PDF Annual Report 2008 Annual Report

352 Pages·2009·1.65 MB·English

American
International
Group, Inc.
2008 Annual Report

To Our Shareholders
W hile I can offer little time, many of these securities were INVESTMENT FROM THE U.S. GOV-
comfort to those of you rated AAA, the highest rating pos- ERNMENT. Because of its size and
who suffered severe sible. However, in late 2007, as the substantial interconnection with
losses as AIG share- U.S. residential mortgage market fi nancial markets and institutions
holders during 2008, I can assure began to deteriorate, the valuation around the world, the government
you that everyone at AIG is working of these securities declined severely. recognized that a failure of AIG
hard to preserve as much value as As a result, AIG recorded substantial would have had severe ramifi ca-
possible while maximizing the future unrealized market valuation losses, tions. In addition to being one of
potential of AIG’s businesses around especially on AIGFP’s credit default the world’s largest insurers, AIG was
the world. swap portfolio, which led to signifi - providing more than $400 billion of
Last year’s economic cataclysm cant cash requirements. credit protection to banks and other
was unprecedented. Less than At the same time, AIG reported clients around the world through
12 months after reporting record large unrealized losses in its securi- its credit default swap business. AIG
results, AIG found itself on the ties lending program. Through this also is a major participant in foreign
brink of collapse. On September program, AIG made short-term exchange and interest rate markets.
18, when I consented to the U.S. loans of certain securities it owned To stabilize AIG and prevent re-
government’s request to lead AIG, I to generate revenues by investing verberations throughout the econo-
found an organization full of proud, in high-grade residential mortgage- my, the government extended to
talented and dedicated people who backed securities. These and other AIG a two-year emergency loan of
were stunned and bewildered to see AIG real estate-related investments $85 billion on September 16, 2008.
their life’s work—and in many cases suffered sharp losses in value as well. The facility carried a rate of LIBOR
their life’s savings—a shambles. The It is important to reiterate that (the London Interbank Offered
swift decline of AIG seemed all the throughout the crisis, AIG’s insur- Rate—a widely used benchmark to
more incongruous because most ance businesses were—and continue set short-term interest rates) plus
of our businesses were healthy and to be—healthy and well capitalized. 8.5 percent, a commitment fee of 2
operating normally—as they are The losses that occurred as a result percent on the loan principal and a
today. But the implosion of the U.S. of AIGFP’s actions have no direct fee on the undrawn portion of
housing market exposed AIG’s risk impact on AIG policyholders. AIG’s 8.5 percent. Additionally, the gov-
concentration in mortgage-backed insurance companies are closely ernment would be entitled to 79.9
securities. That concentration, com- regulated, and their reserves are pro- percent equity ownership of the
bined with tumbling asset values and tected with adequate assets to meet company through preferred stock.
dysfunctional credit markets, led to policyholder obligations. With the loan in place, the
a sudden and severe cash crisis. The collapse of respected fi nan- management team developed a plan
WHAT HAPPENED? Over the years, cial institutions such as Bear Stearns to enable AIG to sell many of its
AIG built upon its premier global and Lehman Brothers sent shock leading businesses around the world
franchises in life and general insur- waves throughout the world econo- to pay back the government loan
ance by expanding into a range of my. The crisis at the U.S.-sponsored with interest. However, with this
fi nancial services businesses. One mortgage companies Fannie Mae divestiture and restructuring plan in
of these, created in 1987, was AIG and Freddie Mac added to the place, AIG still had to address its two
Financial Products Corp. (AIGFP), fi nancial disruption. Credit markets principal liquidity issues: the multi-
a company that engaged as principal deteriorated rapidly, making it virtu- sector credit default swap portfolio
in a wide variety of fi nancial trans- ally impossible to access capital. In and the securities lending program.
actions for a global client base. In September, AIG’s credit ratings were On November 10, 2008, AIG
1998, AIGFP began to sell credit downgraded once again, triggering and the Federal Reserve Bank
default swaps to other fi nancial additional collateral calls and cash of New York (NY Fed) announced
institutions to protect against the requirements in excess of $20 billion. a comprehensive plan to address
default of certain securities. At the Although solvent, AIG suddenly
faced an acute liquidity crisis.
