AIG 2010 Annual Report Download - page 265

American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
market activity for an investment in RMBS, CMBS, CDOs or other ABS is limited, certain inputs used to
determine fair value may not be observable in the market.
Maiden Lane II and Maiden Lane III
At their inception, ML II and ML III were valued and recorded at the transaction prices of $1 billion and
$5 billion, respectively. Subsequently, the Maiden Lane Interests are valued using a discounted cash flow
methodology that uses the estimated future cash flows of the Maiden Lane assets. AIG applies model-determined
market discount rates to its interests. These discount rates are calibrated to the changes in the estimated asset
values for the underlying assets commensurate with AIG’s interests in the capital structure of the respective
entities. Estimated cash flows and discount rates used in the valuations are validated, to the extent possible, using
market observable information for securities with similar asset pools, structure and terms.
The fair value methodology used assumes that the underlying collateral in the Maiden Lane Interests will
continue to be held and generate cash flows into the foreseeable future and does not assume a current liquidation
of the assets underlying 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.
Adjustments to the fair value of AIG’s interest in ML II are recorded on the Consolidated Statement of Income
(Loss) in Net investment income for SunAmerica’s domestic life insurance companies. Adjustments to the fair
value of AIG’s interest in ML III are recorded on the Consolidated Statement of Income (Loss) in Net
investment income and, beginning in the second quarter of 2009, were included in Other operations results,
reflecting the contribution to an AIG subsidiary. Prior to the second quarter of 2009, such amounts had been
included in Other Parent company results. AIG’s Maiden Lane Interests are included in Bond trading securities,
at fair value, on the Consolidated Balance Sheet.
As of December 31, 2010, 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 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.
AIG 2010 Form 10-K 249