AIG 2008 Annual Report Download - page 69

As a consequence of its wind-down strategy, AIGFP is entering into new derivative transactions only to hedge
its current portfolio, reduce risk and hedge the currency, interest rate and other market risks associated with its
affiliated businesses. AIGFP has already reduced the size of certain portions of its portfolio, including effecting a
substantial reduction in credit derivative transactions in respect of multi-sector CDOs (see Termination of
$62 billion of CDS below), a sale of its commodity index business, termination of its activities as a foreign
exchange prime broker, sale and other disposition of the large majority of its energy/infrastructure investment
portfolio. Due to the long-term duration of many of AIGFP’s derivative contracts and to the complexity of AIGFP’s
portfolio, AIG expects that an orderly wind-down will take a substantial period of time. The cost of executing the
wind-down will depend on many factors, many of which are not within AIGFP’s control, including market
conditions, AIGFP’s access to markets via market counterparties, the availability of liquidity and the potential
implications of further rating downgrades.
AIGCFG experienced significant deposit withdrawals in Hong Kong during September 2008. The inability of
AIGCFG to access its traditional sources of funding resulted in AIG lending $1.6 billion to subsidiaries of AIGCFG
in September and October of 2008. Additional funding during the remainder of the fourth quarter of 2008 was not
material. AIG has entered into contracts to sell certain finance operations in Taiwan, Thailand and the Philippines.
Asset Management
Distressed global markets have reduced the value of assets under management, translating to lower base
management fees and reduced carried interest revenues. Tight credit markets have put pressure on the commercial
and residential real estate markets, which has caused values in certain geographic locations to fall, resulting in
impairment charges on real estate held for investment purposes.
Liquidity issues at AIG parent and lower asset performance as a result of challenging market conditions have
contributed to the loss of institutional and retail clients, as well as higher redemptions from some of AIG
subsidiaries’ managed hedge and mutual funds, have prevented AIG subsidiaries from launching new funds and will
continue to adversely affect Asset Management results.
Within the Spread-Based Investment business, distressed markets have resulted in significant loss of invested
asset value, and AIG expects such losses to continue through mid 2009. In addition, AIG does not expect to issue
any additional debt to fund the Matched Investment Program for the foreseeable future.
As AIG implements the proposed transactions with the NY Fed and United States Department of the Treasury
described above and in Note 23 to the Consolidated Financial Statements, AIG expects to incur significant
additional restructuring related charges, such as accelerated amortization of the pre-paid commitment asset and,
potentially, the write-off of intangible assets. Further, if AIG continues to incur losses in its businesses, AIG may
need to write off material amounts of goodwill.
Results of Operations
Consolidated Results
Fourth quarter 2008 net loss
Due to continued severe market deterioration and charges related to ongoing restructuring activities, AIG
incurred a substantial net loss of $61.7 billion in the fourth quarter of 2008. This loss resulted primarily from the
following:
• net realized capital losses arising from other-than-temporary impairment charges of $18.6 billion ($13.0 bil-
lion after tax) reflecting severity losses primarily related to CMBS, other structured securities and securities
of financial institutions due to rapid and severe market valuation declines where the impairment period was
not deemed temporary; losses related to the change in AIG’s intent and ability to hold to recovery certain
securities; and issuer-specific credit events, including charges associated with investments in financial
institutions;
• net realized capital losses of $2.4 billion ($1.7 billion after tax) related to certain securities lending activities
which were deemed to be sales due to reduced levels of collateral provided by counterparties;
AIG 2008 Form 10-K 63
American International Group, Inc., and Subsidiaries