AIG 2009 Annual Report Download - page 288

American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$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.
In January 2010, AIGFP and ML III amended and restated such 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 with respect to such
multi-sector CDOs. 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 of such multi-sector CDO simultaneously with the exercise of its put option then, upon
the expiration of ML III’s aforementioned obligations with respect to such multi-sector CDO, AIGFP will be
obligated under the related 2a-7 Put to purchase such multi-sector CDO at par in the circumstances and subject to the
limited conditions contained in the applicable agreements.
The corporate arbitrage portfolio consists principally of CDS transactions written on portfolios of senior unsecured
corporate obligations that were generally rated investment grade at inception of the CDS. These CDS transactions
require cash settlement. Also, included in this portfolio are CDS transactions with a net notional of $1.4 billion written
on the senior part of the capital structure of CLOs, which require physical settlement.
Certain of the super senior credit default swaps provide the counterparties with an additional termination right if
AIG’s rating level falls to BBB or Baa2. At that level, counterparties to the CDS transactions with a net notional
amount of $10.4 billion at December 31, 2009 have the right to terminate the transactions early. If counterparties
exercise this right, the contracts provide for the counterparties to be compensated for the cost to replace the
transactions, or an amount reasonably determined in good faith to estimate the losses the counterparties would incur
as a result of the termination of the transactions.
Due to long-term maturities of the CDS in the arbitrage portfolio, AIG is unable to make reasonable estimates of
the periods during which any payments would be made. However, the net notional amount represents the maximum
exposure to loss on the super senior credit default swap portfolio.
AIG 2009 Form 10-K 280