AIG - Federal Reserve

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Bloomberg documents the AIG-Fed timeline

"...Below is a timeline outlining New York-based AIG’s disclosures along with comments from the New York Fed and the Securities and Exchange Commission to the insurer.

Nov. 10, 2008: AIG says the New York Fed will contribute as much as $30 billion to a facility to retire credit-default swaps sold by the insurer to protect banks from losses on securities tied to subprime mortgages. The insurer will contribute as much as $5 billion, and the facility, named Maiden Lane III, will buy about $70 billion in collateralized debt obligations from the banks that bought protection, AIG says.

Nov. 11, 2008: Elias Habayeb, then-Chief Financial Officer of AIG’s Financial Services division, e-mails executives that he wants to clear up “confusion” about the price the company will pay to retire derivatives. “The Fed offered all counterparties par,” Habayeb says. “I think we should be clear on that point.”

Nicholas Ashooh, then-senior vice president in charge of AIG’s communications, replies to Habayeb that his proposed explanation “would be very helpful, but I understand that the Fed is very sensitive and we have to clear it with them.”

Nov. 24, 2008: Geithner is nominated for Treasury secretary by President-elect Barack Obama. Geithner is recused from “working on issues involving specific companies, including AIG,” a Treasury spokeswoman later says.

Nov. 25, 2008: Maiden Lane III begins buying CDOs from AIG’s counterparties.

Dec. 2, 2008: AIG submits a regulatory filing detailing the terms of the Maiden Lane III agreement.

The filing contains a so-called shortfall agreement between Maiden Lane III and AIG listing terms of payments should the vehicle need more funds. The accord refers to Schedule A, the document listing counterparties, collateral postings and market declines on the derivative contracts. The Schedule A isn’t included.

The filing states that on Nov. 25, “ML III bought approximately $46.1 billion in par amount of Multi-Sector CDOs through a net payment to CDS counterparties of approximately $20.1 billion, and AIGFP terminated the related CDS with the same notional amount. The aggregate cost of the purchases and terminations was funded through approximately $15.1 billion of borrowings under the Senior Loan, the surrender by AIGFP of approximately $25.9 billion of collateral previously posted by AIGFP to CDS counterparties in respect of the terminated CDS and AIG’s equity investment in ML III of $5 billion.”

Dec. 21, 2008: AIG sends a draft of its regulatory filing detailing the purchase of additional CDOs to New York Fed lawyers. “Counterparties received 100 percent of the par value of the Multi-Sector CDOs sold and the related CDS have been terminated,” the draft says.

Dec. 23, 2008: The New York Fed sends AIG a marked-up version of the filing draft, crossing out the explanation of AIG paying 100 percent.

The New York Fed also crosses out a reference to an amendment of the company’s shortfall agreement and asks if including the amendment is “necessary or helpful?”

Dec. 24, 2008: AIG submits filing saying it retired another $16 billion in credit-default swaps after buying the underlying securities through Maiden Lane III, bringing the total collateralized debt obligations purchased to about $62 billion.

The filing omits the sentence that said “counterparties received 100 percent.”

The filing has the amendment to the shortfall agreement, which mentions Schedule A without including it.

Dec. 30, 2008: The SEC writes a letter to then-Chief Executive officer Edward Liddy telling AIG to provide a Schedule A for the shortfall agreement in its Dec. 24 and Dec. 2 filings. “You are required to file the entire agreement, including all exhibits, schedules, appendices and any document which is incorporated in the agreement,” the SEC’s letter says.

Jan. 13, 2009: Peter Bazos, an outside lawyer for the New York Fed, writes to AIG in an e-mail, asking the company to “Please omit/redact the column headings included in the Schedule” in an amendment of the Dec. 24, 2008, filing.

Diego Rotsztain, then an outside lawyer for the New York Fed, writes the company an e-mail saying “AIG should be getting a call from the SEC to discuss the special procedures to be followed in connection with the submission of the confidential- treatment request.”

Jan. 14, 2009: Anthony Greco, an outside lawyer representing AIG, writes to Bazos and asks, “We will defer to you on this, but could you please provide us the basis for the headings being confidential? The letter appears to be directed towards the information contained in the columns as opposed to the headings themselves.”

AIG files an amendment to the accord. In the page available to the public with the headline “Schedule A to Shortfall Agreement,” the insurer excludes the table listing banks, writedowns and collateral postings.

