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Clinton Lively/NY/FRS11/03/200806:01 PM
Toccbcc
Subject
Jonathan PolklNY/FRS@FRS
Fw: AIG questions from our meeting with Govs. Kohn andWarsh
----- Forwarded by Clinton Lively/NY/FRS on 11/03/200805:57 PM
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Clinton Lively/NY/FRS11/03/200804:12 PM
Mike
To
cc
SUbject
Michael S Gibson/Board/FRS@BOARDDeborah P
Bailey/BOARD/FRS@BOARD, Jim Mahoney/NY/FRS@FRS,Jon D
Greenlee/BOARD/FRS@BOARD, KieranFallon/BOARD/FRS@BOARD, Michael S
Gibson/BOARD/FRS@BOARD,Paul WhynottlNY/FRS@NY, Rich
Ashton/BOARD/FRS@BOARD, SarahDahlgren/NY/FRS@FRS, Scott
Alvarez/BOARD/FRS@BOARD, Steven JManzarilNY/FRS@FRSRe: AIG
questions from our meeting with Govs. Kohn and Warsh
Several weeks ago AIG created a governance structure for the
wind down ofFP which includes a Steering Committee upon which
Jonathan Polk and I sit asFRBNYobservers. I have attached below a
copy ofthe agenda and discussion document forthe meeting that
occurred last Friday OCT 31. The plan foranorderly unwind of FP and
the oversight structure is set forth on pages 22 through 30 of the
document. AIG has engaged Blackrock and McKinsey as advisors inthe
unwind.My observation of the status to date is that AIG has largely
been dealing with the organizational and human resource issues
required to set upan orderly unwind.In particular, they have been
working to identify and retain key personnel to lead and execute
the disposition of the firm. Once thisis completed - perhaps soon
they should be able to begin proactive disposition of the books. In
the meantime there has been a fair amount of activity accommodating
clientlcounterpartyrequests to terminate or collateralize trades.
Part ofthe governance process has been to define levels of
materiality (in terms of cash f low and p/l) at whichtermination
requests are escalated. Overall I would say the termination
activity that has taken placeso far has not materially changed the
risk profi le of FP andthat substantive changes in risk wil l l
ikely occur only when AIG begins to proactively target books for
disposition.We are putting together a list of deals FP has with
tax-exempt entit ies and will send that along soon.Regards,Clint
Lively
FP Steering Committee OCT 31 200S.ppt
CONFIDENTIAL FRBNY-TOWNS-Rl-204748
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MichaelS Gibson/Board/FRS@BOARDSent by: Michael S
Gibson/BOARD/FRS@BOARD
To10/31/2008 02:41 PM
Sarah,
cc
Subject
Sarah Dahlgren/NY/FRS@FRSDeborah P Bailey/BOARD/FRS@BOARD, Jon
DGreenlee/BOARD/FRS@BOARD, Kieran Fallon/BOARD/FRS@BOARD,Paul
WhynottlNY/FRS@NY, Rich Ashton/BOARD/FRS@BOARD, StevenJ
Manzari/NY/FRS@FRS, Clinton Lively/NY/FRS@FRS,
JimMahoney/NY/FRS@FRS, Michael S Gibson/BOARD/FRS@BOARD,
ScottAlvarez/BOARD/FRS@BOARDAIG questions from ourmeeting with
Govs. Kohn and Warsh
We met with Govs. Kohn and Warsh today to updatethem on the
package of measures being prepared for AIG.The governors asked two
questions in the meeting that we did not knowthe answers to. I
expectthese are issues that someone on your team is already
workingon, but we would like to getthe latest information from you
so we can get back to the governors with answers.1. Who is
overseeing the tear-up process on the COS? There are two issues
here, concessions and Goldman.Concessions: the worry is that giving
the counterparties par in exchange for the underlying COO security
might be giv ing them a gif t - they no longer have AIGcredit risk,
and whatever CVA they have taken against potential future exposure
to AIG will be released upon tear-up. If a counterparty has not
received all thecollateral it has called for, the tear-up
eliminates current exposure also. On the other hand, AIG is now
receiving government support so the perceived credit risk ofAIG is
less. Also, AIG needs to get the CDS torn upto put its problems
behind it, so its bargaining power may be weak. If I understand the
current version oftheproposed structure, any concessions will
result in an excess amount left in the escrow account which pays
down the Fed's senior note. This may reduce AIG'sincentive to
bargain for the best concession possible. Is Morgan Stanley or some
advisor from ourside embedded in the tear-up negotiations to track
theseissues?Goldman: is a special case because their CDS with AIG
are a naked short position and they don't own the bonds. I f the
CDS are just torn up at current mark-tomarket, the value of that
mark influences the cash Goldman will receive in a way that is not
the case forthe counterparties who own the bonds and will
bereceiving par. The Fed, Goldman's senior management, and Treasury
all havean interest in making sure the negotiation of the mark
between AIG and Goldman isdone in a fair way. However, the normal
procedure might be for the negotiations to be done between someone
at AIGFP and their counterpart on a trading desk atGoldman. A
Goldman trader may not share the perspective of Goldman's senior
management and may attach higher value to an extra bil lion dollars
of P&L thatcould affect his or her 2008 bonus, even ifthat
carries significant reputation risk for Goldman as a firm. Again,
is Morgan Stanley or some advisor involved hereand aware of the
issue? Is there a contingency plan to approach Goldman at a more
senior level if roadblocks start appearing in the negotiations?2.
What public disclosures will be made of the mark-to-market on ML II
and ML III once they are consolidated on FRBNY's balance sheet?The
governors were concerned that the market could attach a
disproportionate significance to any public disclosureof "the
Fed's" marks on the nonagency RMBSand ABS COO portfolios once ML II
and ML III are consolidated onto FRBNY's balance sheet. Do we have
a strategy for that? Would the disclosure be the sameas Maiden Lane
LLC (quarterly disclosure of fair value of the holdings of ML II
and ML III on the H.4.1)?Three more questions that are mine, not
the governors.1. Given all the public hue and cry about the transit
authorities whose tax-motivated lease transactions are in danger of
unwinding due to AIG's downgrade belowAAA, are there other similar
transactions that we should know about (and alert the governors
about)? I assume this transaction was part of the AIGFP
TOGportfolio; do what know what else lurks there?2. What is the
status of the FP winddown?3. Can we have an update on the asset
disposal process?Thanks,Mike
CONFIDENTIAL FRBNY-TOWNS-Rl-204749