AIG 2008 Annual Report 1
AIG’s liquidity issues and provide net loss for the fourth quarter of Reserve, agreements in principle
more time and greater fl exibility $61.7 billion, or $22.95 per diluted were reached to develop a new set of
to sell assets and repay the govern- share, compared to a 2007 fourth tools to strengthen AIG’s capital base
ment. Among the provisions was the quarter net loss of $5.3 billion, or and allow us time to benefi t from
creation of two fi nancing entities, $2.08 per diluted share. AIG’s re- future improvements in market and
Maiden Lane II and Maiden Lane ported net loss for full year 2008 was industry conditions.
III, to acquire AIG’s securities lend- $99.3 billion, or $37.84 per diluted Under the new plan, the terms of
ing assets and the multi-sector share, compared to net income of the U.S. Treasury’s preferred stock
collateralized debt obligations that $6.2 billion, or $2.39 per diluted investment in AIG will be modifi ed
were guaranteed by AIGFP’s credit share, for full year 2007. to make these preferred securities
default swaps. The entities were Despite the challenging condi- more closely resemble common eq-
funded primarily by the government, tions in 2008, insurance premiums uity, improving AIG’s capital struc-
with a subordinated capital contri- and other considerations declined ture. The U.S. Treasury also agreed
bution by AIG. Under the terms only modestly by 1.9 percent for to provide AIG with a new fi ve-year
of the agreements, the majority of the fourth quarter, compared to the standby equity capital facility,
any appreciation in the securities same period of 2007. For the year, which will allow AIG to raise up to
held by the entities would go to the premiums and other considerations $30 billion of capital by issuing non-
government, but a portion would be grew by 5.3 percent. cumulative preferred stock to the
retained by AIG. A NEW RESTRUCTURING PLAN. U.S. Treasury from time to time.
In addition, the U.S. Department Although the divestiture and busi- AIG will transfer to the NY Fed,
of the Treasury (U.S. Treasury) ness sale process had some successes or to a trust for its benefi t, preferred
purchased, through the Troubled with several announced transactions, interests in American Life Insurance
Asset Relief Program (TARP), the worldwide economy continued Company (ALICO) and American
$40 billion of newly issued AIG to worsen at an alarming pace, and International Assurance Company,
perpetual preferred shares. The potential buyers of AIG businesses Limited (AIA) in return for a reduc-
proceeds were used to pay down a faced growing challenges of their tion in the outstanding balance of up
portion of the government loan. own, including a lack of access to to $26 billion of the senior secured
The perpetual preferred shares capital. The life insurance sec- credit facility.
carried a 10 percent coupon with tor has seen enormous declines in In addition, AIG announced that
cumulative dividends. stock market value. Life insurance it expects to transfer to the NY Fed
Although Maiden Lane II and company stocks, as measured by embedded value of up to $8.5 billion,
III and the government’s equity indices published by A.M. Best, have representing securitization notes of
injection signifi cantly relieved AIG’s declined 51 percent globally and 60 certain of its U.S. life insurance busi-
liquidity pressures, the world percent in the United States since nesses, in return for a further reduc-
economy in general and the fi nancial October 1, 2008. Standard & Poor’s tion in its outstanding senior secured
industry in particular continued to recently downgraded many major credit facility balance. This capital
falter. AIG’s losses mounted through- life insurance companies in the U.S. management strategy—securitiza-
out the end of the year, taking a The same trend is seen among life tion—will not affect the day-to-day
heavy toll on fourth quarter results. insurers throughout Europe with the operations, sales activities or custom-
2008 RESULTS. AIG reported that rating agencies Fitch and Moody’s. ers of these businesses.
the continued severe credit market Against this backdrop, on March Also, under the terms of the new
deterioration, particularly in mort- 2, 2009, AIG made important adjust- plan, the NY Fed will remove the
gage-backed securities, and charges ments in our plan to assure the sta- LIBOR fl oor on the senior secured
related to ongoing restructuring bility and vitality of our businesses, credit facility. This will save AIG an
activities, contributed to a record protect policyholders and repay the estimated $1 billion in interest costs
government. In cooperation with per year, based on current levels.
