Ongoing Government Assistance for
American International Group (AIG)
Baird Webel
Specialist in Financial Economics
March 18, 2010
Congressional Research Service
7-5700
www.crs.gov
R40438
CRS Report for Congress
P
repared for Members and Committees of Congress
Ongoing Government Assistance for American International Group (AIG)
Summary
In the beginning of 2008, American International Group (AIG) was one of the world’s largest
insurers, generally considered to be financially sound with an AA credit rating. By the end of the
year, it had undergone a near bankruptcy and had been forced to seek up to $173.4 billion in
financial assistance from the U.S. government. The CEO had been replaced at the government’s
behest, executive compensation was under limits, and shareholders in AIG had been nearly wiped
out as their equity was diluted by a new 79.9% stake held by the government. The government
assistance to AIG has been largely ad hoc. The overarching AIG holding company was regulated
by the Office of Thrift Supervision (OTS), but because the company was primarily an insurer, it
was largely outside of the normal Federal Reserve (Fed) facilities that lend to thrifts facing
liquidity difficulties. AIG was also outside of the normal receivership provisions that apply to
banking institutions. Had AIG not been effectively deemed “too big to fail” and given assistance
by the government, bankruptcy seemed a near certainty in September 2008.
The losses that led to AIG’s essential failure resulted largely from two sources: the state-regulated
AIG insurance subsidiaries’ securities lending program and the AIG Financial Products (AIGFP)
subsidiary, a largely unregulated subsidiary that specialized in financial derivatives. The
transactions that led to the immediate losses were dealt with relatively quickly in 2008, albeit
with significant outlay of government funds. Although the securities lending program was
relatively straightforward to discontinue, the AIGFP derivative operations extended well beyond
the transactions that caused the immediate losses and are taking longer to wind down. The overall
AIGFP derivative portfolio remains significant, as AIG reported approximately $940.7 billion in
notional net value of derivatives at the end of 2009.
The government assistance to AIG began with an $85 billion loan from the Fed in September
2008. This loan was on relatively onerous terms with a high interest rate and required a handover
of 79.9% of the equity in AIG to the government. As AIG’s financial position weakened, several
rounds of additional funding were provided to AIG and the terms were loosened to some degree.
The current major restructuring of the assistance to AIG was announced in March 2009 and
comprises (1) $47.3 billion (of up to $68.8 billion) in capital injections through preferred share
purchases by the Treasury; (2) $25.3 billion (of up to $35 billion) in extraordinary loans from the
Fed; (3) $24.8 billion in Fed loans retired by equity interests provided to the government by AIG;
(4) $2.3 billion in Fed loans through the Commercial Paper Funding Facility; and (5) $43.8
billion (of up to $52.5 billion) in Fed loans for troubled asset purchases—assets that are now
owned by the government.
Congress has held several hearings specifically focusing on the intervention in AIG.
Congressional attention and anger has been focused on perceived corporate profligacy,
particularly bonuses for AIG employees. Bills that would place specific taxes on or otherwise
restrict such bonuses include H.R. 1586, passed by the House on March 19, 2009; S. 651,
introduced on the same day; and H.R. 1664, passed by the House on April 1, 2009.
The future of AIG and the ultimate government cost of the intervention are unclear. Recently
announced asset sales by AIG may repay all of the Fed loans, but this would leave the Troubled
Asset Relief Program (TARP) preferred shares outstanding. Recent estimates of the losses on the
TARP funding range from $9 billion to $49 billion.
This report will be updated as warranted by financial and legislative events.
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Ongoing Government Assistance for American International Group (AIG)
Contents
Introduction ................................................................................................................................ 1
Current Status of Government Assistance to AIG......................................................................... 2
Ultimate Cost of Assistance to AIG? ........................................................................................... 3
Legal Authority for Assistance to AIG ......................................................................................... 4
Sources of AIG Losses ................................................................................................................ 4
AIG Financial Products......................................................................................................... 4
AIG Securities Lending Program........................................................................................... 5
Forms of Assistance for AIG ....................................................................................................... 6
Initial Loan ........................................................................................................................... 6
Securities Borrowing Facility ................................................................................................ 7
Commercial Paper Funding Facility ...................................................................................... 7
November 10, 2008, Revision of Assistance to AIG............................................................... 8
Loan Restructuring.......................................................................................................... 8
Troubled Asset Relief Program Direct Capital Injection................................................... 8
Purchase of Troubled Assets............................................................................................ 9
March 2, 2009, Revision of Assistance to AIG ..................................................................... 11
Who Has Benefited from Assistance to AIG? ............................................................................ 12
Congressional Action ................................................................................................................ 13
Hearings ............................................................................................................................. 13
Legislation .......................................................................................................................... 14
H.R. 1586 ..................................................................................................................... 14
H.Con.Res. 76............................................................................................................... 14
S. 651 ........................................................................................................................... 14
H.R. 1664 ..................................................................................................................... 14
H.Res. 251 .................................................................................................................... 15
Tables
Table 1. Summary of Assistance to AIG ...................................................................................... 3
Table 2. Congressional Hearings Focusing on AIG .................................................................... 13
Contacts
Author Contact Information ...................................................................................................... 15
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Ongoing Government Assistance for American International Group (AIG)
Introduction
In 2007, American International Group (AIG) was the fifth-largest insurer in the world with $110
billion overall revenues. In the United States, it ranked second in property/casualty insurance
premiums ($37.7 billion/7.5% market share) and first in life insurance premiums ($53.0
billion/8.9%). For particular lines, AIG ranked first in surplus lines, ninth in private passenger
auto, first in overall commercial lines (fifth in commercial auto), and fourth in mortgage guaranty.
It was outside the top 10 in homeowners insurance.1 According to the National Association of
Insurance Commissioners, AIG had more than 70 state-regulated insurance subsidiaries in the
United States, with more than 175 non-insurance or foreign entities under the general holding
company.
