NEW YORK (
American International Group
has exited more than 90% of the derivatives positions that got the firm into trouble during 2008, leading to its enormous bailout.
AIG's financial products division, known as AIGFP, now has 3,900 outstanding trade positions, down from 44,000 at Sept. 30, 2008. The notional value of those trades is $350 billion, just a fraction of the $2 trillion held when AIG reached the breaking point.
"This portfolio has been significantly wound down, derisked, and is generating modest operating profits and providing positive liquidity," CFO David Herzog said on a conference call Friday to discuss the firm's fourth-quarter results.
>>>Read More: AIG's Tangled Web Unwinds Slowly
Bill Dooley, an executive vice president at the top of AIGFP, explained that its traders and risk managers began by unwinding the most complex transactions early on. They then eliminated business in geographic areas with regulatory issues, including closing down operations in Japan and Hong Kong.
Dooley said the business had "positive P&L" throughout that period of time and is now focused on the derivatives positions AIG wants to keep. The company said a year ago that it
plans to keep $500 billion worth of derivatives trades that were more profitable than expected.
"We are now concentrating on what we want to keep," said Dooley. "...And because we feel that there is value left in both the derivative book and the asset books that remained in FP and we want to create that value or generate that value over the period of the next couple of years."
The AIGFP wind-down is being performed in conjunction with the
, which offered AIG access to over $100 billion in loans and other types of funds to make good on its obligations and shore up its balance sheet. The deal ended up being a controversial one, since much of the money was funneled through AIG to investment banking arms of
Bank of America-Merrill Lynch
and foreign banks like Societe Generale,
, which were hedging or betting against the U.S. housing market.
AIGFP employees who have completed their work are now being moved from that division into other areas of AIG to manage assets and liabilities, Dooley said.
"We have moved their operations and risk group into AIG to continue running the risk and operating systems of financial products," said Dooley. "So there won't be any type of disconnection from how we have been managing it forward like this. At the same time, they are also geared to enhance some of our own processes as well, so we are getting two-for-one on that instance."
The implication that AIGFP employees are talented risk managers comes in direct contrast to the sentiment to 2008 and 2009, when AIG was still in the grasp of its bailout. Americans railed against bonuses paid out to those executives and traders, some of whom helped get the firm into trouble in the first place. AIG beefed up security detail for the employees and advised them against displaying the company's logo as anti-AIG protesters camped out on executives' lawns.
Since that time, AIGFP has moved forward in fits and starts. The division reported a fourth-quarter operating loss of $326 million, vs. an operating profit of $468 million a year earlier.
However, the loss mostly pertained to impairment charges at its aircraft leasing unit, International Lease Finance Corp., which is overhauling its aging fleet. The capital markets division that houses the derivatives book, reported operating income of $292 million, up from $154 million a year ago. Its performance is partly attributable to valuation gains, as the market for complex derivative products has become more liquid.
-- Written by Lauren Tara LaCapra in New York
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