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SEPTEMBER : THE BAILOUT OF AIG
AIG had written on commercial paper, requiring AIG to come up with another to
billion.
Finally, AIG was increasingly strained by its securities lending business. As a
lender of securities, AIG received cash from borrowers, typically equal to between
and of the market value of the securities they lent. As borrowers began
questioning AIG’s stability, the company had to accept below-market terms—some-
times accepting cash equal to only of the value of the securities. Furthermore,
AIG had invested this cash in mortgage-related assets, whose value had fallen. Since
September , state regulators had worked with AIG to reduce exposures of the se-
curities lending program to mortgage-related assets, according to testimony by Eric
Dinallo, the former superintendent of the New York State Insurance Department
(NYSID). Still, by the end of June , AIG had invested billion in cash in
mortgage-related securities, which had declined in value to . billion. By late Au-
gust , the parent company had to provide . billion to its struggling securities
lending subsidiary, and counterparties were demanding billion to offset the
shortfall between the cash collateral provided and the diminished value of the securi-
ties. According to Dinallo, the collateral call disputes between AIG and its credit de-
fault swap counterparties hindered an orderly wind down of the securities lending
business, and in fact accelerated demands from securities lending counterparties.
That Friday, AIG’s board dispatched a team led by Vice Chairman Jacob Frenkel
to meet with top officials at the Federal Reserve Bank of New York. Elsewhere in
the building, Treasury Secretary Henry Paulson and New York Fed President Timo-
thy Geithner were telling Wall Street bankers that they had the weekend to devise a
solution to prevent Lehman’s bankruptcy without government assistance. Now came
this emergency meeting regarding another beleaguered American institution. “Bot-
tom line,” the New York Fed later reported of that meeting, “[AIG’s] Treasurer esti-
mates that parent and [Financial Products] have – days before they are out of
liquidity.”
AIG posed a simple question: how could it obtain an emergency loan under the
Federal Reserve’s () authority? Without a solution, there was no way this con-
glomerate, despite more than trillion in assets, would survive another week.
“CURRENT LIQUIDITY POSITION IS PRECARIOUS”
AIG’s visit to the New York Fed may have been an emergency, but it should not have
been a surprise. With the Primary Dealer Credit Facility (PDCF), the Fed had effec-
tively opened its discount window—traditionally available only to depository institu-
tions—to investment banks that qualified as primary dealers; AIG did not qualify.
But over the summer, New York Fed officials had begun to consider providing emer-
gency collateralized funding to even more large institutions that were systemically
important. That led the regulators to look closely at two trillion-dollar holding com-
panies, AIG and GE Capital. Both were large participants in the commercial paper
market: AIG with billion in outstanding paper, GE Capital with billion. In