Although AIG is generally identified as an insurance company, the parent entity of the various
subsidiaries is a thrift holding company and thus falls under the general supervision of the Office
of Thrift Supervision (OTS). The individual regulation of the subsidiaries is done according to the
function of that subsidiary—for example, insurance subsidiaries are regulated by state insurance
regulators, and bank subsidiaries are regulated by the appropriate banking regulator. This
functional regulatory structure was enacted in the Gramm-Leach-Bliley Act of 1999.2
In the fall of 2008, facing losses on various operations, AIG experienced a significant decline in
its stock price and downgrades from the major credit rating agencies.3 These downgrades led to
immediate demands for significant amounts of collateral (approximately $14 billion to $15 billion
in collateral payments, according to contemporary press reports).4 As financial demands on the
company mounted, bankruptcy appeared a possibility, as occurred with Lehman Brothers. Fears
about the spillover effects from such a failure brought calls for government action to avert such a
failure. Many feared that AIG was “too big to fail”5 due to the potential for widespread disruption
to financial markets resulting from such a failure. The New York Insurance Superintendent,
primary regulator of many of the AIG insurance subsidiaries, led an effort to allow access by the
parent holding company and other subsidiaries of up to $20 billion in cash from AIG’s insurance
subsidiaries, which were perceived as solvent and relatively liquid. Ultimately, this transfer did
not take place; instead, the Federal Reserve (Fed) approved an up to $85 billion loan in
September 2008, as detailed below.
1 Statistics from The I.I.I. Insurance Fact Book 2009, (New York: Insurance Information Institute, 2009).
2 P.L. 106-102, 113 Stat. 1338.
3 In 2005, amid accounting irregularities that ultimately led to the resignation of then-CEO Maurice Greenberg, AIG
was downgraded by S&P from AAA to AA+. Further downgrades followed in June 2005 and May 2008. In September
2008, S&P downgraded AIG to A-.
4 See, for example, “U.S. to Take Over AIG in $85 Billion Bailout; Central Banks Inject Cash as Credit Dries Up,”
Wall Street Journal, September 17, 2008, pp. A1-A6.
5 Institutions that are too big to fail are ones that are deemed to be big enough that their failure could create systemic
risk, the risk that the financial system as a whole would cease to function smoothly. See CRS Report R40877,
Financial Regulatory Reform: Systemic Risk and the Federal Reserve, by Marc Labonte and CRS Report R40417,
Macroprudential Oversight: Monitoring Systemic Risk in the Financial System, by Darryl E. Getter for more
information on systemic risk and “too big to fail.”
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Current Status of Government Assistance to AIG
As AIG’s financial position weakened after September, several rounds of additional funding were
provided to AIG and the terms were loosened to some degree (see “Forms of Assistance for AIG”
below for more complete discussion of the changes to AIG’s assistance). The latest major
restructuring of the assistance to AIG was announced in March 2009. As currently structured, the
assistance to AIG comprises
• $47.5 billion (of up to $68.8 billion) in capital injections through preferred share
purchases by the Treasury’s Troubled Asset Relief Program (TARP);6
• $24.8 billion (of up to $35 billion) in extraordinary loans from the Fed;7
• $25 billion in Fed loans retired by equity interests in AIG subsidiaries AIA Group
Limited (AIA) and American Life Insurance Company (ALICO);8
• $2.3 billion in Fed loans through the Commercial Paper Funding Facility
(CPFF);9 and
• $43.8 billion (of up to $52.5 billion) in Fed loans for troubled asset purchases—
assets that are now owned by the government.10
On March 1, 2010, AIG announced that an agreement had been reached to sell AIA to the
Prudential PLC11 for approximately $35.5 billion, which includes $25 billion in cash and $10.5
billion in securities. Assuming completion of this sale, the Fed would receive approximately $16
billion immediately because of its previous equity stake in AIA. AIG indicated that the remaining
$9 billion in cash and the ultimate proceeds of the securities would be used to pay down some of
the outstanding loan from the Fed.12
On March 8, 2010, AIG announced that an agreement had been reached to sell ALICO to MetLife
for approximately $15.5 billion, including $6.8 billion in cash and $8.7 billion in securities.
Assuming completion of this sale, the Fed would likely receive all of the cash as well as an
additional $2.2 billion in securities because of its previous $9 billion equity stake in ALICO. The
6 U.S. Treasury, TARP Monthly 105(a) Report—February 2010, March 10, 2010, pp.12-13, available at
http://financialstability.gov/latest/reportsanddocs.html.
7 Federal Reserve H.4.1 data release, Factors Affecting Reserve Balances of Depository Institutions, March 11, 2010,
Table 1, available at http://www.federalreserve.gov/releases/h41/.
8 Federal Reserve H.4.1 data release, Factors Affecting Reserve Balances of Depository Institutions, March 11, 2010,
Table 9, available at http://www.federalreserve.gov/releases/h41/.
9 American International Group, Inc., “Aig Reports Fourth Quarter and Full Year 2009 Results”, press release,
February 26, 2010, p. 5, available at http://phx.corporate-ir.net/External.File?item=
UGFyZW50SUQ9MzM3MjR8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1. The CPFF was closed to further borrowing on
February 1, 2010.
10 Federal Reserve H.4.1 data release, Factors Affecting Reserve Balances of Depository Institutions, March 11, 2010,
Tables 5 and 6, available at http://www.federalreserve.gov/releases/h41/.
11 Prudential PLC is a British insurer and not related to the large U.S. insurer Prudential Financial.
12 AIG, “AIG to Sell AIA to Prudential for Approximately $35.5 Billion,” press release, March 1, 2010,
http://www.aigcorporate.com/newsroom/index.html.
