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The information below describes the New York Fed’s actions and involvement with AIG. This repository for various sources of public information on federal financial assistance extended to AIG includes timelines, press releases, Congressional testimony and financial data. OVERVIEW Financial Information News and Testimony Timeline Transparency In September 2008, the Federal Reserve extended credit to American International Group, Inc. (AIG) to preserve the stability of an already fragile U.S. economy and to protect the U.S. taxpayer from the potentially devastating consequences of the company’s disorderly failure. From that initial intervention, the New York Fed and the U.S. Department of the Treasury worked with AIG to stabilize the company so that it no longer posed a systemic risk and to ensure repayment of taxpayer assistance. On January 14, 2011, the New York Fed’s assistance to AIG was terminated and its loans to AIG fully repaid. The New York Fed’s exit was part of a comprehensive recapitalization announced in September, 2010, and closed on January 14, 2011, by the company, the New York Fed, the Treasury Department and the Credit Facility Trust. The recapitalization, which reflected the progress made in reducing the scope, risk and complexity of AIG’s operations and stabilizing its operating results, was designed to accelerate the repayment of AIG’s obligations to the American public. Background Consequences of an AIG Failure Key Dates and Actions New York Fed's Role and Objectives Sample 2008 U.S. Economic Indicators
Money market funds, long viewed as a safe investment by millions of Americans, were experiencing massive withdrawals. The run on these funds, in turn, severely disrupted the commercial paper market, a vital source of funding for American businesses. Securitization markets started to seize up, especially those reliant on instruments backed by consumer loans. Banks sharply curtailed their lending. A full-fledged panic had started and was spreading rapidly. The effects of the crisis extended well beyond Wall Street. State governments faced significant budget shortages; schools, universities and hospitals curtailed spending; and large and small businesses came under pressure to cut costs and eliminate jobs, leaving millions of Americans unemployed. AIG 2008 Performance
In light of the unusual and exigent circumstances at the time, the New York Fed and the Board of Governors of the Federal Reserve System—in close cooperation with the U.S. Department of the Treasury—made the decision to intervene to prevent the imminent collapse of AIG. The decision to lend to AIG was motivated by a single goal: to protect the U.S. and global economies and the American people from the devastating effects that its disorderly failure would have caused in the then prevailing economic environment. The first response of policymakers to the crisis at AIG was to encourage a private-sector solution. A consortium of private-sector financial institutions was convened at the New York Fed, but specific terms for an AIG financing package could not be agreed upon. At the time of AIG’s liquidity crisis, no effective bankruptcy framework existed for a firm of AIG’s type and size. There was no single regulator to step in and manage the company’s failure, no single court that could sort out the demands of creditors and shareholders, and no practical way to coordinate among the hundreds of U.S. and foreign regulators responsible for overseeing all of AIG’s businesses. The absence of a resolution authority, combined with the size and scope of AIG’s businesses and the existing stress on the economy, would have made the consequences of its failure potentially catastrophic, stressing the need for quick, effective action. Back to Top The failure of AIG, a company with more than 76 million customers in approximately 140 countries—more than 30 milion customers in the United States alone—posed a direct threat to millions of policyholders, state and local government agencies, 401(k) participants, banks and other financial institutions in the United States and abroad, and would have shattered confidence in already fragile financial markets. AIG’s Reach in the United States in September 2008
Many of AIG’s insurance subsidiaries could have been seized by their state and foreign regulators, leaving policyholders facing uncertainty about their rights and claims. Seizure of AIG subsidiaries would likely have put a moratorium on claims and withdrawals, and could have impaired those claims in the longer term. A run on AIG, in the form of a massive cashing in of insurance policies and annuities, would have strained the company’s ability to meet its obligations to millions of policyholders. State and local government entities that had lent investment funds to AIG would have been exposed to losses in an already difficult and deteriorating municipal budget environment. Workers whose 401(k) plans had purchased guarantees in the form of stable-value contracts from AIG could have lost that insurance. Pension plans would have been forced to write down their AIG-related assets, resulting in significant losses in participants’ portfolios. The resulting losses to money market mutual funds, to which millions of Americans entrust their savings, would have had potentially devastating effects on confidence, and would have accelerated the run on various financial institutions. Global commercial banks and investment banks would have suffered losses on loans and lines of credit to AIG, and on derivatives contracts and other transactions, potentially causing even greater constraints on the availability of credit to homeowners and businesses. Confidence in other insurance providers could have been impacted, leading to a possible run on the industry. Given the unusual and exigent circumstances at the time, the potentially far-reaching consequences of an AIG bankruptcy compelled policymakers to take decisive action to