AIG 2009 Annual Report Download - page 155

American International Group, Inc., and Subsidiaries
The following table presents the amount of collateral postings by underlying mechanism as described above with
respect to the regulatory capital relief portfolio (prior to consideration of transactions other than AIGFP’s super senior
credit default swaps subject to the same Master Agreements) as of the periods ended:
(in millions) December 31, 2008 December 31, 2009 February 17, 2010
Reference to market indices $ 667 $ 60 $ 48
Market value of referenced obligation 380 - -
Expected loss models 5 20 19
Negotiated amount 235 230 219
Total $ 1,287 $ 310 $ 286
Arbitrage Portfolio — Multi-Sector CDOs
In the CDS transactions, with physical settlement provisions, in respect of multi-sector CDOs, the standard CSA
provisions for the calculation of Exposure have been modified, with the Exposure amount determined pursuant to an
agreed formula that is based on the difference between the net notional amount of such transaction and the market
value of the relevant underlying CDO security, rather than the replacement value of the transaction. As of any date,
the ‘‘market value’’ of the relevant CDO security is the price at which a marketplace participant would be willing to
purchase such CDO security in a market transaction on such date, while the ‘‘replacement value of the transaction’’ is
the cost on such date of entering into a credit default swap transaction with substantially the same terms on the same
referenced obligation (e.g., the CDO security). In cases where a formula is utilized, a transaction-specific threshold is
generally factored into the calculation of Exposure, which reduces the amount of collateral required to be posted.
These thresholds typically vary based on the credit ratings of AIG and/or the reference obligations, with greater
posting obligations arising in the context of lower ratings. For the large majority of counterparties to these
transactions, the Master Agreement and CSA cover non-CDS transactions (e.g., interest rate and cross currency swap
transactions) as well as CDS transactions. As a result, the amount of collateral to be posted by AIGFP in relation to
the CDS transactions will be added to or offset by the amount, if any, of the Exposure AIG has to the counterparty on
the non-CDS transactions.
Arbitrage Portfolio — Corporate Debt/CLOs
All of AIGFP’s corporate arbitrage transactions are subject to CSAs. None of these transactions (measured by net
notional amount) contains a special collateral posting provision, but each is subject to a Master Agreement that
includes a CSA. These transactions are treated the same as other transactions subject to the same Master Agreement
and CSA, with the calculation of collateral in accordance with the standard CSA procedures outlined above.
2.98 percent (measured by net notional amount) of these transactions, although subject to a Master Agreement and
CSA, have specific valuation and threshold provisions. These thresholds are typically based on a combination of the
credit rating of AIG and a ratings model of the transaction developed by Moody’s model rating of the transaction
(and not based on the value of any underlying reference obligations). Thus, as long as AIG maintains a rating above a
specified threshold and the Moody’s model of the underlying transaction exceeds a specified rating, the collateral
provisions do not apply.
Collateral Calls
AIGFP has received collateral calls from counterparties in respect of certain super senior credit default swaps, of
which a large majority relate to multi-sector CDOs. To a lesser extent, AIGFP has also received collateral calls in
respect of certain super senior credit default swaps entered into by counterparties for regulatory capital relief
purposes and in respect of corporate arbitrage.
Frequently, valuation estimates made by counterparties with respect to certain super senior credit default swaps or
the underlying reference CDO securities, for purposes of determining the amount of collateral required to be posted
by AIGFP in connection with such instruments, have differed, at times significantly, from AIGFP’s estimates. In
147 AIG 2009 Form 10-K