“The confidential portion of this Schedule A has been omitted and filed separately with the Securities and Exchange Commission,” AIG says in the filing. “Confidential Treatment has been requested for the omitted portions.”

Jan. 27, 2009: Geithner is sworn in as Treasury secretary and will be replaced at the New York Fed by William Dudley.

March 5, 2009: Senators including Christopher Dodd, a Connecticut Democrat, tell Federal Reserve Vice Chairman Donald Kohn that the regulator should reveal the banks that bought credit-default swaps from AIG.

“We need AIG to be stable and to continue in a stable condition,” Kohn tells a Senate panel. “And I would be very concerned that if we gave out the names of counterparties here, people wouldn’t want to be doing business with AIG.”

March 12, 2009: Kathleen Shannon, an AIG deputy general counsel, writes to the insurer’s executives in an e-mail about the conflicting pressures from the New York Fed and SEC regarding amendments to the filings. She says she believes the New York Fed doesn’t want the insurer to include names of the tranches of the securities tied to the swaps or their Committee on Uniform Securities Identification Procedures numbers, or CUSIPs.

“In order to make only the disclosure that the Fed wants us to make,” Shannon writes, “we need to have a reasonable basis for believing and arguing to the SEC that the information we are seeking to protect is not already publicly available.”

AIG’s then-General Counsel Anastasia Kelly e-mails the New York Fed a draft of a letter to the SEC saying that the insurer intends to withdraw its request for confidential treatment because some of the information had been reported by the media.

March 13, 2009: New York Fed lawyer James Bergin writes an e- mail to the New York Fed and AIG executives that he wants to set up a 2 p.m. conference call with the insurer and the SEC. “AIG is still confirming their comfort with certain of the redactions we’d like made on the 8-K schedule,” Bergin writes.

Bergin writes in a separate e-mail that “I’d suggest also we have a call among AIG and FRBNY prior to the 2 p.m. so that we have our ducks in a row.”

March 15, 2009: AIG, under pressure from regulators, releases a statement that discloses the names of its counterparties, which includes banks such as Goldman Sachs and Deutsche Bank AG. The counterparties received about $50 billion in forfeited collateral postings and Maiden Lane III payments since the Sept. 16, 2008, rescue, the statement says. The statement lists a sum of payments to each bank. It doesn’t identify the securities tied to the swaps or list the value of individual purchases by the banks.

March 16, 2009: AIG amends its Dec. 2 and Dec. 24 filings to include a list of derivative transactions and the insurer’s counterparties. The updated Dec. 2 filing includes a Schedule A that lists the names of counterparties on about 165 contracts, while the amended Dec. 24 filing includes about 180 contracts. AIG redacts the notional value of the trades, market declines, collateral posted, tranche names and CUSIPs. Each of the Schedule A documents includes the word “redacted” more than 800 times.

April 28, 2009: New York Fed posts a portfolio breakdown for Maiden Lane III on its Web site. The summary includes the value of assets that are tied to residential- and commercial-mortgage- backed securities and credit ratings for the holdings.

May 15, 2009: AIG amends its Dec. 2 and Dec. 24 filings to include the lists of collateral postings and mark-to-market losses on derivatives contracts. The amended Dec. 24 filing also includes the CUSIPs, tranche names and notional amounts for 10 contracts. The word “redacted” appears more than 400 times in each filing.

May 22, 2009: AIG may withhold the redacted information from Schedule A until Nov. 25, 2018, a decade after the date when Maiden Lane began purchasing assets, the SEC says.

The information “qualifies as confidential commercial or financial information under the Freedom of Information Act,” based on statements from AIG, the SEC says in a letter.

Nov. 17, 2009: Neil Barofsky, the special inspector general charged with policing the Troubled Asset Relief Program, says disclosure of swaps details didn’t bring on the “dire consequences” that Kohn said could accompany its release.

“Notwithstanding the Federal Reserve’s warnings, the sky did not fall; there is no indication that AIG’s disclosure undermined the stability of AIG or the market,” Barofsky wrote in a report. “The default position, whenever government funds are deployed in a crisis to support markets or institutions, should be that the public is entitled to know what is being done with government funds.”

Jan. 7, 2010: Bloomberg reports that e-mails obtained by Representative Darrell Issa show the New York Fed pressed AIG to withhold details from the public about the insurer’s payments to banks.