the U.S. Treasury and the Federal
2 AIG 2008 Annual Report
Moving forward, AIG will con- combined assets of $240 billion, 16 Even prior to this controversy,
tinue to have access to the remaining million customers and over 300,000 however, we had taken a number of
NY Fed credit facility. Following licensed fi nancial professionals, the steps to restrict executive compensa-
the repayment of the outstand- combined companies would be op- tion. I agreed to serve AIG for $1
ing amount on the facility with the erating from a position of signifi cant a year in 2008 and 2009, with no
preferred interests and securitization strength and business diversifi cation. bonus, no severance agreement and
notes, the total amount available to AIG’S PRIORITIES GOING FORWARD. no equity contribution of any kind.
AIG under the facility will be at least Preserving the value of our business- For AIG’s top seven executives,
$25 billion. es and returning value to American there will be no annual bonus for
Also on March 2, AIG announced taxpayers have been the top priori- 2008 and no regular salary increase
its intention to form a general insur- ties for AIG since the U.S. govern- through 2009. In addition, these
ance holding company, composed of ment’s initial investment in AIG in executives gave up their right to
its Commercial Insurance Group, September 2008. AIG was the fi rst receive severance and did not accept
Foreign General unit, and other TARP-funded company to embark payments from their deferred com-
property and casualty operations, to upon a clear plan to return value to pensation accounts, money that they
be called AIU Holdings, Inc. The taxpayers—predicated on divesting earned over the years and had every
new holding company will have its assets, reducing unnecessary expens- right to receive. Salary and bonus
own board of directors, management es, and keeping our insurance busi- restrictions have been put in place
team and brand distinct from AIG. nesses healthy and well capitalized. for the entire senior partner group
The name of the company is derived To reduce expenses, we initiated of 50.
from American International Under- a thorough review of all company ex- To keep our insurance businesses
writers, a world-class organization penditures, events and other business healthy, we have emphasized the
whose legacy can be traced back to activities last October. In the wake need to maintain quality customer
its formation in 1926. of that review, AIG has taken several service and, just as important, to
Taken together, AIU Holdings, measures to control expenses, further maintain discipline in our business
Inc. includes the largest U.S. under- align the company with the interests practices. Our goal is to achieve an
writers of commercial and industrial of taxpayers, and ultimately become underwriting profi t. We will not
insurance, and the most extensive a more focused and competitive artifi cially price business to build
international property-casualty enterprise, including the cancellation market share—our pricing must ap-
network. AIU Holdings, Inc. is a of more than 600 conferences, meet- propriately refl ect risk. As I have said
unique leading franchise with more ings and other events that were not repeatedly, we do not want to fi nd
than 40,000 employees worldwide essential in the current environment. ourselves sitting on a pile of unprof-
and over 650 products and services Executive compensation has re- itable policies after we emerge from
that generate net premiums written ceived a great deal of attention since this diffi cult period.
in excess of $40 billion. AIG received public aid. As I write BOARD AND MANAGEMENT CHANGES.
The steps toward this separation this letter, there is bitter controversy With the considerable change that
of AIU Holdings, Inc. will assist AIG over retention contracts that were has taken place at AIG over the
in preparing for the potential sale written for AIGFP employees in past year, there have been signifi cant
of a minority stake in the business. early 2008. AIG was legally bound to changes in corporate leadership.
This ultimately may include a public honor those contracts, which provide Martin J. Sullivan stepped down as
offering of shares, depending on incentive for AIGFP employees to President and Chief Executive
market conditions. remain and carefully unwind transac- Offi cer in June following a 37-year
Further, AIG announced that it is tions as the business is being closed career with AIG. Robert B.
considering combining its domestic down. I am pleased that, in light of Willumstad assumed the role of
life and retirement businesses to en- the controversy, a number of AIGFP Chairman and Chief Executive
hance market competitiveness. With employees have agreed to return all
or part of these payments.
