AIG 2008 Annual Report Download - page 9

Part I
Item 1. Business
American International Group, Inc. (AIG), a Delaware corporation, is a holding company which, through its
subsidiaries, is engaged in a broad range of insurance and insurance-related activities in the United States and
abroad. AIG’s primary activities include both General Insurance and Life Insurance & Retirement Services
operations. Other significant activities include Financial Services and Asset Management.
Liquidity Events and Transactions with the NY Fed and the United States Department of the Treasury
Liquidity Entering the Third Quarter of 2008
AIG parent entered the third quarter of 2008 with $17.6 billion of cash and cash equivalents, including the
remaining proceeds from the issuance of $20 billion of common stock, equity units, and junior subordinated debt
securities in May 2008. In addition, AIG’s securities lending collateral pool held $10.4 billion of cash and other
short-term investments. On August 18, 2008, AIG raised $3.25 billion through the issuance of 8.25% Notes Due
2018.
Strategic Review and Proposed Liquidity Measures
From mid-July and throughout August 2008, AIG’s then Chief Executive Officer, Robert Willumstad, was
engaged in a strategic review of AIG’s businesses.
During this time period, AIG was engaged in a review of measures to address the liquidity concerns in AIG’s
securities lending portfolio and to address the ongoing collateral calls with respect to the AIG Financial Products
Corp. and AIG Trading Group Inc. and their respective subsidiaries (collectively, AIGFP) super senior multi-sector
credit default swap portfolio, which at July 31, 2008 totaled $16.1 billion. To facilitate this process, AIG asked a
number of investment banking firms to discuss possible solutions to these issues. In late August, AIG engaged
J.P. Morgan Securities, Inc. (J.P. Morgan) to assist in developing alternatives, including a potential additional capital
raise.
Continuing Liquidity Pressures
Historically, under AIG’s securities lending program, cash collateral was received from borrowers and
invested by AIG primarily in fixed maturity securities to earn a spread. AIG had received cash collateral from
borrowers of 100 to 102 percent of the value of the loaned securities. In light of more favorable terms offered by
other lenders of securities, AIG accepted cash advanced by borrowers of less than the 102 percent historically
required by insurance regulators. Under an agreement with its insurance company subsidiaries participating in the
securities lending program, AIG parent deposited collateral in an amount sufficient to address the deficit. AIG
parent also deposited amounts into the collateral pool to offset losses realized by the pool in connection with sales of
impaired securities. Aggregate deposits by AIG parent to or for the benefit of the securities lending collateral pool
through August 31, 2008 totaled $3.3 billion.
In addition, from July 1, 2008 to August 31, 2008, the continuing decline in value of the super senior
collateralized debt obligation (CDO) securities protected by AIGFP’s super senior credit default swap portfolio,
together with ratings downgrades of such CDO securities, resulted in AIGFP posting additional collateral in an
aggregate net amount of $5.9 billion.
By the beginning of September 2008, these collateral postings and securities lending requirements were
placing increasing stress on AIG parent’s liquidity.
Rating Agencies
In early September 2008, AIG met with the representatives of the principal rating agencies to discuss
Mr. Willumstad’s strategic review as well as the liquidity issues arising from AIG’s securities lending program and
AIGFP’s super senior multi-sector CDO credit default swap portfolio. On Friday, September 12, 2008, Standard &
Poor’s, a division of The McGraw-Hill Companies, Inc. (S&P), placed AIG on CreditWatch with negative
AIG 2008 Form 10-K 3
American International Group, Inc., and Subsidiaries