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SEPTEMBER : THE BAILOUT OF AIG
billion if AIG was downgraded. Yet AIG had only billion of revolving credit
facilities in addition to the to billion of cash it had on hand at the time.
The rating agencies waited to see how AIG would address its liquidity and capital
needs. Analysts worried about the losses in AIG’s credit default swaps and investment
portfolios, about rating agency actions, and about subsequent impacts on capital. In-
deed, Goldman’s August report on AIG concluded that the firm itself and the rat-
ing agencies were in denial about impending losses.
By early September, management was no longer in denial. At the Friday, Septem-
ber , meeting at the New York Fed, AIG executives reported that the company was
“facing serious liquidity issues that threaten[ed] its survival viability” and that a
downgrade, possibly after a rating agency meeting September , would trigger bil-
lions of dollars in collateral calls, liquidity puts, and other liquidity needs. AIG’s
stock had fallen significantly (shares hit an intraday low of . Friday, down from
a . close the day before) and credit default swap spreads had reached dur-
ing the day, indicating that protection on million of AIG debt would cost ap-
proximately . million per year. AIG reported it was having problems with its
commercial paper, able to roll only . billion of the . billion that matured on
September . In addition, some banks were pulling away and even refusing to pro-
vide repo funding. Assets were illiquid, their values had declined, borrowing was
restricted, and raising capital was not viable.
“SPILLOVER EFFECT”
The New York Fed knew that a failure of AIG would have dramatic, far-reaching con-
sequences. By the evening of September , after the meeting with AIG executives,
that possibility looked increasingly realistic. Hayley Boesky of the New York Fed
emailed William Dudley and others. “More panic from [hedge funds]. Now focus is
on AIG,” she wrote. “I am hearing worse than LEH. Every bank and dealer has expo-
sure to them.”
Shortly before midnight, New York Fed Assistant Vice President Alejandro La-
Torre emailed Geithner, Dudley, and other senior officials about AIG: “The key take-
away is that they are potentially facing a severe run on their liquidity over the course
of the next several (approx. ) days if they are downgraded. . . . Their risk exposures
are concentrated among the largest international banks (both U.S. and European)
across a wide array of product types (bank lines, derivatives, securities lending, etc.)
meaning [there] could be significant counterparty losses to those firms in the event
of AIG’s failure.”
New York Fed officials met on Saturday morning, and gathered additional infor-
mation about AIG’s financial condition, but according to New York Fed General
Counsel Tom Baxter, it “seemed clear that the private sector solution would material-
ize for AIG.” Indeed, Christopher Flowers, head of J. C. Flowers & Co., a private eq-
uity firm, had spoken to AIG CEO Robert Willumstad the prior Thursday, and the
two had called Warren Buffett to discuss a possible deal. Willumstad told the FCIC
