AIG 2008 Annual Report Download - page 267

those CDS transactions relating to the multi-sector CDOs purchased from them. AIG has a significant variable
interest in ML III, which is a VIE. See Note 5 for details of AIG’s agreement regarding ML III.
Other Asset Accounts
Structured Investment Vehicle
In 2007, AIGFP sponsored Nightingale Finance LLC, its only structured investment vehicle (SIV), that invests
in variable rate, investment-grade debt securities, the majority of which are asset-backed securities. AIGFP has an
obligation to support the SIV by purchasing commercial paper or providing repurchase financing to the extent that
the SIV is unable to finance itself in the open market. The SIV meets the definition of a VIE because it does not have
sufficient equity to operate without subordinated capital notes, which serve as equity even though they are legally
debt instruments. The capital notes absorb losses prior to the senior debt. During 2008, AIGFP’s interest in the SIV
was reduced to $150 million of investments in its medium term notes and $406 million of securities purchased under
agreement to resell, primarily due to the issuance of $1.1 billion of commercial paper as a result of its participation
in the NY Fed’s CPFF in October 2008. AIGFP did not own a material loss-absorbing variable interest in the SIVat
December 31, 2008 and, therefore, is not the primary beneficiary.
Qualifying Special Purpose Entities (QSPEs)
AIG sponsors three QSPEs that issue securities backed by consumer loans collateralized by individual life
insurance assets. As of December 31, 2008, AIG’s maximum exposure, representing the carrying value of the
consumer loans, was $854 million and the total VIE assets for these entities was $2.9 billion. AIG records the
maximum exposure as finance receivables and, in accordance with SFAS 140, does not consolidate the total VIE
assets of these entities.
RMBS, CMBS and Other ABS
AIG is a passive investor in RMBS, CMBS and other ABS primarily issued by domestic entities that are
typically structured as QSPEs. AIG does not sponsor or transfer assets to the entities and was not involved in the
design of the entities; as such, AIG has not included these entities in the above table. As the non-sponsor and non-
transferor, AIG does not have the information needed to conclusively verify that these entities are QSPEs. AIG’s
maximum exposure is limited to its investment in securities issued by these entities and AIG is not the primary
beneficiary of the overall entity activities. As further discussed in Note 5, the fair value of AIG’s investment in
RMBS, CMBS and CDO/ABS was $59.6 billion and $134.5 billion at December 31, 2008 and 2007, respectively.
10. Derivatives and Hedge Accounting
AIG uses derivatives and other financial instruments as part of its financial risk management programs and as
part of its investment operations. AIGFP has also transacted in derivatives as a dealer.
Derivatives, as defined in FAS 133, are financial arrangements among two or more parties with returns linked
to or “derived” from some underlying equity, debt, commodity or other asset, liability, or foreign exchange rate or
other index or the occurrence of a specified payment event. Derivative payments may be based on interest rates,
exchange rates, prices of certain securities, commodities, or financial or commodity indices or other variables.
Derivatives are reflected at fair value on the balance sheet in “Unrealized gain on swaps, options and forward
transactions” and “Unrealized loss on swaps, options and forward contracts.”
AIG 2008 Form 10-K 261
American International Group, Inc., and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)