GAO
United States Government Accountability Office
Report to Congressional Committees
TROUBLED ASSETRELIEF PROGRAMStatus of Government Assistance Providedto AIG
September 2009GAO-09-975
What GAO Found
United States Government Accountability Office
Why GAO Did This Study
H
ighlights
Accountability Integrity Reliability
S
eptember 2009
TROUBLED ASSET RELIEF PROGRAM
S
tatu
s
of Government A
ss
i
s
tance Provided to AIG
The Federal Reserve and Treasury provided assistance to AIG to limit furtherdisruption to financial markets. These agencies determined that market eventscould have caused AIG to fail, which would have posed systemic risk to thefinancial system. According to the Federal Reserve, a disorderly failure of AIGwould have contributed to higher borrowing costs and additional failures, furtherdestabilizing fragile financial markets. The Federal Reserve and Treasurydetermined that an AIG default would place considerable pressure on AIG’scounterparties and trigger serious disruptions to an already distressedcommercial paper market. They concluded that because AIG was a large seller of credit default swaps—protection against losses from defaults—on collateralizeddebt obligations (CDO), had AIG failed, its counterparties would have beenexposed to large losses if the values of the CDOs had continued to decline and AIG defaulted on its contracts. The Federal Reserve intended the initialSeptember 2008 assistance to enable AIG to meet these added obligations with itscounterparties and begin the process of selling business lines to raise monies torepay the government and resolve other liabilities. Subsequent assistance inNovember 2008 and March 2009 was intended to augment these goals, supportliquidity needs, and repay FRBNY while mitigating disruptions in the broaderfinancial markets.To address systemic risk that could result if AIG were to fail, the Federal Reserveand Treasury made over $182 billion available to assist AIG between September2008 and April 2009. As of September 2, 2009, AIG’s outstanding balance of assistance was $120.7 billion. Some federal assistance was designated for specific purposes, such as a special purpose vehicle to provide liquidity for purchasingassets such as CDOs. Other assistance, such as that available through theTreasury’s Equity Facility, is available to meet the general financial needs of the parent company and its subsidiaries. The table on the next page provides anoverview of the total federal assistance to AIG and its related entities. Repaymentof the $120.7 billion outstanding government exposure is expected to come from various sources. As of September 2, 2009, $6.8 billion was paid toward principalon the Maiden Lane facilities created by FRBNY to purchase certain AIG assetsand provide AIG with liquidity. In providing the assistance, the Federal Reserveand Treasury have taken several steps intended to protect the government’sinterest. These include making loans that are secured with collateral, institutingcertain controls over management, and obtaining compensation for risks such ascharging interest, requiring dividend payments, and obtaining warrants. Moreover,Federal Reserve and Treasury staff routinely monitor AIG’s operations andreceive reports on AIG’s condition and restructuring. While these efforts are beingmade, the government remains exposed to risks, including credit risk andinvestment risk, which could result in the Federal Reserve and Treasury not beingrepaid in full.While federal assistance has helped stabilize AIG’s financial condition,GAO-developed indicators suggest that AIG’s ability to restructure its business andrepay the government is unclear at this time. Indicators of AIG’s financial risksuggest that since AIG reported significant losses in late 2008, AIG’s operations,with federal assistance, have begun to show signs of stabilizing in mid 2009.Similarly, after a declining trend through 2008 and early 2009, indicators of AIGinsurance companies’ financial risk suggest improved financial conditions thatwere largely results of federal assistance. Indicators of AIG’s repayment of federal
GAO’s seventh report on the Troubled Asset Relief Program (TARP) focuseson the initial assistance thegovernment provided to AmericanInternational Group, Inc. (AIG)—anorganization with over 200 companiesoperating in over 130 countries and jurisdictions and $830 billion inassets—in September 2008 and therestructuring of that assistance inNovember 2008 and March 2009. Theunfolding crisis threatened the stabilityof the U.S. banking system and thesolvency of a number of financialinstitutions, including AIG. InSeptember 2008, downgrades of AIG’scredit rating prompted collateral callsby counterparties and raised concernsthat a rapid and disorderly failure of AIG would further destabilize themarkets. As a result, the Board of Governors of the Federal ReserveSystem (Federal Reserve) authorizedthe Federal Reserve Bank of New York(FRBNY), in consultation with theDepartment of the Treasury (Treasury),to provide assistance to AIG. Thisreport describes (1) the basis for thefederal assistance, (2) the nature andtype of assistance and steps intendedto protect the government’s interest,and (3) selected GAO-developedindicators of the status of federalassistance and AIG’s financialcondition.To do this, GAO reviewed signedagreements and other relevantdocumentation from the FederalReserve, FRBNY, Treasury, and AIGand interviewed their officials, amongothers. To develop the indicators, GAOreviewed rating agencies’ reports,identified critical activities, anddiscussed them with the above namedagencies and AIG.Treasury had no substantive commentson the report. It provided technicalcomments along with the FederalReserve, FRBNY, and AIG.