AIG 2008 Annual Report 3
Offi cer until September, when the Frank brought deep knowledge of Each one has been affected in some
U.S. government asked me to serve international affairs and public poli- way, and many have suffered severe-
in those capacities. cy to his position as Vice Chairman, ly. Nevertheless, throughout even
We were extremely fortunate External Affairs, and also through the most diffi cult days of the past
when Paula Rosput Reynolds agreed his service on the Board from 1997 year, they have worked with com-
to join AIG in October 2008 as Vice until 2003. He retires with our deep mitment and focus. I am extremely
Chairman and Chief Restructur- appreciation. proud of them—and salute each and
ing Offi cer. I cannot overstate the Three other Board members every one.
contribution she has made. In addi- have retired since the 2008 annual I also want to thank our custom-
tion, Anastasia D. Kelly, Executive meeting: Ellen V. Futter, Richard C. ers, policyholders and business part-
Vice President, General Counsel Holbrooke, and Fred H. Langham- ners who stayed with AIG during
and Senior Regulatory and Compli- mer. In addition, current directors our most diffi cult moments. We are
ance Offi cer, assumed a new role Virginia M. Rometty and Michael H. working very hard to reward your
as Vice Chairman with additional Sutton have decided that they will trust and confi dence.
responsibilities for Government Af- not stand for election at the 2009 Insurance is about keeping com-
fairs, Communications and Human annual meeting. We thank them all mitments. AIG became a great com-
Resources. Richard H. Booth was for their dedicated service. pany by keeping its commitments,
elected Vice Chairman, Transition In July 2008, the Board elected and that has not changed. However,
Planning and Chief Administrative Suzanne Nora Johnson a Director. AIG strayed into businesses that
Offi cer, in addition to his role as She is a former Vice Chairman of were outside of its core competency,
Chairman of HSB Group, Inc. And, The Goldman Sachs Group, Inc. and shareholders have paid a heavy
David L. Herzog, Senior Vice In November 2008, Dennis D. price as a result. We are now com-
President and Comptroller, was Dammerman was elected a Director. mitted to an orderly, responsible res-
elected Executive Vice President and Dennis is a former Vice Chairman olution of AIG’s fi nancial issues and
Chief Financial Offi cer, succeeding of the Board of General Electric to helping our businesses prosper
Steven J. Bensinger who left AIG Company. and contribute to a world economic
in October. OUR VISION FOR THE FUTURE. Our recovery. We are extremely grateful
Edmund S.W. Tse, who is retir- priorities are clear: protect cus- to the Federal Reserve and the U.S.
ing as Senior Vice Chairman, Life tomers, repay taxpayers, and give Treasury for providing the tools to
Insurance, made enormous contri- employees a vision of success and a pursue our restructuring plan.
butions to AIG during his 48-year path for achieving it. To be success- I can say confi dently that everyone
career. Edmund joined AIG in 1961 ful, we must move quickly to allow at AIG will work as hard as we can
and has served on the AIG Board our ongoing businesses to oper- to achieve the best possible outcome
since 1996. He has played a principal ate with greater independence and for our customers, employees,
role in building our life operations transparency, still as AIG entities but business partners, shareholders and
throughout Southeast Asia, as well as separate from the fi nancial chal- the American taxpayers.
in the establishment of our business lenges of the parent company. In this
in China. We have all benefi ted from way, we will preserve and build value
Sincerely,
Edmund’s counsel and leadership, in our businesses, return value to the
and I am glad that he will continue government and provide a new sense
to serve as a senior advisor and Hon- of purpose to our employees.
orary Chairman of AIA. Speaking of AIG’s employees,
Ambassador Frank G. Wisner, this year they deserve more than
Edward M. Liddy
who retired from AIG in March as a routine acknowledgment. All of
Chairman and Chief Executive Offi cer
Vice Chairman, served the company our 116,000 employees are striv-
with distinction for over a decade. ing under diffi cult circumstances to March 27, 2009
overcome AIG’s fi nancial challenges.
4 AIG 2008 Annual Report
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
¥ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
or
n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8787
American International Group, Inc.
(Exactnameofregistrantasspecifiedinitscharter)
Delaware 13-2592361
(Stateorotherjurisdictionof (I.R.S.Employer
incorporationororganization) IdentificationNo.)
