AIG case study

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.




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