intervene. Back to Top SEPTEMBER 16, 2008 The Board of Governors of the Federal Reserve, relying on its emergency lending authority granted by Congress under section 13(3) of the Federal Reserve Act and mindful of its responsibility to maintain financial stability and with the full support of the U.S. Treasury Department, authorized the New York Fed to extend a secured revolving credit facility of up to $85 billion to AIG. The New York Fed extended that credit to AIG and the company agreed to transfer a controlling stake of 79.9 percent of company equity to a trust for the sole benefit of the United States Treasury. AIG’s chief executive officer was also replaced. The credit facility initially carried a rate of LIBOR plus 8.5 percent—comparable to the terms contemplated by the consortium of private banks that explored a private-sector solution. The credit facility is secured by a pledge of a substantial portion of AIG’s assets. Additional Information Board of Governors Press Release » New York Fed Press Release » Original Credit Agreement Credit Agreement Amendment No. 1 Credit Agreement Amendment No. 2 Credit Agreement Amendment No. 3 Credit Agreement Amendment No. 4 Guarantee and Pledge Agreement The initial emergency $85 billion facility successfully stabilized AIG in the short term, but the company’s financial condition and capital structure remained vulnerable to further deterioration in market conditions. In October, borrowing costs continued to rise, credit markets remained essentially frozen and equity markets trended downward. OCTOBER 8, 2008 The Board of Governors approved an additional secured credit facility that permitted the New York Fed to borrow up to $37.8 billion of investment-grade, fixed-income securities from certain regulated U.S. insurance subsidiaries of AIG in return for cash collateral. By November 20, 2008, AIG received approximately $20 billion in cash collateral under the program, which was returned in full when the program was terminated on December 12, 2008, in connection with the formation of the Maiden Lane II facility (see below). Additional Information Board of Governors Press Release » Additionally, toward the end of October 2008, four AIG affiliates began participating in the Federal Reserve’s Commercial Paper Funding Facility (CPFF) on the same terms and conditions as other participants in the program. The CPFF program ended in April, 2010 without incurring any credit losses. Additional Information CPFF » Despite having access to these additional credit facilities, AIG continued to face serious liquidity pressures related to losses on residential mortgage-backed securities, and its exposure to CDS contracts. NOVEMBER 10, 2008 The Federal Reserve Board and the U.S. Treasury announced the restructuring of the government's financial support to AIG in order to provide the company more time and greater flexibility to sell assets and repay the government. Measures included certain modifications to the New York Fed’s credit facility, including a reduction of the interest rate to three-month LIBOR plus 300 basis points, and a reduction of the fee charged on undrawn funds to 75 basis points (from the then-existing rate of 850 basis points). The length of the facility was also extended from two years to five years. In addition, the U.S. Treasury announced its plan to purchase $40 billion of newly issued AIG preferred shares under the Troubled Asset Relief Program (TARP), the proceeds of which were used to reduce the balance of the Fed’s credit facility. The total amount available to AIG under the credit facility was also reduced from $85 billion to $60 billion. About the Facilities Maiden Lane II LLC and Maiden Lane III Finally, the Board of Governors, relying on its emergency lending authority granted by Congress under section 13(3) of the Federal Reserve Act, approved the creation by the New York Fed of two new secured lending facilities designed to alleviate capital and liquidity pressures on AIG associated with two distinct portfolios of mortgage-related securities. These new facilities resulted in the creation of two new special purpose vehicles (SPV): Maiden Lane II LLC and Maiden Lane III LLC. Additional Information Board of Governors Press Release » JANUARY 16, 2009 The New York Fed, with the full support of the U.S. Treasury, established the AIG Credit Facility Trust to hold the controlling equity interest in AIG. The Trust was established for the sole benefit of the United States Treasury, the general fund of the U.S. government, and thus effectively for the benefit of U.S. taxpayers. The New York Fed appointed three independent trustees to control the Trust. |
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From the NY Fed website
November 21, 2011 |
| The text being discussed is available at http://newyorkfed.org/aboutthefed/aig/index.html#1 |
The fall of 2008 was a time of severe economic distress, marked by a broad-based decline in home prices, a rise in delinquencies and foreclosures, and a substantial drop in the values of mortgage-backed securities and other related instruments. Major institutions, including IndyMac Bank and Lehman Brothers, experienced debilitating losses that eventually led to their collapse, while Fannie Mae and Freddie Mac were placed into government conservatorship. There was a growing loss of confidence in U.S. and global financial markets, and credit markets were virtually frozen.
AIG, the world’s largest insurance company and a major participant in the global trade of derivatives and other financial instruments, was encountering severe liquidity problems, primarily as a result of losses on its mortgage-related investment portfolio and collateral calls on credit default swaps (CDS) and other financial contracts. By mid-September 2008, these liquidity pressures brought the firm to the brink of collapse. On September 15, 2008, downgrades by certain credit rating agencies triggered CDS-related collateral calls that the company could not meet.