AIG 2009 Annual Report Download - page 152

American International Group, Inc., and Subsidiaries
super senior securities. Thus, a pari passu tranche of securities does not affect the amount of losses that have to be
absorbed by classes of CDO securities other than the super senior CDO securities before the super senior securities
incur a loss, although the pari passu tranche will absorb losses on a pro rata basis after subordinate classes of securities
are exhausted.
2a-7 Puts: Included in the multi-sector CDO portfolio are maturity-shortening puts that allow the holders of the
securities issued by certain CDOs to treat the securities as short-term 2a-7 eligible investments under the Investment
Company Act of 1940 (2a-7 Puts). Holders of securities are required, in certain circumstances, to tender their
securities to the issuer at par. If an issuer’s remarketing agent is unable to resell the securities so tendered, AIGFP
must purchase the securities at par so long as the security has not experienced a payment default or certain
bankruptcy events with respect to the issuer of such security have not occurred.
At January 1, 2008, 2a-7 Puts with a net notional amount of $6.5 billion were outstanding and included as part of
the multi-sector CDO portfolio. During 2008, AIGFP issued new 2a-7 Puts with a net notional amount of $5.4 billion
on the super senior security issued by a CDO of AAA-rated CMBS pursuant to a facility that was entered into in 2005.
During 2008, AIGFP repurchased multi-sector CDO securities with a principal amount of $9.4 billion in connection
with these obligations, of which $8.0 billion was funded using existing liquidity arrangements. In connection with the
ML III transaction, ML III purchased $8.5 billion of multi-sector CDOs underlying 2a-7 Puts written by AIGFP. A
portion of the net payment made by ML III to the counterparties for the purchase of the multi-sector CDOs
facilitated the resolution of liquidity arrangements, which had funded certain of the multi-sector CDOs in connection
with the 2a-7 Puts.
Among the multi-sector CDOs purchased by ML III are certain CDO securities with a net notional amount of
$1.7 billion for which the related 2a-7 Puts to AIGFP remained outstanding as of December 31, 2008, of which
$1.6 billion remained outstanding as of December 31, 2009. In December 2008, ML III and AIGFP entered into an
agreement with respect to the $252 million net notional amount of multi-sector CDOs held by ML III with 2a-7 Puts
that may be exercised in 2009. Under that agreement, ML III agreed not to sell the multi-sector CDOs in 2009 and
either not to exercise its put option on such multi-sector CDOs or simultaneously to exercise its put option with a par
purchase of the multi-sector CDO securities. In exchange, AIGFP agreed to pay to ML III the consideration that it
received for providing the put protection. AIGFP is not a party to any commitments to issue any additional 2a-7 Puts.
In January 2010, AIGFP and ML III amended and restated their agreement in respect of the outstanding 2a-7 Puts
as of the date of the agreement. Pursuant to this agreement, ML III has agreed not to exercise its put option on multi-
sector CDOs or simultaneously to exercise its put option with a corresponding par purchase of the multi-sector CDOs
with respect to the $867 million notional amount of multi-sector CDOs held by ML III with 2a-7 Puts that may be
exercised on or prior to December 31, 2010 and $543 million notional amount of multi-sector CDOs held by ML III
with 2a-7 Puts that may be exercised on or prior to April 30, 2011. In addition, there are $186 million notional amount
of multi-sector CDOs held by MLIII with 2a-7 Puts that may not be exercised on or prior to December 31, 2010, for
which MLIII has only agreed not to exercise its put option on multi-sector CDOs or simultaneously to exercise its put
option with a corresponding par purchase of the multi-sector CDOs through December 31, 2010. In exchange, AIGFP
has agreed to pay to ML III the consideration that it receives for providing the put protection. Additionally, ML III
has agreed that if it sells any such multi-sector CDO with a 2a-7 Put to a third-party purchaser, that such sale will be
conditioned upon, among other things, such third-party purchaser agreeing that until the legal final maturity date of
such multi-sector CDO it will not exercise its put option on such multi-sector CDO or it will make a corresponding par
purchase of such multi-sector CDO simultaneously with the exercise of its put option. In exchange for such
commitment from the third-party purchaser, AIGFP will agree to pay to such third-party purchaser the consideration
that it receives for providing the put protection.
ML III has agreed to assist AIGFP in efforts to mitigate or eliminate AIGFP’s obligations under such 2a-7 Puts
relating to multi-sector CDOs held by ML III prior to the expiration of ML III’s obligations discussed above. There
can be no assurances that such efforts will be successful. To the extent that such efforts are not successful with respect
to a multi-sector CDO held by ML III with a 2a-7 Put and ML III has not sold such multi-sector CDO to a third-party
who has committed not to exercise its put option on such multi-sector CDO or to make a corresponding par purchase
AIG 2009 Form 10-K 144