American International Group (AIG) said that nearly $10 billion in cash settlement swaps sold as credit protection on "synthetic" securities can be resolved under existing arrangements with the Fed and no further loans are needed.
Responding to an article published in the Wall Street Journal, AIG sought to clarify the existence of the $9.8 billion in "cash settlement" or "Pay As You Go (PAUG) swaps.
The company said in a statement that the PAUG swaps have a lower liquidity risk than the "physical settlement" swaps that make up the majority of the multisector credit default swaps to which AIG is exposed.
AIG explained, "A credit event on a physical settlement swap requires AIG to buy the total underlying CDO (collateralized debt obligation) portion in an amount equal to AIG's full notional exposure."
It said a PAUG contract only obliges AIG to pay losses on the CDO portion as and when they occur, "therefore reducing the cash impact."
However, the WSJ article stated that the facility set up by the Fed and AIG, Maiden Lane III (which buys the CDO securities underlying the CDSs written by AIG), cannot buy securities underlying the PAUG swaps since there are no securities backing these arrangements.
AIG accepted government ownership and secured support in the form of $150 billion in loans and credit from the Fed when it had a liquidity crisis brought on by losses from its financial products unit.
Joe Norton, AIG spokesman, told NU Online News the $9.8 billion in synthetic swaps can be resolved through existing credit arrangements and would not require any new deal with the Fed or a new loan, but he would not say if it could be resolved through Maiden Lane III specifically.
Another AIG spokesman, Nicholas Ashooh, was quoted in another report as saying the company has to "figure out some other way of unwinding these" besides through Maiden Lane III.
AIG's statement also pointed out that the synthetic swaps have been accounted for in SEC filings and are part of the reported $71.6 billion CDS portfolio. The statement references a quarterly SEC filing for the period ending September 30, 2008 that explains the PAUG swaps.
The statement also noted, "AIG is addressing its exposure to its entire multisector CDS portfolio through its existing credit agreement with the Federal Reserve Bank of New York. As previously announced, AIG and the Federal Reserve have funded the Maiden Lane III facility, which has negotiated agreements to settle $53.5 billion of AIG's $71.6 billion CDS portfolio."
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