70PineStreet,NewYork,NewYork 10270
(Addressofprincipalexecutiveoffices) (ZipCode)
Registrant’s telephone number, including area code [phone]
Securities registered pursuant to Section 12(b) of the Act:
TitleofEachClass NameofEachExchangeonWhichRegistered
CommonStock,ParValue$2.50PerShare NewYorkStockExchange
5.75%SeriesA-2JuniorSubordinatedDebentures NewYorkStockExchange
4.875%SeriesA-3JuniorSubordinatedDebentures NewYorkStockExchange
6.45%SeriesA-4JuniorSubordinatedDebentures NewYorkStockExchange
7.70%SeriesA-5JuniorSubordinatedDebentures NewYorkStockExchange
CorporateUnits(composedofstockpurchasecontractsand
juniorsubordinateddebentures) NewYorkStockExchange
NIKKEI225»IndexMarketIndexTarget-TermSecurities»
dueJanuary5,2011 NYSEArca
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ¥ No n
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes n No ¥
Indicatebycheckmarkwhethertheregistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecurities
ExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports),
and(2)hasbeensubject tosuchfilingrequirements forthepast90days. Yes ¥ No n
IndicatebycheckmarkifdisclosureofdelinquentfilerspursuanttoItem405ofRegulationS-Kisnotcontainedherein,andwill
not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated by reference in
PartIIIofthisForm10-Koranyamendment tothisForm10-K. n
Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,anon-acceleratedfiler,orasmaller
reportingcompany.Seethedefinitionsof“largeacceleratedfiler,”“acceleratedfiler”and“smallerreportingcompany”inRule12b-2
oftheAct.
Largeaccelerated filer ¥ Accelerated filer n Non-accelerated filer n Smaller reportingcompany n
(Donotcheckifasmallerreportingcompany)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes n No ¥
The aggregate market value of the voting and nonvoting common equity held by nonaffiliates of the registrant computed by
referencetothepriceatwhichthecommonequitywaslastsoldof$26.46asofJune30,2008(thelastbusinessdayoftheregistrant’s
mostrecently completed secondfiscalquarter),wasapproximately $61,753,000,000.
As of January 30, 2009, there were outstanding 2,690,747,320 shares of Common Stock, $2.50 par value per share, of the
registrant.
DOCUMENTS INCORPORATED BY REFERENCE
DocumentoftheRegistrant Form10-KReferenceLocations
Portionsoftheregistrant’sdefinitiveproxystatementforthe PartIII,Items10,11,12,13and14
2009AnnualMeetingofShareholders
AmericanInternationalGroup,Inc.,andSubsidiaries
Table of Contents
Index Page
PART I
Item 1. Business.............................. ................................. 3
Item 1A. Risk Factors........................... ................................. 21
Item 1B. Unresolved Staff Comments ............... ................................. 32
Item 2. Properties............................. ................................. 33
Item 3. Legal Proceedings ...................... ................................. 33
Item 4. Submission of Matters to a Vote of Security Holders .............................. 33
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.............. ................................. 34
Item 6. Selected Financial Data................... ................................. 36
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations .. 38
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ........................ 190
Item 8. Financial Statements and Supplementary Data.. ................................. 190
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.. 324
Item 9A. Controls and Procedures .................. ................................. 324
Item 9B. Other Information....................... ................................. 326
PART III
Item 10. Directors, Executive Officers and Corporate Governance ........................... 326
Item 11. Executive Compensation.................. ................................. 326
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters............................... ................................. 326
Item 13. Certain Relationships and Related Transactions, and Director Independence ............. 326
Item 14. Principal Accounting Fees and Services....... ................................. 326
PART IV
Item 15.* Exhibits, Financial Statement Schedules ...... ................................. 326
Signatures ..................................... ................................. 327
*PartIV,Item15,Schedules,theExhibit Index,andcertain Exhibitswereincluded inForm10-Kfiledwiththe
Securities and Exchange Commission but have not been included herein. Copies may be obtained electronically
throughAIG’swebsiteatwww.aigcorporate.comorfromtheDirectorofInvestorRelations,AmericanInternational
Group, Inc.
2 AIG2008Form10-K
AmericanInternationalGroup,Inc.,andSubsidiaries
Part I
Item 1. Business
AmericanInternationalGroup,Inc.(AIG),aDelawarecorporation,isaholdingcompanywhich,throughits
subsidiaries, is engaged in a broad range of insurance and insurance-related activities in the United States and
abroad. AIG’s primary activities include both General Insurance and Life Insurance & Retirement Services
operations. Other significant activities include Financial Services and Asset Management.