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remaining securities would be sold over time with the proceeds being used to pay down a portion
of the outstanding loan from the Fed.13
These announced asset sales will likely take several months to complete and will not be reflected
in the announced totals from government assistance to AIG until completion. A summary of
current amounts outstanding is presented in Table 1.
Table 1. Summary of Assistance to AIG
Maximum Amount of
Recompense to the
Current Government
Latest Reported
Government/Value of
Program
Assistance
Amount Outstanding
Current Holdings
TARP Share Purchase
$69.8 billion
$47.5 billion
10% dividend; warrants for 2%
(Feb. 28, 2010)
of AIG equity
Federal Reserve Loan
$35 billion
$24.8 billion
3 month LIBOR+3%; 77.9% of
(Mar. 10, 2010)
AIG equity
Retired Federal Reserve
Loan
$25 billion
$25.3 billion
(Mar. 10, 2010)
$25.3 billion
Commercial Paper
three-month overnight index
Funding Facility
$2.3 billion
$2.3 billion
(Feb. 17, 2010)
swap (OIS) rate+1%; OIS+3%
Maiden Lane II
$19.5 billion
$15.3 billion
$15.6 billion
(Mar. 10, 2010)
(Dec. 31, 2009)
Maiden Lane III
$24.3 billion
$17.3 billion
$22.4 billion
(Mar. 10, 2010)
(Dec. 31, 2009)
Source: Federal Reserve, U.S. Treasury, AIG 10-Q and 10-K Statements.
Notes: Dividend paid on shares under TARP is subject to the AIG board approval. Outstanding amounts for
Federal Reserve loans and LLCs include interest and dividends due. The loan amounts to Maiden Lane II and III
are from these entities to the Fed, and are not to be repaid by AIG.
Ultimate Cost of Assistance to AIG?
Because the assistance to AIG has come in the form of asset purchases and loans, which have
resulted in equity stakes in AIG, the ultimate cost to the government of the AIG rescue will
depend critically on the future value of these assets. The Federal Reserve assistance to AIG
appears to be on track to be repaid without loss to the Fed. If the sales of ALICO and AIA go
through as currently reported, the proceeds of these sales would be approximately enough to
repay the extraordinary loans made by the Fed. The current estimated values of the Maiden Lane
II and III LLCs are also approximately sufficient to repay the loans to the Fed, and the CPFF
amount has been dropping and will be repaid shortly, as the program’s term has expired.
If the Fed loans are indeed repaid, the ultimate cost of the intervention in AIG would largely be
determined by the outcome of the outstanding assistance under TARP, currently approximately
$45.3 billion, and the value of the approximately 80% equity interest in the company held by the
government. Current estimates of the value of the TARP preferred shares are for significant losses
13 AIG, “AIG to Sell ALICO to MetLife for Approximately $15.5 Billion,” press release, March 8, 2010,
http://www.aigcorporate.com/newsroom/index.html.
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on these instruments, although precise values vary significantly. As of September 30, 2009, the
Treasury estimated that the value of its holdings of TARP preferred shares was only $13.2 billion
on the then-outstanding balance of $43.2 billion. In January 2010, the Congressional Budget
Office estimated a net cost of $9 billion for the TARP assistance to AIG, whereas the Office of
Management and Budget estimated a net cost of $49.9 billion.
The value of the government common equity interests in AIG is equally uncertain. As of March 5,
2009, the market value of the shares being traded on the open market was approximately $3.8
billion. If the approximately 80% of the company held by the government is valued equally to the
20% that is trading, the government’s common equity interests would be worth approximately
$15 billion. It should be noted that a government move to sell its equity interest would likely have
a significant impact on AIG’s share price.
Legal Authority for Assistance to AIG
According to the Fed, its assistance to AIG is authorized under Section 13(3) of the Federal
Reserve Act,14 the same emergency authorization used for numerous other Fed actions in the
ongoing financial crisis. This emergency authorization was needed because the Federal Reserve
cannot normally lend to a financial firm that is neither a depository institution nor a primary
dealer. Following amendments passed in 2008, the Fed is required to report on emergency loans
under Section 13(3).15
Treasury assistance to AIG has occurred under Section 101 of the Emergency Economic
Stabilization Act (EESA),16 which authorizes the purchase of “troubled assets” by the Treasury.
Part (B) of the act’s definition of “troubled assets” defines such assets as “any other financial
instrument that the Secretary, after consultation with the Chairman of the Board of Governors of
the Federal Reserve System, determines the purchase of which is necessary to promote financial
market stability.” Treasury is required to report on its transactions under the EESA.17
Sources of AIG Losses
AIG, as most financial institutions, suffered losses on a wide variety of financial instruments
because of the widespread market downturn. The exceptional losses resulting in essential failure
of AIG arose primarily from two sources: the derivative activities of the AIG Financial Products
(AIGFP) subsidiary and the securities lending activities managed by AIG Investments with
securities largely from the AIG insurance subsidiaries.
AIG Financial Products
The AIGFP subsidiary is headquartered in Connecticut with major operations in London.
According to AIG’s website, it was “founded in 1987 as one of the first companies in the United
14 12 U.S.C. 343.
15 Section 13(3) reports can be found at http://www.federalreserve.gov/monetarypolicy/bst_reportsresources.htm.
16 12 U.S.C. 5211.
17 TARP reports can be found at http://financialstability.gov/latest/reportsanddocs.html.
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States focused principally on OTC [over the counter] derivatives markets.”18 In recent years,
AIGFP began writing credit default swaps (CDS), particularly on mortgage-related securities.
