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AIG's Report to Senate Banking Committee

AIG's Report to Senate Banking Committee

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Published by FOXBusiness.com
AIG's Report to Senate Banking Committee
AIG's Report to Senate Banking Committee

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Published by: FOXBusiness.com on Mar 10, 2009
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05/10/2014

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1
AIG: Is the Risk Systemic?
STRICTLY CONFIDENTIALDRAFT ±March 6, 2009
This draft Presentation has been prepared by American International Group, Inc. (³AIG´) with respect to certain informationrelating to its businesses.AIG does not intend to update this Presentation following its distribution.Although AIG believes theinformation included in this Presentation is accurate, AIG makes no representation or warranty as to its accuracy or completeness.
 
2
W
hat is Systemic Risk?
Systemic risk 
is the risk imposed by
inter-linkages
and
interdependencies
in a systemor market, which could potentially bankrupt or bring down the entire system or marketif one player is eliminated, or a cluster of failures occurs at once.
[
S
ystemic financial risk occurs when contingency plans that are developed individuallyto address selected risks are collectively incompatible. It is the quintessential ³kneebone is connected to the thigh bone«´ where every element that once appearedindependent is connected with every other element.
 AIG¶s business model ±a sprawl of $1 trillion of insurance and financial servicesbusinesses, whose AAA credit was used to backstop a $
2
trillion dollar financialproducts trading business ±has many inherent risks that are correlated with oneanother. As the global economy has experienced multi-sector failures, AIG¶s vastbusiness has been weakened by these multi-sector failures.
 AIG¶s original problem ±an over-reliance on U.
S
. residential mortgage-backedsecurities (RMB
S
) in its investment portfolios ±has now been deepened by weaknessin the commercial mortgage-backed securities market, the global real estate market,the global equities market, slowing business and consumer spending activity and theconcomitant demand for higher liquidity by regulators and customers around the world.
S
ystemic risk afflicts all life insurance and investment firms around the world. Thus,what happens to AIG has the potential to trigger a cascading set of further failureswhich cannot be stopped except by extraordinary means.
2
 
33
Risk Assessment Summary
In the fall of 
2008
, the Federal Reserve and Department of the Treasury determined thatthe systemic risk of a failure of AIG was so great that they should provide a supportprogram by injecting liquidity and equity capital into AIG.
To repay the debt and reduce the degree of financial risk to the firm, AIG has instituted awind-down of its Financial Products business and a massive divestiture process to sellbusinesses, despite the increasingly difficult M&A and credit environment.
The previously provided solution addressed short-term liquidity needs and AIG¶s over-concentration in the RMB
S
market. But AIG still faces massive investment losses andcredit downgrades. Without additional federal tools being deployed in the AIG situation, AIG will not be able to repay its obligations. Despite adequate current security against theU.
S
. government¶s investment, that investment may not be recovered.
 AIG operates in more than 1
30
countries around the world, whose customers, regulators,and governments have thus far refrained from liquidating or seizing assets based largelyon the support given to AIG by the U.
S
. government.
The failure of AIG would cause turmoil in the U.
S
. economy and global markets, andhave multiple and potentially catastrophic unforeseen consequences.
The inability of AIG to immediately secure additional assistance from the Federal Reserveand the Department of the Treasury threatens not only AIG¶s sales process, but alsoconsumer and business confidence around the world.

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