Unraveling the AIG Bailout: Critical Transactions Exposed

Strategic Insights -

The House Oversight and Government Reform Committee, led by Delegate Eleanor Holmes Norton, convened a hearing on the Federal Bailout of AIG, featuring key witnesses from the Troubled Asset Relief Program (TARP) and AIG. The hearing shed light on critical transactions that facilitated the unwinding of a significant portion of AIG Financial Products' credit default swaps. The transactions, which involved the purchase of underlying multi-sector CDO bonds from FP swap counterparties, significantly reduced AIG's risk of substantial collateral postings and mitigated erosion of its capital.

Key Takeaways:

  • The Federal Reserve's Maiden Lane III facility was created to reduce AIG's exposure to mark-to-market losses and collateral calls on FP swaps, which exceeded $80 billion.
  • The facility purchased the underlying bonds at the then-market value, effectively unwinding a significant portion of AIG Financial Products' credit default swaps.
  • FP reported billions of dollars in mark-to-market losses on the swaps under the fair value accounting rules, which led to substantial collateral postings to swap counterparties.
  • AIG lacked the financial resources to come up with a large-scale solution, and instead, relied on the capital markets, which were inaccessible due to its non-bank status.
  • The rating agencies downgraded AIG on September 15th, 2008, triggering an onslaught of new collateral calls, which continued even after the federal rescue on September 16th.

Statistics:

  • AIG Financial Products reported billions of dollars in mark-to-market losses on the swaps under the fair value accounting rules ($22 billion in 2007 and $16 billion in 2008).
  • FP posted billions of dollars in collateral to swap counterparties as a result of the declining market value of the bonds and declines in AIG's and the reference bonds' credit ratings.
  • Maiden Lane III bought the underlying bonds at $29.5 billion in face value, with approximately $29.0 billion in outstanding principal.
  • The facility was established on September 22nd, 2008, with the New York Fed as the administrating agent.

Sources:

  • Part 6 of the House Oversight and Government Reform Committee hearing on "The Federal Bailout of AIG"
  • Federal News Service, Inc., Ste. 500, 1000 Vermont Avenue NW, Washington, DC 20005 USA.