CDS can act essentially as insurance policies on securities, typically requiring the company
selling the CDS to pay off the claims on these CDS if there is a default or specified credit event
involving the security. 19 AIGFP’s portfolio of CDS at the end of 2007 had a notional value of
approximately $500 billion, including around $60 billion in CDS on securities linked to subprime
loans. By August of 2008, approximately 64% of the subprime-linked securities backed by AIG
had been downgraded and six were in default.20
As over-the-counter derivatives, CDS can take any form desired by the two parties writing the
contracts in question. In typical CDS contracts, collateral requirements are placed on CDS sellers
such that, even before default occurs, the seller may be required to post cash collateral as either
the seller’s financial condition weakens or the likelihood of default increases. AIG was forced to
post increasing collateral on the CDS written by AIGFP. These collateral calls were an important
factor driving the need for a rescue in September 2008, and a primary motivation for the Fed’s
creation of the Maiden Lane III Limited Liability Corporation (LLC) in the November 2008
restructuring of the AIG intervention (see “Collateralized Debt Obligations/Maiden Lane III”
below for more details on these interventions).
AIG Securities Lending Program
Securities lending is a not uncommon practice where the holder of a security agrees to lend a
security to another party. 21 Such transactions are, like CDS, done over the counter rather than on
exchanges, and thus can take almost any form desired by the two parties. Typically, the borrower
of the security provides some form of collateral, often cash, which the lender invests to further
profit from the transaction. The timing aspects of the transactions, such as when and how loaned
securities are returned, are up to the contract specifics negotiated by the two parties.
Although managed centrally by AIG Investments, the securities used in AIG’s securities lending
originated primarily from its state-regulated insurance subsidiaries. As of June 30, 2008, 71% of
the loaned securities came from AIG’s U.S. life insurers and retirement services and 4% came
from AIG’s U.S. property/casualty insurers. In return for lending securities, AIG typically
received cash collateral worth between 100% and 102% of the loaned securities and then invested
this cash until the loaned securities were returned, at which point the cash collateral was to be
returned. In mid-2008, AIG’s total liability for the return of securities lending collateral equaled
$75.1 billion. The market value of the investments made by AIG with this collateral (largely in
mortgage-backed securities) totaled only $59.5 billion.22 As AIG suffered downgrades and
increased market skepticism during the fall of 2008, increasing numbers of AIG’s counterparties
18 See http://www.aig.com/AIG-Financial-Products-Corp_20_20258.html.
19 For more information on CDS see CRS Report RS22932, Credit Default Swaps: Frequently Asked Questions, by
Edward V. Murphy and Rena S. Miller.
20 For examples, see “Goldman, Merrill Collect Billions after Fed’s AIG Bailout Loans,” Bloomberg, available at
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aTzTYtlNHSG8 and “Behind Insurer’s Crisis, Blind
Eye to a Web of Risk,” New York Times, September 27, p. A1.
21 The International Securities Lending Association estimates that the global amount of loaned securities is greater than
1 trillion pounds (approximately $1.4 trillion).
22 Statistics from American International Group, Inc., Form 10-Q, for the quarterly period ending June 30, 2008, pp.
111-112, available at http://media.corporate-ir.net/media_files/irol/76/76115/reports/Q210Q.pdf.
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in securities lending agreements returned the original securities and expected the return of their
cash collateral. This demand for cash led to the Securities Borrowing Facility, announced by the
Fed on October 8, 2008, and the creation of the Maiden Lane II LLC in November 2008, as
detailed below in “Residential Mortgage-Backed Securities/Maiden Lane II.”
Forms of Assistance for AIG
Initial Loan
On September 16, 2008, the Fed announced, after consultation with the Treasury Department, that
it would lend up to $85 billion to AIG over the next two years. Drawing from the loan facility
would only occur at the discretion of the Fed. A new CEO was installed after the initial
intervention and Fed staff was put on site with the company to oversee operations. The interest
rate on the funds drawn from the Fed was 8.5 percentage points above the London Interbank
Offered Rate (LIBOR), a rate that banks charge to lend to each other. AIG also had to pay a flat
8.5% interest rate on any funds that it is does not draw from the facility. The government received
warrants that, if exercised, would give the government a 79.9% ownership stake in AIG. Three
independent trustees were to be named by the Fed to oversee the firm for the duration of the loan.
The trustees for the AIG Credit Trust were announced on January 16, 2009.23
This lending facility (and its successors) is secured by the assets of AIG’s holding company and
non-regulated subsidiaries.24 In other words, the Fed could seize AIG’s assets if AIG fails to
honor the terms of the loan. This reduces the risk that the Fed and the taxpayers would suffer a
loss. The risk still remains that if AIG turns out to be insolvent, its assets may be insufficient to
cover the amount it had borrowed from the Fed.25
On September 18, the Fed announced that it had initially lent $28 billion of the $85 billion
possible. This amount grew to approximately $61 billion on November 5, shortly before the
restructuring of the loan discussed below in “Loan Restructuring.”26
23 See http://www.newyorkfed.org/newsevents/news/markets/2009/an090116.html.
24 The regulated subsidiaries are primarily the state-chartered insurance subsidiaries. Thus, if AIG were to default on
the loan, the Fed could seize the insurance subsidiary stock held by the holding company, but not the actual assets held
by the insurance companies.
25 If AIG is indeed too big to fail, however, it is unclear whether its assets could be seized in the event of non-payment
without precipitating system-wide problems.
26 Federal Reserve, “Factors Affecting Reserve Balances,” Statistical Release H.4.1, September 18, 2008. See
http://www.federalreserve.gov/releases/h41/20080918/; and “Report Pursuant to Section 129 of the Emergency
Economic Stabilization Act of 2008: Restructuring of the Government’s Financial Support to the American
International Group, Inc. on November 10, 2008, p. 4. See http://www.federalreserve.gov/monetarypolicy/files/
129aigrestructure.pdf.
