An AIG Timeline, by GAO

The question of who is to blame for the AIG bonuses and its general performance is much in the news. We have an almost Watergatian inquiry: What did they know and when did they know it?

GAO has produced an overview of events, including a timeline, that should be helpful in understanding these complex issues.

The GAO report is Federal Financial Assistance: Preliminary Observations on Assistance Provided to AIG GAO-09-490T, March 18, 2009

This report includes in Appendix I a Timeline of AIG Financial Difficulties Leading Up to Federal Assistance, something that I think is very useful. Here is that timeline.

• July 2008 to August 31, 2008:

• The super senior collateralized debt obligation (CDO) securities protected by American International Group Financial Products’ (AIGFP) super senior credit default swap (CDS) portfolio continued to decline and ratings of CDO securities were downgraded, resulting in AIGFP posting additional $5.9 billion collateral.

• AIG was doing a strategic review of AIG’s businesses and reviewing measures to address the liquidity concerns in AIG’s securities lending portfolio and to address the ongoing collateral calls regarding AIGFP’s super senior multi-sector CDS portfolio, which as of July 31, 2008,
totaled $16.1 billion.

• Early September 2008: These collateral postings and securities lending requirements were placing increasing stress on the AIG parent company’s liquidity.

• September 8 to September 12, 2008: AIG’s common stock price declined from $22.76 to $12.14, making it unlikely that AIG would be able to raise the large amounts of capital that would be necessary if AIG’s long-term debt ratings were downgraded.

• September 11 or 12, 2008: AIG approached the Federal Reserve with two concerns:

• AIG had significant losses in the first two quarters of calendar year 2008, primarily attributable to AIGFP and decreasing values in their securities, leading AIG to request to place large amounts of cash collateral.

• AIG’s investments in mortgage-backed securities (MBS) were very illiquid. Consequently, AIG would not be able to liquidate its assets to meet the demands of counterparties. Since AIG is not regulated by the Federal Reserve, the agency was not aware of the company’s financial
problems.

Also, because AIG was facing a downgrade in its credit rating the next week, it needed immediate liquidity help. Over the weekend, the Federal Reserve was examining AIG to determine if it was systemically important, meaning that its failure would have a broader effect on the economy. This
was the same weekend that Lehman Brothers went into bankruptcy.

• September 12, 2008:

• Standard & Poor’s (S&P), placed AIG on CreditWatch with negative implications and noted that upon completion of its review, the agency could affirm the AIG parent company’s current rating of AA- or lower the rating by one to three notches.

• AIG’s subsidiaries, International Lease Finance Corporation (ILFC) and American General Finance, Inc. (AGF), were unable to replace all of their maturing commercial paper with new issuances of commercial paper. As a result, AIG advanced loans to these subsidiaries to meet their commercial paper obligations.

• September 13 and 14, 2008: AIG accelerated the process of attempting to raise additional capital and discussed potential capital injections and other liquidity measures with private equity firms, sovereign wealth funds and other potential investors. AIG also met with Blackstone Advisory Services
LP to discuss possible options.

• September 15, 2008:

• AIG was again unable to access the commercial paper market for its primary commercial paper programs, AIG Funding, ILFC and AGF. AIG advanced loans to ILFC and AGF to meet their funding obligations.

• AIG met with representatives of Goldman, Sachs & Co., J.P. Morgan, and the Federal Reserve Bank of New York (FRBNY) to discuss the creation of a $75 billion secured lending facility.

• S&P, Moody’s, and Fitch Ratings (Fitch) downgraded AIG’s long-term debt rating. As a result, AIGFP estimated that it needed in excess of $20 billion to fund additional collateral demands and transaction termination payments in a short period of time.

• September 15, 2008: AIG’s common stock price fell to $4.76 per share.

• September 16, 2008:

• AIG’s strategy to obtain private financing failed. Goldman, Sachs & Co. and J.P. Morgan were unable to syndicate a lending facility. Consequently, counterparties were withholding payments from AIG, and AIG was unable to borrow in the short-term lending markets.

• To provide liquidity, both ILFC and AGF drew down on their existing revolving credit facilities, resulting in borrowings of approximately $6.5 billion and $4.6 billion, respectively.

• AIG was notified by its insurance regulators that it would no longer be permitted to borrow funds from its insurance company subsidiaries under a revolving credit facility that AIG maintained with certain of its insurance subsidiaries acting as lenders. Subsequently, the insurance regulators required AIG to repay any outstanding loans under that facility and to terminate it.

• The Federal Reserve extended the facility to AIG to prevent systemic failure. AIG had no viable private sector solution to its liquidity issues. It received the terms of a secured lending agreement that FRBNY was prepared to provide. AIG estimated that it had an immediate need for cash in excess of its available liquid resources. That night, AIG’s Board of Directors approved borrowing from FRBNY based on a term sheet that set forth the terms of the secured credit agreement and related equity participation.

• September 22, 2008:

• The inter-company facility was terminated effective September 22, 2008.

• AIG entered into the Fed Credit Agreement in the form of a two-year secured loan.

Here is GAO’s summary of its research into this issue.

Federal financial assistance to AIG, both from the Federal Reserve and Federal Reserve Bank of New York through their authority to lend funds to critical nonbank institutions and from Treasury’s Troubled Asset Relief Program (TARP), has focused on preventing systemic risk that could result from a rating downgrade or failure of AIG. The goal of the assistance and subsequent restructurings was to prevent systemic risk from the failure of AIG by allowing AIG to sell assets and restructure its operations in an orderly manner.

The Federal Reserve has been monitoring AIG’s operations since September, and Treasury has begun to more actively monitor AIG’s operations as well. Although the ongoing federal assistance has prevented further downgrades in AIG’s credit rating, AIG has had mixed success in fulfilling its other restructuring plans, such as terminating its securities lending program, selling assets, and unwinding its AIG Financial Products portfolio.

For example, AIG has made efforts at selling certain business units and has begun an overall restructuring, but market and other conditions have prevented significant asset sales, and most restructuring efforts are still under way. AIG faces ongoing challenges from the continued overall economic deterioration and tight credit markets. AIG’s ability to repay its obligations to the federal government has also been impaired by its deteriorating operations, inability to sell its assets and further declines in its assets. All of these issues will continue to adversely impact AIG’s ability to repay its government assistance.

As part of GAO’s ongoing work related to the federal assistance provided to AIG, GAO is reviewing the potential impact of the assistance on the commercial property/casualty insurance market. Specifically, GAO is reviewing potential effects of the assistance on AIG’s pricing practices. According to some of AIG’s competitors, federal assistance to AIG has allowed AIG’s commercial property/casualty insurance companies to offer coverage at prices that are inadequate for the risk involved.

Conversely, state insurance regulators, insurance brokers, and insurance buyers said that while AIG may be pricing somewhat more aggressively than in the past in order to retain business in light of damage to the parent company’s reputation, they did not see indications that this pricing was inadequate or out of line with previous AIG pricing practices. Moreover, some have noted that AIG has lost business because of the problems encountered by its parent company. As GAO evaluates these issues, it faces a number of challenges associated with determining the adequacy of commercial property/casualty premium rates, especially in the short term. These challenges include the unique, negotiated nature of many commercial insurance policies, the subjective assumptions involved in determining premiums, and the fact that for some lines of commercial insurance it can take several years to determine if premiums charged were adequate for the related losses.

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