Liquidity Events and Transactions with the NY Fed and the United States Department of the Treasury
Liquidity Entering the Third Quarterof 2008
AIG parent entered the third quarter of 2008 with $17.6 billion of cash and cash equivalents, including the
remainingproceedsfromtheissuanceof$20billionofcommonstock,equityunits,andjuniorsubordinateddebt
securities inMay2008. Inaddition, AIG’ssecurities lending collateral pool held $10.4billion ofcash and other
short-term investments.OnAugust18,2008,AIGraised$3.25billion throughtheissuanceof8.25%NotesDue
2018.
Strategic Review and Proposed Liquidity Measures
From mid-July and throughout August 2008, AIG’s then Chief Executive Officer, Robert Willumstad, was
engaged in a strategic review of AIG’s businesses.
Duringthistimeperiod,AIGwasengagedinareviewofmeasurestoaddresstheliquidityconcernsinAIG’s
securitieslendingportfolioandtoaddresstheongoingcollateralcallswithrespecttotheAIGFinancialProducts
Corp.and AIGTradingGroupInc.andtheirrespectivesubsidiaries(collectively,AIGFP)superseniormulti-sector
creditdefaultswapportfolio,whichatJuly31,2008totaled$16.1billion.Tofacilitate thisprocess,AIGaskeda
number of investment banking firms to discuss possible solutions to these issues. In late August, AIG engaged
J.P.MorganSecurities,Inc.(J.P.Morgan)toassistindevelopingalternatives,includingapotentialadditionalcapital
raise.
Continuing Liquidity Pressures
Historically, under AIG’s securities lending program, cash collateral was received from borrowers and
invested by AIG primarily in fixed maturity securities to earn a spread. AIG had received cash collateral from
borrowersof100to102percentofthevalueoftheloanedsecurities.Inlightofmorefavorabletermsofferedby
other lenders of securities, AIG accepted cash advanced by borrowers of less than the 102 percent historically
requiredbyinsuranceregulators.Underanagreementwithitsinsurancecompanysubsidiariesparticipatinginthe
securities lending program, AIG parent deposited collateral in an amount sufficient to address the deficit. AIG
parentalsodepositedamountsintothecollateralpooltooffsetlossesrealizedbythepoolinconnectionwithsalesof
impairedsecurities.AggregatedepositsbyAIGparenttoorforthebenefitofthesecuritieslendingcollateralpool
through August 31, 2008 totaled $3.3 billion.
In addition, from July 1, 2008 to August 31, 2008, the continuing decline in value of the super senior
collateralized debt obligation (CDO) securities protected by AIGFP’s super senior credit default swap portfolio,
together with ratings downgrades of such CDO securities, resulted in AIGFP posting additional collateral in an
aggregate net amount of $5.9 billion.
By the beginning of September 2008, these collateral postings and securities lending requirements were
placing increasing stress on AIG parent’s liquidity.
Rating Agencies
In early September 2008, AIG met with the representatives of the principal rating agencies to discuss
Mr.Willumstad’sstrategicreviewaswellastheliquidityissuesarisingfromAIG’ssecuritieslendingprogramand
AIGFP’ssuperseniormulti-sectorCDOcreditdefaultswapportfolio.OnFriday,September12,2008,Standard&
Poor’s, a division of The McGraw-Hill Companies, Inc. (S&P), placed AIG on CreditWatch with negative
AIG2008Form10-K 3
AmericanInternationalGroup,Inc.,andSubsidiaries
implicationsandnotedthatuponcompletionofitsreview,theagencycouldaffirmAIGparent’scurrentratingof
AA- or lower the rating by one to three notches. AIG understood that both S&Pand Moody’s Investors Service
(Moody’s)wouldre-evaluateAIG’sratingsearlyintheweekofSeptember15,2008.AlsoonFriday,September12,
2008, AIG’s subsidiaries, International Lease Finance Corporation (ILFC) and American General Finance, Inc.