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Securities Borrowing Facility27
On October 8, the Fed announced that it was expanding its assistance to AIG by swapping cash
for up to $37.8 billion of AIG’s investment-grade, fixed-income securities. These securities
stemmed from the AIG securities lending program (described above). As some counterparties
stopped participating in the lending program, AIG was forced to incur losses on its securities
lending investments.28 AIG needed liquidity from the Fed to cover these losses and counterparty
withdrawals. This lending facility was to extend for nearly two years, until September 16, 2010,
and advances from the securities borrowing facility to AIG paid an interest rate of 1% over the
average overnight repo rate. As of November 5, 2008, $19.9 billion of the $37.8 billion remained
outstanding.
Although this assistance resembles a typical collateralized loan (the Fed receives assets as
collateral, and the borrower receives cash), the Fed characterized the agreement as a loan of
securities from AIG to the Fed in exchange for cash collateral. It appears the arrangement was
structured this way because New York insurance law prevents AIG from using the securities as
collateral in a loan.29
Commercial Paper Funding Facility
The Commercial Paper Funding Facility (CPFF) was initially announced by the Fed on October
7, 2008, as a measure to restore liquidity in the commercial paper market. Through the CPFF, the
Fed purchases both asset-backed and unsecured commercial paper. Rather than charging an
interest rate, the Fed purchases the paper at a discount based on the three-month overnight index
swap rate. Unsecured paper is discounted by 3%, whereas secured paper is discounted by 1%.
Individual participants in this facility and the amounts accessed are not announced by the Fed.
AIG itself announced that, as of November 5, 2008, it had been authorized to issue up to $20.9
billion of commercial paper to the CPFF and had actually issued approximately $15.3 billion of
this amount. Subsequent downgrades of AIG’s airline leasing subsidiary (ILFC) reduced the
maximum amount AIG could access from the CPFF to $15.2 billion in early January 2009. ILFC
had approximately $1.7 billion outstanding to the CPFF when it was downgraded; this amount
was repaid by January 28, 2009. As of February 17, 2010, the reported total outstanding was $2.3
billion.30 CPFF purchase of commercial paper expired February 1, 2010, with maximum
maturities extending 90 days from this point. Thus, all AIG borrowing from the CPFF must be
repaid by April 30, 2010.
27 Terms detailed by the Federal Reserve in “Report Pursuant to Section 129 of the Emergency Economic Stabilization
Act of 2008: Securities Borrowing Facility for American International Group, Inc.,” available at
http://www.federalreserve.gov/monetarypolicy/files/129aigsecborrowfacility.pdf.
28 Liam Pleven et al, “AIG Bailout Hit By New Cash Woes,” Wall Street Journal, October 9, 2008, p. A1.
29 N.Y. Ins. Law, Sec. 1410.
30 American International Group, Inc., “Aig Reports Fourth Quarter and Full Year 2009 Results”, press release,
February 26, 2010, p. 5, available at http://phx.corporate-ir.net/External.File?item=
UGFyZW50SUQ9MzM3MjR8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1.
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November 10, 2008, Revision of Assistance to AIG
On November 10, 2008, the Federal Reserve and the U.S. Treasury announced a restructuring of
the federal intervention to support AIG. Following the initial loan, some, notably AIG’s former
CEO Maurice Greenberg, criticized the terms as overly harsh, arguing that the loan itself might be
contributing to AIG’s eventual failure as a company. As evidenced by the additional borrowing
after the September 16 loan, AIG had continued to see cash flow out of the company. The revised
agreement points to a fundamental trade-off between making the terms of the assistance
undesirable enough to deter other firms from seeking government assistance and making the
terms of assistance so punitive that they exacerbate the financial problems of the recipient firm. It
also points to the risk that once a firm has been identified as too big to fail, government assistance
to the firm can become open-ended, as the original amounts offered were quickly revised upward.
The revised agreement eased the payment terms for AIG and had three primary parts: (1)
restructuring of the initial $85 billion loan, (2) a $40 billion direct capital injection, and (3) up to
$52.5 billion purchases of troubled assets. Specific details follow. Separately, AIG continued to
access the Fed commercial paper funding facility as described above.
Loan Restructuring
The Fed reduced the $85 billion loan facility to $60 billion, extended the time period to five
years, and eased the financial terms considerably. Specifically, the interest rate on the amount
outstanding was reduced by 5.5 percentage points (to LIBOR plus 3%), and the fee on undrawn
funds was reduced by 7.75 percentage points (to 0.75%).
Troubled Asset Relief Program Direct Capital Injection
Through the Troubled Asset Relief Program (TARP), the Treasury purchased $40 billion in
preferred shares of AIG. In addition to the preferred shares, the Treasury also received warrants
for common shares equal to 2% of the outstanding AIG shares. AIG was the first announced non-
bank to receive TARP funds. The $40 billion in preferred AIG shares held by the Treasury were
slated to pay a 10% dividend per annum, accrued quarterly.31 The amount of shares held in trust
for the benefit of the U.S. Treasury under the previous Fed loan was also reduced to 77.9% so that
the total government equity interest in AIG (trust shares plus warrants) remained 79.9% after the
TARP intervention.
Executive Compensation Restrictions under TARP
By accepting TARP assistance, AIG is subject to the executive compensation standards for their
senior executive officers (SEOs, generally the chief executive officer, the chief financial, and the
three next most highly compensated officials) generally required under Section 111 of EESA. In
addition to these general restrictions, Treasury imposed additional executive compensation
31 Full details of the preferred shares can be found on the Treasury website at http://ustreas.gov/press/releases/reports/
111008aigtermsheet.pdf.