ViewGAO-09-975 or key components.For more information, contact Orice WilliamsBrown at (202) 512-8678 orwilliamso@gao.gov.
United States Government Accountability Office
Hi
g
hli
g
ht
s
of GAO-09-975 (continued)
Overview
of
Federal Assistance Provided to AIG as of September 2, 2009
Dollar in millions
Amount of a
ss
i
s
tanceauthorizedDe
s
cription of the federal a
ss
i
s
tance DebtEquity
Out
s
tandin
g
balance
S
ource
s
to repay the
g
overnmentImplementedFederalRe
s
erve
FRBNY created a Revolving Credit Facility toprovide AIG a revolving loan that AIG and itssubsidiaries could use to enhance their liquidity.In exchange for the facility, for $0.5 million, aTreasury trust received Series C preferred stockfor the benefit of the Treasury, which gaveTreasury a 77.9 percent voting interest in AIG.$60,000
a
$38,792.5 Proceeds from dispositions of AIGbusinesses, internal cash flows, andrestructuring part of the Revolving CreditFacility from debt into equity. The initial feepaid by AIG was reduced by $0.5 million topay for the Series C shares and will not berepaid.FRBNY created SPV—Maiden Lane II—toprovide AIG liquidity by purchasing residentialmortgage-backed securities from AIG lifeinsurance companies. FRBNY provided a loan tothe SPV for the purchases. It also terminated apreviously established securities lendingprogram with AIG.22,50016,899 Proceeds from the assets in Maiden Lane IIwill be used to repay the FRBNY loan toMaiden Lane II.FRBNY created a SPV called Maiden Lane III toprovide AIG liquidity by purchasing CDOs fromAIG Financial Products’ counterparties inconnection with termination of credit defaultswaps. FRBNY again provided a loan to the SPVfor the purchases.30,00020,196 Proceeds from the assets in Maiden LaneIII will be used to repay the FRBNY loan.
Trea
s
ury
Treasury purchased Series D cumulativepreferred stock from AIG. AIG used the proceedsto pay down the Revolving Credit Facility. Theseshares were later exchanged for Series Enoncumulative preferred shares. Unpaiddividends on the series D shares were added tothe Treasury’s equity in the Series E shares.40,000 41,605 Proceeds from dispositions of AIGbusinesses and internal cash flows of AIG.Treasury purchased Series F noncumulativepreferred shares of AIG and is allowing AIG todraw up to $29,835 million through an equityfacility to meet its liquidity and capital needs.Amounts drawn by AIG represent the cost of thefederal equity interest in these shares.29,835 3,206
b
Proceeds from dispositions of AIGbusinesses and internal cash flows of AIG.
S
ubtotal
s
$112,500$69,835
Total authorized and out
s
tandin
g
a
ss
i
s
tance
c
$182,335$120,698.5
Pendin
g
AIG created two SPVs to hold the shares of twoof its foreign life insurance businesses toenhance AIG’s capital and liquidity, and tofacilitate an orderly restructuring of AIG. TheRevolving Credit Facility will be reduced by theamount of preferred equity interest in the SPVsto be received by FRBNY.0(25,000
d
)0Proceeds from the public sale of the SPVs’common stock could be used to buy out thefederal preferred equity and pay down partof the Revolving Credit Facility.AIG will create SPVs that will issue up to $8,500million in notes to FRBNY, which will be fundedwith a loan from FRBNY. AIG will use theproceeds to pay down part of the RevolvingCredit Facility.(8,500
d
)0FRBNY’s loan to the SPVs will be repaidfrom net cash flows of the life insurancepolicies.
Source: AIG SEC filings, Federal Reserve, and Treasury data
.
a
The facility was initially $85 billion but was reduced to $60 billion in November 2008.
b
Amount as of September 8, 2009.
c
Does not include AIG’s participation in the Federal Reserve’s Commercial Paper Funding Facility.
d
These transactions have not been completed and are not included in the total assistance provided to AIG. Theamount of the Revolving Credit Facility will be decreased by an equal amount upon completion.
assistance show some progress in AIG’s ability to repaythe federal assistance; however, improvement in thestability of AIG’s business depends on the long-termhealth of the company, market conditions, and continuedgovernment support. Therefore, the ultimate success of AIG’s restructuring and repayment efforts remainsuncertain. GAO plans to continue to review the FederalReserve’s and Treasury’s monitoring efforts and report onthese indicators to determine the likelihood of AIGrepaying the government’s assistance in full and thegovernment recouping its investment.
Search History:
Result 00 of 00
00 results for result for
p.
GAO Report: Status of Government Assistance Provided to AIG
6.1K
Reads
2
Readcasts
10
Embed Views
Get Scribd Mobile
To get Scribd mobile enter your number and we'll send you a link to the Scribd app for iPhone & Android.We've sent a link to the Scribd app. If you didn't receive it, try again.
We'll never share your phone number.
More From This User
Notes
Load more
