AIG - Securities Lending - Run

  • At the same time, the financial crisis and concerns about AIG’s solvency prompted AIG’s securities lending counterparties to demand the return of additional tens of billions of dollars of cash collateral.

Case 1:11-cv-00779-TCW Document 87-7 Filed 01/23/13 Page 9 of 28 - Starr

  • 3.7 AIG’s securities lending operations faced the same “run on the bank” pressures as many other financial firms.
  • (a) Bernanke: On “September 16, AIG, the largest multidimensional insurance company in the world, which had been selling credit insurance, came under enormous attack from people demanding cash either through margin requirements or through short-term funding,” (PTX 708 at 80), which was part of a pattern of :
    • “Whenever there was doubt about a firm, as in a standard bank run, the investors, the lenders, and the counterparties would all pull back their money quickly for the same reason that depositors would pull their money out of a bank that was thought to be having trouble” (Id. at 79).  (p10)

Document 281-1 - Plaintiffs’ Corrected Proposed Findings of Fact - 99p

Starr International Company, Inc. v. The United States - Case 1:11-cv-00779-TCW

  • Four days later, Goldman Sachs issued a *report to clients that echoed much of Coffey’s internal analysis.
  • The report, “Don’t Buy AIG: Potential Downgrades, Capital Raise on the Horizon,” warned that “we foresee $9–$20 billion in economic losses from [AIG’s credit default swap] book, which could result in larger cash outlays . . .  resulting in a significant shift in the risk quality of AIG’s assets. . . .
  • Put simply, we have seen this credit overhang story before with another stock in our coverage universe, and foresee outcomes similar in nature but on a much larger scale.”

2011 01 - FCIC - Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States - 663p

  • *2008 0819 - FCIC - Goldman Sachs / FRB emails - Don’t Buy AIG: Potential Downgrades, Capital Raise on the Horizon - 20p
  • 2008 0819 - FCIC - FRB Email re Goldman Sachs Report on AIG - Goldman Sachs / FRB emails - Don’t Buy AIG: Potential Downgrades, Capital Raise on the Horizon - 20p
    • 2008 0819 - FRB emails - Coffey
      • Fyi - the attached report from GS hits on many of the key point confronting AIG. Title is "Don't buy AIG"...
    • Goldman Sachs / FRB emails - Don’t Buy AIG: Potential Downgrades, Capital Raise on the Horizon
      • (p7) - (6) AIG could be forced to repay positions in its Guaranteed Investment Agreements "GIAs") book:
        • certain downgrades of AIG's debt ratings could force the firm to post collateral or repay its positions.
        • While AIG discloses and quantifies this incremental amount of collateral (aggregated for both the GIA and "financial derivative transactions"), it does not disclose the amount of assets currently under management in this book.
        • Thus, there is a specific risk that AlG's invested assets are under water relative to the book value of the assets, and thus deficient in fair value relative to the obligation to the municipalities.
        • If AIG has to terminate such liabilities without holding the assets to recovery, it could result in further realized investment losses.
          • Alternatively, there is the chance that the company could repay such liabilities with more liquid securities or cash, but without the detail as to how much in GIA assets and liabilities are currently on AIG's books, we cannot assess the likelihood of either scenario.
        • We note that the risk associated with this business is reminiscent of the securities lending misstep (see Securities Lending subsection below).
      • (p14) - Securities Lending: Still a problem
        • AIG, like many other insurance companies, lends out a portion of large security holdings to various investors and financial institutions.
        • In return, AIG receives collateral from counterparties, which it invests in various asset classes to earn a spread.
        • In an effort to increase returns, the duration of these assets often exceeds that of the liabilities because many companies choose to renew their contracts and roll over the extended dates.
        • However, due to AIG's aggressive investment strategy into riskier classes, the current market value of the assets stood at $59.5 billion as compared with liabilities of $75.1 billion.
        • Exhibit 10 shows the distribution of the assets and their respective credit ratings.
        • As a result of the shortfall in the market value of assets relative to liabilities, during the quarter, AIG agreed to "deposit into the securities pool an amount equal to the investment losses realized by the pool in connection with sales of impaired securities, up to $5 billion" (per SEC filings).

    • Exhibit 10: Securities lending: asset quality still a concern - $ millions

    •                                                            AAA         AA            A      BBB/Not Rated  Short-Term  Total
      Corporate debt                                   696         7,407     3,557    1,245                                     12,905
      MBS, ABS, and collateralized             30,933      3,170       437     1.640                                    36,180
      Cash / short term investments              --             --           --          --                     10,445       10,445
      Total                                                    31,629    10,577    3,994      2,885                 10,445       59,530