Jan. 8, 2010: Thomas Baxter, general counsel of the New York Fed, writes to lawmakers saying efforts to limit AIG’s disclosure “did not warrant” Geithner’s attention.

Jan. 13, 2010: Edolphus Towns, the New York Democrat who is chairman of the oversight committee, subpoenas Geithner’s e- mails, phone logs and meeting notes tied to the bailout of AIG.

Jan. 19, 2010: The New York Fed produces more than 250,000 pages of documents in response to the House subpoena. The regulator says that it “assisted AIG in ensuring the accuracy of its disclosures and protected important U.S. taxpayer interests.” AIG was responsible for its disclosures, and the New York Fed asked AIG to remove a reference to the bank payments because it wasn’t “precisely accurate,” the regulator says in a statement.

Fed actions Sept 16, 2008

On September 16, 2008, the Federal Reserve announced that it would lend to American International Group, Inc., (AIG) to provide AIG with the time and flexibility to execute a value-maximizing strategic plan. Initially, the FRBNY extended an $85 billion line of credit to the company. On October 8, 2008, the FRBNY was authorized to extend credit to certain AIG subsidiaries against a range of securities. The terms of the loan were disclosed on this website. The credit extended to AIG under both of these programs is presented in table 1 of the H.4.1 and included in "Other loans" loans in tables 9 and 10.

Fed actions Nov 10, 2008

On November 10, 2008, the Federal Reserve and the Treasury announced a restructuring of the government's financial support to AIG. As part of this restructuring, two new LLCs were created. On December 12, 2008, FRBNY began extending credit to Maiden Lane II LLC, a company formed to purchase residential mortgage-backed security (RMBS) assets from AIG subsidiaries.

Because this LLC is consolidated onto the balance sheet of the FRBNY, the loan from the FRBNY to the LLC is not on the balance sheet. To provide details about the loan and other information about the LLC, table 5 in the H.4.1 statistical release provides detail on the principal accounts of Maiden Lane II.

Fed actions Nov 25, 2008

On November 25, 2008, the FRBNY began extending credit to Maiden Lane III LLC, a company formed to purchase multi-sector collateralized debt obligations (CDOs) on which the Financial Products group of AIG had written credit default swap and similar contracts. Because this LLC is consolidated onto the balance sheet of the FRBNY, the loan from the FRBNY to the LLC is not on the balance sheet. To provide details about the loan and other information, H.4.1 statistical release table 6 provides detail on the principal accounts of Maiden Lane III.

Fed actions March 2, 2009

On March 2, 2009, the Federal Reserve and the Treasury announced a restructuring of the government's assistance to AIG. Specifically, the government's restructuring was designed to enhance the company's capital and liquidity in order to facilitate the orderly completion of the company's global divestiture program.

American International Group said on Monday that it had reached a revised rescue deal with the U.S. government, warding off for now the prospect of crippling credit rating downgrades.

The new deal is the latest revamp to the rescue package, which had already seen the U.S. Treasury and the Federal Reserve give AIG a commitment for $150 billion (107 billion pounds) in government funds.

Here are the key features:

  • New equity capital commitment: Up to $30 billion equity line from the $700 billion Troubled Asset Relief Program, with a five-year term.
  • Terms of Treasury's $40 billion preferred investment eased: The new deal increases equity content of the preferred stake and reduces the annual cost of servicing dividends by more than $4 billion.
  • ALICO & AIA: Foreign life operations American International Assurance (AIA) and American Life Insurance Co (Alico) will be put in special purpose vehicles. The New York Federal Reserve will get preferred stock in the vehicles in return for a reduction in the outstanding balance by up to $26 billion of its $60 billion credit line.
  • Life insurance securitization: AIG plans to give the Fed securitization notes of up to $8.5 billion representing the embedded value of some U.S. life insurance businesses to further reduce government debt.
  • Credit facility: The total amount available to AIG under the facility will remain at least $25 billion.
  • Interest rate cut: The Libor floor on credit facility to be removed, saving AIG about $1 billion per year.
  • AIU Holdings Inc: A new general insurance holding company with AIG's Commercial Insurance Group, Foreign General unit, and other property and casualty operations to be formed. AIG plans to sell a minority stake in AIU. A source with direct knowledge of the matter told Reuters earlier that up to 20 percent of the business may be sold to public, and over time it could be sold off in its entirety.

