AIG 2009 Annual Report Download - page 137

American International Group, Inc., and Subsidiaries
of the Maiden Lane Interests. Other methodologies employed or assumptions made in determining fair value for
these investments could result in amounts that differ significantly from the amounts reported.
As of December 31, 2009, AIG expected to receive cash flows (undiscounted) in excess of AIG’s initial investment,
and any accrued interest, in the Maiden Lane interests over the remaining life of the investments after repayment of
the first priority obligations owed to the FRBNY. AIG’s cash flow methodology considers the capital structure of the
collateral securities and their expected credit losses from the underlying asset pools. The fair values of the Maiden
Lane Interests are most affected by changes in the discount rates and changes in the underlying estimated future
collateral cash flow assumptions used in the valuation model.
The benchmark London Interbank Offered Rate (LIBOR) interest rate curve changes are determined based on
observable prices, interpolated or extrapolated to derive a LIBOR for a specific maturity term as necessary. The
spreads over LIBOR for the Maiden Lane Interests (including collateral-specific credit and liquidity spreads) can
change as a result of changes in market expectations about the future performance of these investments as well as
changes in the risk premium that market participants would demand at the time of the transactions.
Changes in estimated future cash flows would primarily be the result of changes in expectations for defaults,
recoveries, and prepayments on underlying loans.
Changes in the discount rate or the estimated future cash flows used in the valuation would alter AIG’s estimate of the
fair value of the Maiden Lane Interests as shown in the table below.
Fair Value Change
December 31, 2009
(in millions) Maiden Lane II Maiden Lane III
Discount Rates:
200 basis point increase $ (75) $ (593)
200 basis point decrease 84 695
400 basis point increase (142) (1,101)
400 basis point decrease 179 1,514
Estimated Future Cash Flows:
10% increase 284 791
10% decrease (282) (779)
20% increase 565 1,580
20% decrease (540) (1,526)
AIG believes that the ranges of discount rates used in these analyses are reasonable based on implied spread
volatilities of similar collateral securities and implied volatilities of LIBOR interest rates. The ranges of estimated
future cash flows were determined based on variability in estimated future cash flows implied by cumulative loss
estimates for similar instruments. Because of these factors, the fair values of the Maiden Lane Interests are likely to
vary, perhaps materially, from the amount estimated.
AIGFP’s Super Senior Credit Default Swap Portfolio: AIGFP wrote credit protection on the super senior risk layer of
collateralized loan obligations (CLOs), multi-sector CDOs and diversified portfolios of corporate debt, and prime
residential mortgages. In these transactions, AIGFP is at risk of credit performance on the super senior risk layer
related to such assets. To a lesser extent, AIGFP also wrote protection on tranches below the super senior risk layer,
primarily in respect of regulatory capital relief transactions.
129 AIG 2009 Form 10-K