AIG 2009 Annual Report Download - page 285

American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
risk senior to one or more risk layers rated AAA by the credit rating agencies, or if the transaction is not rated,
structured to the equivalent thereto.
The following table presents the net notional amount, fair value of derivative (asset) liability and unrealized market
valuation gain (loss) of the AIGFP super senior credit default swap portfolio, including credit default swaps written on
mezzanine tranches of certain regulatory capital relief transactions, by asset class:
Fair Value Unrealized Market
Net Notional Amount of Derivative (Asset) Valuation Gain (Loss)
December 31, Liability at December 31, Year Ended December 31,
(in millions) 2009(a)(b) 2008(a) 2009(b)(c)(d) 2008(c)(d) 2009(d) 2008(d)
Regulatory Capital:
Corporate loans(e)(f) $ 55,010 $ 125,628 $- $- $-$-
Prime residential
mortgages(g) 93,276 107,246 (137) -137 -
Other(e)(f) 1,760 1,575 21 379 35 (379)
Total 150,046 234,449 (116) 379 172 (379)
Arbitrage:
Multi-sector CDOs(h)(i) 7,926 12,556 4,418 5,906 (669) (25,700)
Corporate debt/CLOs(j) 22,076 50,495 309 2,554 1,863 (2,328)
Total 30,002 63,051 4,727 8,460 1,194 (28,028)
Mezzanine tranches(f)(k) 3,478 4,701 143 195 52 (195)
Total $ 183,526 $ 302,201 $ 4,754 $ 9,034 $ 1,418 $ (28,602)
(a) Net notional amounts presented are net of all structural subordination below the covered tranches.
(b) During 2009, AIGFP terminated certain super senior CDS transactions with its counterparties with a net notional amount of $14.0 billion,
comprised of $1.5 billion in Regulatory Capital — Other, $3.0 billion in Multi-sector CDO and $9.5 billion in Corporate debt/CLOs. These
transactions were terminated at approximately their fair value at the time of the termination. As a result, a $2.7 billion loss, which was previously
included in the fair value derivative liability as an unrealized market valuation loss, was realized. During 2009, AIGFP also extinguished its
obligation with respect to a Multi-sector CDO by purchasing the protected CDO security for $496 million, its principal amount outstanding related to
this obligation. Upon purchase, the CDO security was included in the available for sale portfolio at fair value.
(c) Fair value amounts are shown before the effects of counterparty netting adjustments and offsetting cash collateral.
(d) Includes credit valuation adjustment gains of $52 million and $185 million in 2009 and 2008, respectively, representing the effect of changes in
AIG’s credit spreads on the valuation of the derivatives liabilities.
(e) During 2009, AIGFP reclassified one regulatory capital CDS transaction from Regulatory Capital — Corporate loans to Regulatory Capital —
Other, given the understanding that the counterparty no longer receives regulatory capital benefits.
(f) During 2009, AIGFP reclassified two mezzanine trades having net notional amounts of $462 million and $240 million, respectively, into Regulatory
Capital — Corporate loans and Regulatory Capital — Other, respectively, after determining that the trades were not stand-alone but rather part of
the related regulatory capital trades. The effect on unrealized market valuation gain (loss) was not significant.
(g) During the fourth quarter of 2009, one counterparty notified AIG that it would not terminate early two of its prime residential mortgage transactions
with a combined net notional amount of $32.8 billion that were expected to be terminated in the first quarter of 2010. With respect to these
transactions, the counterparty no longer has any rights to terminate the transactions prior to maturity and is required to pay AIG fees on the original
notional amounts reduced only by realized losses through the final contractual maturity. Since the two transactions have weighted average lives that
are considerably less than their final contractual maturities, there is a value to AIGFP representing counterparty contractual fees to be received
beyond the date at which the net notional amounts have fully amortized through the final contractual maturity date. As a result, the fair value of
these two transactions as of December 31, 2009 is a derivative asset of $137 million.
(h) Includes $6.3 billion and $9.7 billion in net notional amount of credit default swaps written with cash settlement provisions at December 31, 2009
and 2008, respectively.
(i) During the fourth quarter of 2008, AIGFP terminated the majority of the CDS transactions written on multi-sector CDOs in connection with the ML
III transaction.
277 AIG 2009 Form 10-K