ML
III, all remaining amounts received by ML III will be paid 67 percent to the NY Fed as contingent interest and
33 percent to AIG as contingent distributions on its equity interest.
The NY Fed is the controlling party and managing member of ML III for so long as the NY Fed has any interest
in the ML III Senior Loan. AIG does not have any control rights over ML III. AIG has determined that ML III is a
VIE and AIG is not the primary beneficiary. AIG has elected to account for its $5 billion interest in ML III
(including the rights to contingent distributions) at fair value under FAS 159. This interest is reported in Bonds —
trading securities, at fair value, with changes in fair value reported as a component of Net investment income. See
Note 4 for a further discussion of AIG’s fair value methodology.
Through December 31, 2008, AIG Financial Products Corp. terminated CDS transactions with its counter-
parties 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 NY Fed advanced an aggregate of
$24.3 billion to ML III under the ML III Senior Loan, and ML III funded its purchase of the $62.1 billion of multi-
sector CDOs with a net payment to AIG Financial Products Corp. counterparties of $26.8 billion. AIG Financial
Products Corp.’s counterparties also retained $35.0 billion, of which $2.5 billion was returned under the shortfall
agreement, in net collateral previously posted by AIG Financial Products Corp. in respect of the terminated multi-
sector CDS. The $26.8 billion funded by ML III was based on the fair value of the underlying multi-sector CDOs at
October 31, 2008, as mutually agreed between the NY Fed and AIG.
AIG 2008 Form 10-K 251
American International Group, Inc., and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)