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restrictions on AIG that are more stringent than for other participants in TARP in recognition of
the special assistance received by AIG.32
The TARP executive compensation restrictions were amended and strengthened by the 111th
Congress in the American Recovery and Reinvestment Act of 2009,33 which amended Section 111
of EESA to further limit executive compensation for financial institutions receiving assistance
under that act, including AIG. Among other things, for applicable companies, the new language
requires the adoption of standards by Treasury that
1. prohibit paying certain executives any bonus, retention or incentive
compensation other than certain long-term restricted stock that has a value not
greater than one-third of the total annual compensation of the employee receiving
the stock (the determination of how many executives will be subject to these
limitations depends on the amount of funds received by the TARP recipient);
2. require the recovery of any bonus, retention award or incentive compensation
paid to SEOs and the next 20 most highly compensated employees based on
earnings, revenues, gains or other criteria that are later found to be materially
inaccurate;
3. prohibit any compensation plan that would encourage manipulation of the
reported earnings of the firm to enhance the compensation of any of its
employees;
4. prohibit the provision of “golden parachute” payment to an SEO and the next
five most highly compensated employees for departure from a company for any
reason, except for payments for services performed or benefits accrued; and
5. prohibit any compensation plan that would encourage manipulation of the
reported earnings of the firm to enhance the compensation of any of its
employees.
Although the new Section 111 (b)(1) of the amended EESA indicates that these standards are to
apply to all TARP recipients until they repay TARP funding, later language (Section
111(b)(3)(iii)) specifically allows bonuses required to be paid under employment contracts
executed before February 11, 2009, to go forward notwithstanding the new requirements.
Treasury published an interim final rule implementing these requirements in June 2009 and the
Special Master for TARP Executive Compensation released several specific determinations for
AIG compensation.34
Purchase of Troubled Assets
Although P.L. 110-343 provided for Treasury purchase of troubled assets under TARP, the
troubled asset purchases related to AIG were done by LLCs created and controlled by the Federal
Reserve. This structure is similar to that created by the Fed to facilitate the purchase of Bear
32 U.S. Treasury, “Treasury to Invest in AIG Restructuring under the Emergency Economic Stabilization Act,” hp-
1261, November 10, 2008, available at http://www.ustreas.gov/press/releases/hp1261.htm.
33 Section 7001 of P.L. 111-5.
34 See “Executive Compensation” on the Treasury Financialstability.gov website available at
http://www.financialstability.gov/about/executivecompensation.html.
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Stearns by JPMorgan Chase in March 2008. There are two LLCs set up for AIG—Maiden Lane II
for residential mortgage-backed securities (RMBS) and Maiden Lane III for collateralized debt
obligations (CDO).35
Residential Mortgage-Backed Securities/Maiden Lane II
Under the November 2008 restructuring, the RMBS LLC/Maiden Lane II could receive loans up
to $22.5 billion by the Fed and $1 billion from AIG to purchase RMBS from AIG’s securities
lending portfolio. The previous $37.8 billion securities lending loan facility was repaid and
terminated following the creation of this LLC. The Fed is credited with interest from its loan at a
rate of LIBOR plus 1% for a term of six years, extendable by the Fed. The $1 billion loan from
AIG is credited with interest at a rate of LIBOR plus 3%. The AIG loan, however, is subordinate
to the Fed’s. Any proceeds from Maiden Lane II are to be distributed in the following order: (1)
operating expenses of the LLC, (2) principal due to the Fed, (3) interest due to the Fed, and (4)
deferred payment and interest due to AIG. Should additional funds remain at the liquidation of the
LLC, these remaining funds are to be shared by the Fed and AIG with AIG’s insurance
subsidiaries receiving one-sixth of the value.
The actual amount of Fed loan made to Maiden Lane II was $19.5 billion of the $22.5 billion
maximum. Maiden Lane II purchased RMBS with this amount along with the $1 billion loan
from AIG. The securities purchased had a face value of nearly double the purchase price ($39.3
billion).36 As of February 24, 2010, outstanding loan principal plus interest owed to the Fed was
$15.5 billion; the reported market value of the RMBS portfolio holdings was $15.5 billion as of
December 31, 2009.37
Collateralized Debt Obligations/Maiden Lane III
Under the November 2008 restructuring, the CDO LLC/Maiden Lane III could receive loans up
to $30 billion from the Fed and $5 billion from AIG to purchase CDOs on which AIG has written
credit default swaps. The Fed and AIG are to be credited with interest from the loans at a rate of
LIBOR plus 3% until the LLC is ultimately liquidated. The proceeds from Maiden Lane III are to
be distributed in the following order: (1) operating expenses of the LLC, (2) principal due to the
Fed, (3) interest due to the Fed, and (4) deferred payment and interest due to AIG. Should any
funds remain after this distribution, they are to go two-thirds to the Fed and one-third to AIG.
The actual amount of the Fed loan to Maiden Lane III was $24.3 billion of the $30 billion
maximum, while AIG loaned the LLC $5 billion. In addition to these loans, Maiden Lane III
purchase of CDOs was also funded by approximately $35 billion in cash collateral previously
posted to holders of CDS by AIGFP. In return for the use of this collateral, AIGFP received
approximately $2.5 billion from the LLC. The total par value of CDOs purchased by Maiden
Lane III was approximately $62.1 billion. At the same time that the CDOs were purchased, the
CDS written on these CDOs were terminated, relieving financial pressure on AIG. The
35 The headquarters of the Federal Reserve Bank of New York sits between Maiden Lane and Liberty Street in
downtown New York City.
36 “Maiden Lane Transactions” on the webpage of the Federal Reserve Bank of New York, available at
http://www.newyorkfed.org/markets/maidenlane2.html.
37 Information on Maiden Lane II from the Federal Reserve, “Factors Affecting Reserve Balances,” Statistical Release
H.4.1, February 25, 2010, available at http://www.federalreserve.gov/releases/h41/Current/.
