AIG 2009 Annual Report Download - page 123

American International Group, Inc., and Subsidiaries
AIG recognized an unrealized market valuation loss of $28.6 billion in 2008 compared to $11.5 billion in 2007,
representing the change in fair value of its super senior credit default swap portfolio. The principal components of the
loss recognized in 2008 were as follows:
• Approximately $25.7 billion of the loss relates to derivatives written on the super senior tranches of multi-sector
CDOs. The material decline in the fair value of these derivatives was caused by significant deterioration in the
pricing and credit quality of RMBS, CMBS and CDO securities. Included in this amount is a loss of $4.3 billion
with respect to the change in fair value of transactions outstanding at December 31, 2008 having a net notional
amount of $12.6 billion. Also included in the unrealized market valuation losses on AIGFP’s super senior credit
default swap portfolio are losses of approximately $995 million that were subsequently realized through
payments to counterparties to acquire at par value the underlying CDO securities with fair values that were less
than par. Further, included in the unrealized market valuation losses on AIGFP’s super senior credit default
swap portfolio are losses of approximately $21.1 billion that were subsequently realized through the termination
of contracts through the ML III transaction. See Note 6 to the Consolidated Financial Statements.
• Approximately $2.3 billion relates to derivatives written as part of the corporate arbitrage portfolio. The decline
in the fair value of these derivatives was caused by the continued significant widening in corporate credit
spreads.
• A total of $379 million relates to the decline in fair value of a transaction in the regulatory capital portfolio
where AIGFP no longer believes the credit default swap is used by the counterparty to obtain regulatory capital
relief.
See Critical Accounting Estimates — Level 3 Assets and Liabilities — Valuation of Level 3 Assets and Liabilities
and Note 6 to the Consolidated Financial Statements for a discussion of AIGFP’s super senior credit default swap
portfolio.
During 2008, AIGFP recognized a loss of $888 million on credit default swap contracts referencing single-name
exposures written on corporate, index and asset backed credits, which are not included in the super senior credit
default swap portfolio, compared to a net gain of $370 million in 2007.
The following table presents AIGFP’s credit valuation adjustment gains (losses) (excluding intercompany
transactions):
(in millions)
Counterparty Credit AIG’s Own Credit
Valuation Adjustment on Assets Valuation Adjustment on Liabilities
Year Ended December 31, 2009
Bond trading securities $ 2,095 Notes and bonds payable $ (163)
Loans and other assets (48) Hybrid financial instrument liabilities (83)
Derivative assets 891 GIAs 172
Other liabilities (12)
Derivative liabilities* (64)
Increase in assets $ 2,938 Increase in liabilities $ (150)
Net pre-tax increase to Other income $ 2,788
Year Ended December 31, 2008
Bond trading securities $ (8,928) Notes and bonds payable $ 248
Loans and other assets (61) Hybrid financial instrument liabilities 646
Derivative assets (1,667) GIAs (415)
Other liabilities 55
Derivative liabilities* 860
Decrease in assets $(10,656) Decrease in liabilities $1,394
Net pre-tax decrease to Other income $ (9,262)
* Includes super senior credit default swap portfolio
115 AIG 2009 Form 10-K