The company continued to experience pressing liquidity needs that necessitated rapid draws on the Fed Facility and concerns that AIG’s needs might well exceed the facility’s capacity. Even greater concerns arose out of the continued downgrade risk. The probability of a ratings downgrade was considered high unless the Federal Reserve took further action because the aggregate size of AIG’s draws on the Fed Facility was greater than rating agency expectations – the rating agencies felt that AIG had too much debt – and AIG’s expected third quarter losses, which were to be announced on November 10, 2008, far exceeded analyst estimates. As discussed in Vice Chairman Kohn’s testimony of March 5, 2009, in early October 2008, the Board of Governors approved an additional credit facility (the Securities Borrowing Facility) that permitted the New York Fed to lend to certain AIG domestic insurance subsidiaries up to $ billion in order to allow them to return the cash collateral they received from their securities borrowing counterparties. Additionally, toward the end of October, four AIG affiliates began participating in the Federal Reserve’s Commercial Paper Funding Facility (CPFF) on the same terms and conditions as other participants. The CPFF is a generally available program that involves the purchase, through a special purpose vehicle with financing from the Federal Reserve, of three-month unsecured and assetbacked commercial paper directly from eligible issuers. Notwithstanding AIG’s access to these additional Federal Reserve credit facilities, AIG remained extremely vulnerable to the ongoing and intensifying financial crisis.

Thomas C Baxter, Jr and Sarah J Dahlgren: The Federal Reserve Bank of New York’s involvement with the American International Group (AIG) Joint written testimony before the Congressional Oversight Panel by Mr Thomas C Baxter, Jr, Executive Vice President and General Counsel, and Sarah J Dahlgren, Executive Vice President, of the Federal Reserve Bank of New York, Washington DC, 26 May 2010. *  *  *  Chair Warren and Members of the Panel, thank you for giving us the opportunity to testify here today regarding the Federal Reserve Bank of New York’s (New York Fed) involvement with AIG. I. The decision to lend to AIG  On the morning of September 16, 2008, it became clear to Federal Reserve and Treasury policymakers that AIG, then one of the world’s largest insurance and financial firms, was facing a potentially fatal liquidity crisis. AIG’s crisis was coming amidst the collapse of the housing market, within weeks of the receiverships of Fannie Mae and Freddie Mac, and within 24 hours of the bankruptcy of Lehman Brothers. Confidence in the financial system was exceptionally fragile, and financial firms were taking dramatic and unusual measures to protect their balance sheets. Money market funds, long viewed as a safe investment by millions of Americans, were experiencing massive withdrawals. The run on these funds, in turn, severely disrupted the commercial paper market, a vital source of funding for American businesses. Securitization markets started to seize up, especially those that relied upon instruments backed by consumer loans.