(AGF),wereunabletoreplacealloftheirmaturingcommercialpaperwithnewissuancesofcommercialpaper.Asa
result, AIG advanced loans to these subsidiaries to meet their commercial paper obligations.
The Accelerated Capital Raise Attempt
AsaresultofS&P’saction,AIGacceleratedtheprocessofattemptingtoraiseadditionalcapitalandoverthe
weekend of September 13 and 14, 2008 discussed potential capital injections and other liquidity measures with
privateequityfirms,sovereignwealthfundsandotherpotentialinvestors.AIGkepttheUnitedStatesDepartmentof
theTreasuryandtheNYFedinformedoftheseefforts.AIGalsoengagedBlackstoneAdvisoryServicesLPtoassist
in developing alternatives, including a potential additional capital raise. Despite offering a number of different
structuresthroughthisprocess,AIGdidnotreceiveaproposalitcouldactuponinatimelyfashion.AIG’sdifficulty
inthisregardresulted inpart fromthe dramatic decline initscommon stockprice from$22.76onSeptember 8,
2008to$12.14onSeptember12,2008.ThisdecreaseinstockpricemadeitunlikelythatAIGwouldbeabletoraise
the large amounts of capital that would be necessary if AIG’s long-term debt ratings were downgraded.
AIG Attempts to Enter into a Syndicated Secured Lending Facility
OnMonday,September15,2008,AIGwasagainunabletoaccessthecommercialpapermarketforitsprimary
commercial paperprograms,AIGFunding,ILFCandAGF.Paymentsundertheprogramstotaled$2.2billionfor
theday,andAIGadvancedloanstoILFCandAGFtomeettheirfundingobligations.Inaddition,AIGexperienced
returns under its securities lending programs which led to cash payments of $5.2 billion to securities lending
counterparts on that day.
On Monday morning, September 15, 2008, AIG met with representatives of Goldman, Sachs & Co.,
J.P. Morgan and the NY Fed to discuss the creation of a $75 billion secured lending facility to be syndicated
amonganumberoflargefinancialinstitutions.ThefacilitywasintendedtoactasabridgeloantomeetAIGparent’s
liquidity needs until AIG could sell sufficient assets to stabilize and enhance its liquidity position. Goldman,
Sachs & Co. and J.P. Morgan immediately commenced syndication efforts.
The Rating Agencies Downgrade AIG’s Long-Term Debt Rating
InthelateafternoonofSeptember15,2008,S&PdowngradedAIG’slong-termdebtratingbythreenotches,
Moody’s downgraded AIG’s long-term debt rating by two notches and Fitch Ratings (Fitch) downgraded AIG’s
long-termdebtratingbytwonotches.Asaconsequenceoftheratingactions,AIGFPestimatedthatitwouldneedin
excessof$20billioninordertofundadditionalcollateraldemandsandtransactionterminationpaymentsinashort
period of time. Subsequently, in a period of approximately 15 days following the rating actions, AIGFP was
requiredtofundapproximately$32billion,reflectingnotonlytheeffectoftheratingactionsbutalsochangesin
market values and other factors.
The Private Sector Solution Fails
ByTuesdaymorning,September16,2008,ithadbecomeapparentthatGoldman,Sachs&Co.andJ.P.Morgan
were unable to syndicate a lending facility. Moreover, the downgrades, combined with a steep drop in AIG’s
common stockprice to$4.76onSeptember 15,2008,hadresulted incounterparties withholding payments from
AIGandrefusingtotransactwithAIGevenonasecuredshort-termbasis.Asaresult,AIGwasunabletoborrowin
the short-term lendingmarkets. Toprovideliquidity,onTuesday,September 16,2008bothILFCandAGFdrew
down on their existing revolving credit facilities, resulting in borrowings of approximately $6.5 billion and
$4.6 billion, respectively.
Also,onSeptember16,2008,AIGwasnotifiedbyitsinsuranceregulatorsthatitwouldnolongerbepermitted
toborrowfundsfromitsinsurancecompanysubsidiariesunderarevolvingcreditfacilitythatAIGmaintainedwith
certainofitsinsurancesubsidiariesactingaslenders.Subsequently,theinsuranceregulatorsrequiredAIGtorepay
4 AIG2008Form10-K