Should AIG had used Deriveum as a backstop for 40% of that amount the following effects would have been observed
- No change in the balance sheet position of AIG prior September 2008
- No second bail-out (Maiden Line III facility) would be needed
- At least $6 billion profit would have been made on CDOs disbursement
- High likelihood for additional $4 billion profit on Deriveum holdings
- Huge reduction of reputational costs and brand costs
- Wide spread benefits across the financial system
This case study is based on the official account from the Office of the Special Inspector-General of the Troubled Asset Relief Program (TARP) on AIG from 17 November 2009[1] and concentrated on the initial structured assistance tool and subsequent Maiden Lane III tool that deal with CDS. The case study concentrates on two impacts of the proposed Deriveum conversion – the AIG position before the bailout (balance sheet, profitability and funding requirements) and simulation on the bailout unfolding, should the Deriveum be used as a collateral in 40% of the CDS. We have chosen the 40% level as appropriate future-collateralization since using Deriveum is expected to be a bit more expensive for the CDS holders, as the managers of the insurer would like to price distinguish between the two categories (vanilla and future-collateralization).
AIG was brought down by insufficient collateral posted for $62 billion worth of CDS.
[1] https://www.nytimes.com/interactive/projects/documents/the-special-inspector-general-s-report-on-the-a-i-g-bailout