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outstanding loan principal plus interest owed to the Fed was $17.7 billion as of February 24,
2010, whereas the reported market value of the CDO portfolio holdings was $22.4 billion as of
December 31, 2009.38
March 2, 2009, Revision of Assistance to AIG
On March 2, 2009, the Treasury and Fed announced another revision of the financial assistance to
AIG. On the same day, AIG announced a loss of more than $60 billion in the fourth quarter of
2008. In response to the poor results and ongoing financial turmoil, the ratings agencies were
reportedly considering further downgrading AIG, which would most likely have resulted in
further significant cash demands due to collateral calls.39 According to the Treasury, AIG
“continues to face significant challenges, driven by the rapid deterioration in certain financial
markets in the last two months of the year and continued turbulence in the markets generally.”
The revised assistance is intended to “enhance the company’s capital and liquidity in order to
facilitate the orderly completion of the company’s global divestiture program.”40
The announced revised assistance includes the following:
• Exchange of the previous $40 billion in preferred shares purchased through the
TARP program for $41.6 billion in preferred shares that more closely resemble
common equity, thus improving AIG’s financial position. Dividends paid on
these new shares remain at 10%, but will be non-cumulative and only be paid as
declared by AIG’s Board of Directors. Should dividends not be paid for four
consecutive quarters, the government would have the right to appoint at least two
new directors to the board.
• Commitment of up to $29.8 billion41 in additional preferred share purchases from
TARP. When these share purchases may occur are at the discretion of AIG.
• Reduction of interest rate on the existing Fed loan facility by removing the
current floor of 3.5% over the LIBOR portion of the rate. The rate will now
simply be three-month LIBOR plus 3%, which was approximately 4.25% at the
time.
• Limit on Fed revolving credit facility is to be reduced from $60 billion to as low
as $25 billion.
• Up to $34.5 billion of the approximately $38 billion outstanding on the Fed credit
facility is to be repaid by asset transfers from AIG to the Fed. Specifically, (1)
$8.5 billion in ongoing life insurance cash flows will be securitized by AIG and
38 Information on Maiden Lane III from the Federal Reserve, “Factors Affecting Reserve Balances,” Statistical Release
H.4.1, February 25, 2010, available at http://www.federalreserve.gov/releases/h41/Current/, and “Factors Affecting
Efforts to Limit Payments to AIG Counterparties” Testimony of Thomas C. Baxter Jr. of the Federal Reserve Bank of
New York, January 27, 2010, available at http://www.newyorkfed.org/newsevents/speeches/2010/bax100127.html.
39 See, for example, “A.I.G. Reports Loss of $61.7 Billion as U.S. Gives More Aid,” New York Times, March 2, 2009,
p. A1.
40 U.S. Treasury, “U.S. Treasury and Federal Reserve Board Announce Participation in AIG Restructuring Plan,” Press
Release dated March 2, 2009.
41 The amount was reduced from $30 billion following controversy over $165 million in employee bonuses paid to
AIGFP employees in March 2009.
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transferred to the Fed; and (2) approximately $26 billion in equity interests in
two of AIG’s large foreign life insurance subsidiaries (ALICO and AIA) will be
issued to the Fed. This effectively transfers a majority stake in these companies
to the Fed, but the companies will still be managed by AIG.
A $25 billion repayment of the Fed loan through the transfer of equity interest worth $16 billion
in AIA and $9 billion in ALICO was completed on December 1, 2009, with a corresponding
reduction in the Fed loan maximum to $35 billion. According to AIG’s 2009 annual 10-K filing
with the SEC, the repayment through securitization of life insurance cash flows is no longer
expected to occur.
Who Has Benefited from Assistance to AIG?
Although billions of dollars in government assistance have gone to the AIG, in many cases, it can
be argued that AIG has essentially acted as an intermediary for this assistance. In short order after
drawing on government assistance, substantial funds flowed out of AIG to entities on the other
side of AIG’s financial transactions, such as securities lending or credit default swaps. If AIG had
been allowed to fail and had entered bankruptcy, as was the case with Lehman Brothers, then
these counterparties in many cases would have been treated as unsecured creditors and may have
received relatively little for their claims.
Seen from this view, the true beneficiary of many of the federal funds that flowed to AIG was not
AIG itself, but these counterparties. In the interest of transparency, many argued that these
counterparties need to be identified, so that both Congress and taxpayers can judge the efficacy
and fairness of the assistance to AIG. Until March 15, 2009, no such list of counterparties had
been published by the Fed or AIG. Several Senators pressed Donald Kohn, the vice chairman of
the Board of Governors of the Federal Reserve, on this point in a March 5, 2009, Senate hearing
on AIG. Vice Chairman Kohn, however, expressed his judgment that “giving the names would
undermine the stability of the company and could have serious knock-on effects to the rest of the
financial markets and the government’s efforts to stabilize them.”42 Ten days following the Senate
hearing, on March 15, 2009, AIG released information detailing $52.0 billion of direct support to
AIG that went to AIGFP related transactions, $27.1 billion in Maiden Lane III CDS-related
transactions, and $43.7 billion in payments to securities lending counterparties.43
Questions about transparency and disclosure were brought forward again late in 2009 and early in
2010, particularly regarding the actions of the Federal Reserve Bank of New York, whose
president was then Timothy Geithner, who is now the U.S. Treasury Secretary, relating to AIG
SEC filings regarding the creation of the Maiden Lane entities. According to reports, staff at the
Fed discouraged AIG from including details such as 100% payments to counterparties and the
identification of counterparties in SEC filings in late 2008. During the subsequent months, AIG
amended its SEC filings several times in response to the agency’s request for more disclosure.
Later, AIG asked the SEC to grant confidential treatment to the filings that would exclude them
42 Donald Kohn, answering a question by Senator Christopher Dodd, reported in Federal News Service’s transcript of
the March 5, 2008 hearing of the Senate Committee On Banking, Housing, And Urban Affairs on “American
International Group: Examining What Went Wrong, Government Intervention, and Implications For Future
Regulation.”
43 See http://www.aig.com/aigweb/internet/en/files/CounterpartyAttachments031809_tcm385-155645.pdf for a full
listing of counterparties.
