AIG - Collateral for Federal Reserve Loan

So the -- the type of collateral and the type of
22 risk we were taking in this case or considering taking
23 in this case was fundamentally different because in this
24 case we were going to be forced to rely principally on a
25 judgment about the underlying value of those insurance

1 companies over time.
2 The reason why those, Your Honor, were
3 collateral, valuable collateral, was because they
4 generated a fair amount of earnings and profits over
5 time. And if the company survived and the world didn't
6 fall apart, we thought there was a basis for concluding
7 that they might have enough value in the future, not
8 tomorrow, not in September, but in the future, to allow
9 us to recover the proceeds of any assistance we
10 provided. (p153-154)

2014 1008 -  Starr International Company, Inc. v. The United States - Case 1:11-cv-00779-TCW -  Trial Volume 8 - Geithner - 254p

(p40) 9 And President Geithner actually mentioned that
10 over time, the value of this collateral depended on a
11 variety of factors, including that the management of the
12 insurance companies continue to be adequate and manage
13 the companies appropriately, and there was concern about
14 the effect of the economy on the business generally and
15 on the insurance -- the insurance companies as well.

(p218-219) - 21 And the problem with taking shares of a subsidiary
22 as collateral for a loan made to the parent is that if
23 the parent files in bankruptcy, that customarily will
24 have a deleterious effect on the value of the subs,
25 particularly in a regulated space like insurance and

1 banking.
2 Q. Can you expand upon what? What do you mean? What
3 is the correlation risk concerned with insured
4 subsidiaries?
5 A. Well, you can value an insured subsidiary today,
6 for example, where the parent company is fully operating
7 and not in bankruptcy. Once the company, the parent,
8 goes into bankruptcy, you lose all source of parental
9 support, so with respect to the ability to downstream
10 equity, for example, that goes away.
11 So a bankruptcy of a parent always has an adverse
12 effect on the valuation of subsidiary shares. It can't
13 be good for the subsidiaries. And that is a shorthand
14 summary of correlation risk.

2014 1001 - Starr International Company, Inc. v. The United States - Case 1:11-cv-00779-TCW - Trial Volume 3 - Alvarez, Baxter - 228p