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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
August, the New York Fed set up a team to study the two companies’ funding and liq-
uidity risk.
On August , New York Fed officials met with Office of Thrift Supervision (OTS)
regulators to discuss AIG. The OTS said that it was “generally comfortable with
[the] firm’s current liquidity . . . [and] confident that the firm could access the capital
markets with no problem if it had to.” The New York Fed did not agree. On August
, , Kevin Coffey, an analyst from the Financial Sector Policy and Analysis unit,
wrote that despite raising billion earlier in the year, “AIG is under increasing cap-
ital and liquidity pressure” and “appears to need to raise substantial longer term
funds to address the impact of deteriorating asset values on its capital and available
liquidity as well as to address certain asset/liability funding mismatches.”
Coffey listed six concerns: () AIG’s significant losses on investments, primarily
because of securities lending activities; () . billion in mark-to-market losses on
AIG Financial Products’ credit default swap book and related margin calls, for which
AIG had posted . billion in collateral by mid-August; () significant near-term
liabilities; () commitments to purchase collateralized debt obligations due to out-
standing liquidity puts; () ratings-based triggers in derivative contracts that could
cause significant additional collateral calls if AIG were downgraded; and () limited
standby credit facilities to manage sudden cash needs. He noted Moody’s and S&P
had highlighted worries about earnings, capital, and liquidity following AIG’s
second-quarter earnings. The agencies warned they would downgrade AIG if it did
not address these issues.
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, Capi-
tal Raise on the Horizon,” warned that “we foresee – 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 uni-
verse, and foresee outcomes similar in nature but on a much larger scale.” Goldman
appeared to be referring to Bear Stearns. Ira Selig, a manager at the New York Fed,
emailed the Goldman report to Coffey and others. “The bottom line: large scale cash
outflows and posting of collateral could substantially weaken AIG’s balance sheet,”
the manager wrote.
On September , the New York Fed’s Danielle Vicente noted the situation had
worsened: “AIG’s current liquidity position is precarious and asset liability manage-
ment appears inadequate given the substantial off balance sheet liquidity needs.” Liq-
uidating an billion securities portfolio to cover liabilities would mean
substantial losses and “potentially” affect prices, she wrote. Borrowing against AIG’s
securities through the Fed’s PDCF might allow AIG to unwind its positions calmly
while satisfying immediate cash needs, but Vicente questioned whether the PDCF
was “necessary for the survival of the firm.” Arguably, however, AIG’s volatile fund-
ing sources made the firm vulnerable to runs. Off-balance-sheet commitments—in-
cluding collateral calls, contract terminations, and liquidity puts—could be as high as