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from public disclosure. On May 22, 2008, after a staff ruling that the filings met the necessary
standard of “commercially sensitive information”—the SEC granted the AIG filings confidential
treatment through November 25, 2018.44 Several Members of Congress have raised questions
about the Fed’s intervention in the AIG disclosures and the House Committee on Government
Reform and Oversight focused on this question in a hearing on January 27, 2010. Following this
hearing, the information that had been granted confidential treatment was released publicly by
Representative Darryl Issa.45
Congressional Action
Hearings
Congressional committees, including the House Oversight and Reform Committee, the House
Financial Services Committee, and the Senate Banking, Housing, and Urban Affairs Committee,
have held several hearings on AIG. Congressional attention (and anger) toward AIG has been
focused on concerns regarding possible waste of taxpayer money through corporate profligacy
and payment of employee bonuses. Transparency regarding the intervention and the ultimate
future of AIG have also been of significant concern.
Table 2. Congressional Hearings Focusing on AIG
Date Title
Committee
October 7, 2008
The Causes and Effects of the AIG Bailout
House Oversight and Government Reform
March 5, 2009
American International Group: Examining
what went wrong, government intervention, Senate Banking, Housing & Urban Affairs
and implications for future regulation
March 18, 2009
American International Group’s Impact on
the Global Economy: Before, During, and
House Financial Services
After Federal Intervention
March 24, 2009
Oversight of the Federal Government’s
Intervention at American International
House Financial Services
Group
April 2, 2009
The Collapse and Federal Rescue of AIG
and What it Means for the U.S. Economy
House Oversight and Government Reform
May 15, 2009
AIG: Where is the Taxpayer Money Going?
House Oversight and Government Reform
October 14, 2009
AIG Bonuses: Report of the Special
Inspector General for the Troubled Asset
House Oversight and Government Reform
Relief Program
January 27, 2010
The Federal Bailout of AIG
House Oversight and Government Reform
Source: CRS.
44 For example, see “SEC May Keep Potentially Controversial AIG Actions Secret for a Decade,” Best’s Insurance
News, January 12, 2010.
45See “Issa: AIG Investigation Just Getting Started,” January 27, 2010, available at
http://republicans.oversight.house.gov/index.php?option=com_content&view=article&id=518%3Aissa-aig-
investigation-just-getting-started&catid=22&Itemid=1.
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Legislation
Legislation regarding AIG has focused on issues surrounding executive compensation including
the following:
H.R. 1586
This bill, “[t]o impose an additional tax on bonuses received from certain TARP recipients,” was
introduced by Representative Charles Rangel on March 18, 2009. It has been widely portrayed as
responding to an outpouring of anger over the AIG bonuses. The House passed H.R. 1586 under
suspension of the rules by a vote of 328-93 on March 19, 2009.
The bill would institute a tax of 90% on bonuses given by companies who have more than $5
billion in outstanding funding from TARP. In addition to AIG, several other companies would fall
under this definition, including Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase,
Morgan Stanley, Wells Fargo, U.S. Bancorp, and General Motors. The bill also specifically
included Fannie Mae and Freddie Mac by name. The 90% tax rate would only apply to bonus
recipients with a household income greater than $250,000 for singles or married couples filing
jointly or $125,000 for a married person filing separately.
H.Con.Res. 76
This Sense of the Congress resolution regarding “executive and employee bonuses paid by AIG
and other companies assisted with taxpayer funds” was introduced March 19, 2009. It was
brought up the same day under suspension of the rules, but failed to gain a two-thirds majority on
a vote of 255-140.
S. 651
The Compensation Fairness Act of 2009 was introduced on March 19, 2009. It was placed on the
legislative calendar but has not been acted on by the full Senate.
This bill would impose an excise tax of 35% on both the employee and the employer should
“excessive” bonuses be paid out by recipients of federal economic assistance. Any retention
bonus would be considered excessive, while non-retention bonuses would be excessive if they
exceeded $50,000 with an exception for equity-based bonuses with a vesting period of at least
three years. It would also apply a $1 million limit on nonqualified deferred compensation. These
provisions would apply to Fannie Mae and Freddie Mac specifically, as well as to any recipient of
federal assistance with more than $100 million of assistance outstanding.
H.R. 1664
This bill “[t]o amend the executive compensation provisions of the Emergency Economic
Stabilization Act of 2008 to prohibit unreasonable and excessive compensation and compensation
not based on performance standards,” was introduced on March 23, 2009. It was amended and
passed by the House on April 1, 2009, on a vote of 241-171.
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As passed, it would prohibit institutions with outstanding capital obligations from TARP, as well
as Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, from making a compensation
payment (other than a longevity bonus or a payment in the form of restricted stock) to any
employee under an existing or new compensation arrangement, if (1) it provides for
compensation that is “unreasonable or excessive,” or (2) it results in any bonus or supplemental
payment that is not directly based on performance. Defining both “unreasonable and excessive”
and allowable performance-based measures would be done by the Treasury Secretary, with the
approval of the agencies that make up the Federal Financial Institutions Examination Council,
and in consultation with the chairperson of the Congressional Oversight Panel.
H.Res. 251
This resolution would direct the Secretary of the Treasury to transmit specified information
regarding AIG to the House. It was introduced on March 17, 2009, and marked up on March 25,
2009, by the House Financial Services Committee. Although placed on the House Calendar when
reported on April 23, 2009, it has not been considered by the full House.
H.Res. 251 would direct the Secretary to transmit information regarding (1) negotiations on
possible break-up of AIG, (2) negotiations regarding additional TARP assistance, or (3)
communications or authorization for payment of executive bonuses by AIG.
Author Contact Information
Baird Webel
Specialist in Financial Economics
bwebel@crs.loc.gov, 7-0652
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