2008 0716 - AIG Board of Directors Minutes - 11p

• (p3) - Mr. Willumstad advised the Board that the early snapshot of the second quarter focused on liquidity issues, potential asset sales and transactions and expense reduction.
• (p4) - With respect to estimated results, Mr. Bensinger reported that credit markets declined sharply again in late June into July, irrespective of quality, so that the AIGFP valuation adjustment caused an overall operating loss. He added that partnership income showed a very noticeable decline, United Guaranty operating losses increased significantly, prior year development of loss reserves is adverse, largely for 2002 and prior years, and the general deterioration in pricing both domestically and overseas in general insurance is becoming more acute.
• (p4) - Mr. Bensinger next provided an overview of securities lending activities, emphasizing key points: the change in the market with collateral received declining from·102 percent and the differential between the market value of assets in the securities lending pool and the settlement value of the liability is widening. He reviewed the borrowers using the program, and indicated that they continue to rol'I their positions. In response to inquiries from Board members, Mr. Bensinger explained the way in which the program works, liquidity issues with the program and the difficulties with exiting the business. He added that if overall market conditions become reflective of the move to provide less than 102 percent collateral pushed by certain of AlG's counterparties, the program may need to change accordingly.
• (p5) - Mr. Gender detailed the use to date of the proceeds from the capital raising activities. He said that $12.3 billion remained at the parent level at that date with $3.4 billion having previously been provided to AlG Financial Products Corp. and an additional $1.3 billion to be funded that day. Mr. Gender advised the Board that Treasury forecasts cash flows on an ongoing basis, and the additional need that day resulted from Fidelity not rolling a $1 billion note. He explained that AIGFP's liquidity risks stem from its debt obligations and the obligations to post collateral arising in connection with pricing declines in the credit default swaps and rating downgrades in connection with the guaranteed investment agreements. In response to a Director inquiry, Mr. Gender said that AIGFP negotiates with every counterparty on valuation and the proper amount of collateral.
• (p5) - Mr. Gender outlined AIG's most significant areas of significant liquidity risk: commercial paper programs, AIGFP, global securities lending and ALICO money market products.
  • He said that AIG's commercial paper programs are all active, with no problems to date, although the market is much more tentative and it is harder to issue on a longer term basis.
  • With respect to securities lending, Mr. Gender said that the assets of the insurance companies are available to provide cash to repay Counterparties.
  • He added that the ALICO money market deposits had historically been run with a significant mismatch in duration, but currently 50 percent of the assets backing the deposits would be liquid within 90 days, and ALICO has the ability, if necessary, to freeze withdrawals if a run were to start.
  •  In response to a Director inquiry, Mr. Gender stated that AIGFP presents the greatest risk, because it is very difficult to predict collateral calls and the market effect of a downgrade in AIG's ratings.
• (p6) - Mr. Schreiber next described:
  • a project known internally as Project Metropolis, which is intended to address AIGFP credit and liquidity issues. He explained that a third party would guarantee certain obligations of AIGFP, so AIGFP would effectively be renting that party's credit ratings.
  • A discussion followed on the potential benefits of membership in the Federal Home loan Bank system by the insurance company subsidiaries, 
  • and the capacity and willingness of third party banks to facilitate access to the Federal Reserve Bank window.
• (p6) - Mr. Schreiber also described types of transactions under consideration to enhance AIG's capital and liquidity positions,
  • such as reinsurance and structured transactions, tracking stocks for various operations, private placements to important financial partners around the world, and new types of securitrzations.
• (p11) - Mr. Willumstad updated the Board on plans for the strategic planning session to be held on September 16th and 17th in the Boardroom at 175 Water Street. He said thata full review of AIG operations is planned, bringing in the senior team to gain an understanding of AIG's strategic position in its various businesses, and the presentations will be fairly detailed and numbers driven.