AIG's Federal Reserve supervisor Sarah Dahlgren

"...Sarah Dahlgren, a New York Fed banking supervisor dispatched to oversee AIG, endorsed the strategy. She had spent nearly two decades at the New York Fed. But she had no experience in the insurance business and relied on the accounting firm of Ernst & Young for insurance advice.

The Fed largely took a hands-off approach to AIG's insurance operation, partly because it felt that too heavy a government presence could make AIG seem weaker and drive away business.

The dozen Fed staffers under Ms. Dahlgren set up shop in AIG's headquarters in Lower Manhattan and focused on the parts of the company that were bleeding red ink. Special attention was paid to AIG Financial Products, which sold contracts that promised to protect major financial institutions against default on securities backed by subprime mortgages. Those contracts called for AIG to come up with billions of dollars in collateral if the value of the contracts fell, a requirement that nearly sank the firm in September.

Ms. Dahlgren had "observer" status at meetings of the AIG board and its committees, and when asked, she made clear the Fed's view on specific issues that arose. "Everything we do, we do in partnership with the Federal Reserve," Mr. Liddy said at Wednesday's hearing.

For instance, when AIG faced the threat of ratings downgrades, the Fed ultimately talked with rating agencies directly, explaining in late February the new government support that would be announced publicly in early March. The government's move prevented the debilitating downgrade that was feared."

Crisis history

Beginning in 2005, AIG became embroiled in a series of fraud investigations conducted by the Securities and Exchange Commission, U.S. Justice Department, and New York State Attorney General's Office. Greenberg was ousted amid an accounting scandal in February 2005; he is still fighting civil charges being pursued by New York state.[1] [2]

The New York Attorney General's investigation led to a $1.6 billion fine for AIG and criminal charges for some of its executives.[3] Greenberg was succeeded as CEO by Martin J. Sullivan, who had begun his career at AIG as a clerk in its London office in 1970.

On June 15, 2008, after disclosure of financial losses and subsequent to a falling stock price, Sullivan resigned and was replaced by Robert B. Willumstad, Chairman of the AIG Board of Directors since 2006. Willumstad was forced by the US government to step down and was replaced by Edward M. Liddy on September 17, 2008.[4]

Currently the firm is lead by:

  • Harvey Golub, Chairman[5]
  • Robert Benmosche, President and Chief executive officer
  • David L. Herzog, Chief financial officer and EVP

Chronology of September, 2008 liquidity crisis

Link here to Wikipedia's account of these events.

Federal Reserve bailout

On the evening of September 16, 2008, the Federal Reserve Bank's Board of Governors announced that the Federal Reserve Bank of New York had been authorized to create a 24-month credit-liquidity facility from which AIG could draw up to $85 billion.

The loan was collateralized by the assets of AIG, including its non-regulated subsidiaries and the stock of "substantially all" of its regulated subsidiaries, and with an interest rate of 850 basis points over the three-month LIBOR (i.e., LIBOR plus 8.5%).

In exchange for the credit facility, the U.S. government received warrants for a 79.9 percent equity stake in AIG, with the right to suspend the payment of dividends to AIG common and preferred shareholders.(Federal Reserve-Press Release-2008-09-16)

The credit facility was created under the auspices of Section 13(3) of the Federal Reserve Act.[6]

AIG's board of directors announced approval of the loan transaction in a press release the same day. The announcement did not comment on the issuance of a warrant for 79.9% of AIG's equity, but the AIG 8-K filing of September 18, 2008, reporting the transaction to the Securities and Exchange Commission stated that a warrant for 79.9% of AIG shares had been issued to the Board of Governors of the Federal Reserve. [7] [8] [9]

AIG drew down US$ 28 billion of the credit-liquidity facility on September 17, 2008.[10]

On September 22, 2008, [11] AIG was removed from the Dow Jones Industrial Average.

An additional $37.8 billion loan was extended in October. As of October 24, [12] AIG had drawn a total of $90.3 billion from the emergency loan, of a total $122.8 billion.

The constitutionality of the portion of the “Emergency Economic Stabilization Act of 2008”, which appropriated $40 billion in taxpayer money to fund and financially support AIG and resulted in the federal government’s majority ownership interest in AIG, is currently pending ruling in the Federal District Court.(Kevin Murray v. Treasury Secretary Timothy Geithner and the Federal Reserve Board represented by The Department of Justice).

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