AIG is an international insurance organization serving customers in more than 130 countries. As of June 30, 2011, AIG reported assets of $616.8 billion and revenues of $34.1 billion for the preceding 6 months. AIG companies serve commercial, institutional, and individual customers through worldwide property/casualty networks. In addition, AIG companies provide life insurance and retirement services in the United States. Federal, state, and international authorities regulate AIG and its subsidiaries. Until March 2010, the Office of Thrift Supervision (OTS) was the consolidated supervisor of AIG, which was a thrift holding company by virtue of its ownership of the AIG Federal Savings Bank. As the consolidated supervisor, OTS was charged with identifying systemic issues or weaknesses and helping ensure compliance with regulations that govern permissible activities and transactions. The Federal Reserve System was not a direct supervisor of AIG. Its involvement with the company was through its responsibilities to maintain financial system stability and contain systemic risk that may arise in financial markets. AIG’s domestic life and property/casualty insurance companies are regulated by the state insurance regulators in the state in which these companies are domiciled. The primary state insurance regulators include New York, Pennsylvania, and Texas. These state agencies regulate the financial solvency and market conduct of these companies, and they have the authority to approve or disapprove certain transactions between an insurance company and its parent or its parent’s subsidiaries. These agencies also coordinate the monitoring of companies’ insurance lines among multiple state insurance regulators. For AIG in particular, these regulators have reviewed reports on liquidity, investment income, and surrender and renewal statistics; evaluated potential sales of AIG’s domestic insurance companies; and investigated allegations of pricing disparities. Finally, AIG’s general insurance business and life insurance business that are conducted in foreign countries are regulated by the supervisors in those jurisdictions. AIG’s financial difficulties stemmed primarily from two sources:  Securities lending. Until 2008, AIG had maintained a large securities lending program operated by its insurance subsidiaries. The securities lending program allowed insurance companies, primarily AIG’s life insurance companies, to lend securities in return for cash collateral, which was then invested in investments such as residential mortgage- backed securities (RMBS).  Credit default swaps. AIG had been active, through its AIG Financial Products Corporation (AIGFP) unit, in writing insurance-like protection called credit default swaps (CDS) that guaranteed the value of CDOs. In September 2008, the Board of Governors of the Federal Reserve System (Federal Reserve Board), FRBNY, and Treasury determined that market events could cause AIG to fail. According to officials from these entities, AIG’s failure would have posed systemic risk to financial markets. Consequently, the Federal Reserve System and Treasury took steps to help ensure that AIG obtained sufficient funds to continue to meet its obligations and could complete an orderly sale of operating assets and close its investment positions in its securities lending program and AIGFP. From July through early September in 2008, AIG faced increasing liquidity pressure following a downgrade in its credit ratings in May 2008, which was due in part to losses from its RMBS investments. The company was experiencing declines in the value and market liquidity of the RMBS assets that served as collateral for its securities lending operation, as well as declining values of CDOs against which AIGFP had written CDS protection. These losses in value forced AIG to use an estimated $9.3 billion of its cash reserves in July and August 2008 to provide capital to its domestic life insurers following losses in their RMBS portfolios and to post additional collateral required by the trading counterparties of AIGFP. AIG attempted to secure private financing in September 2008 but was unsuccessful. On September 15, 2008, credit rating agencies downgraded AIG’s debt rating, which resulted in the need for an additional $20 billion to fund its added collateral demands and transaction termination payments. Following the credit rating downgrade, an increasing number of counterparties refused to transact with AIG for fear that it would fail. Also around this time, the insurance regulators decided they would no longer allow AIG’s insurance subsidiaries to lend funds to the parent company under a credit facility that AIG maintained, and they demanded that any outstanding loans be repaid and that the facility be terminated. In September 2008, another large financial services firm—Lehman Brothers Holdings, Inc. (Lehman)—was on the brink of bankruptcy. As events surrounding AIG were developing over the weekend of September 13–14, 2008, Federal Reserve System officials were also addressing Lehman’s problems. On September 15—the day before the Federal Reserve Board voted to authorize FRBNY to make an emergency loan to AIG—Lehman filed for bankruptcy. Stock prices fell sharply, with the Dow Jones Industrial Average and the Nasdaq market losing 504 points and 81 points, respectively. Because of concerns about the effect of an AIG failure, in 2008 and 2009, the Federal Reserve System and Treasury agreed to make $182.3 billion available to assist AIG. First, on September 16, 2008, the Federal Reserve Board, with the support of Treasury, authorized FRBNY to lend AIG up to $85 billion through a secured revolving credit facility that AIG could use as a reserve to meet its obligations. This debt was subsequently restructured in November 2008 and March 2009 to decrease the amount available under the facility, reduce the interest charged, and extend the maturity date from 2 to 5 years, to September 2013. By January 2011, AIG had fully repaid the facility and it was closed. In October 2008, the Federal Reserve Board approved further assistance to AIG, authorizing FRBNY to borrow securities from certain AIG domestic insurance subsidiaries. Under the program, FRBNY was authorized to borrow up to $37.8 billion in investment-grade, fixed-income securities from AIG in return for cash collateral. These securities were previously lent by AIG’s insurance company subsidiaries to third parties. This assistance was designed to allow AIG to replenish liquidity used to settle securities lending transactions, while providing enhanced credit protection to FRBNY in the form of a security interest in the securities. This program was authorized for up to nearly 2 years but was terminated in December 2008. In late 2008, AIG’s mounting debt—the result of borrowing from the Revolving Credit Facility—led to concerns that the company’s credit ratings would be lowered, which would have caused its condition to deteriorate further. In response, the Federal Reserve Board and Treasury in November 2008 announced the restructuring of AIG’s debt. Under the restructured terms, Treasury purchased $40 billion in shares of AIG preferred stock (Series D), and the cash from the sale was used to pay down a portion of AIG’s outstanding balance from the Revolving Credit Facility. The limit on the facility also was reduced to $60 billion, and other changes were made to the terms of the facility. This restructuring was critical to helping AIG maintain its credit ratings. To provide further relief, FRBNY also announced in November 2008 the creation of two new facilities to address some of AIG’s more pressing liquidity issues. AIG’s securities lending program continued to be one of the greatest ongoing demands on its working capital, and FRBNY announced plans to create an RMBS facility—Maiden Lane II (ML II) —to purchase RMBS assets from AIG’s U.S. securities lending portfolio. The Federal Reserve Board authorized FRBNY to lend up to $22.5 billion to ML II; AIG also acquired a subordinated $1 billion interest in the facility, which would absorb the first $1 billion of any losses. In December 2008, FRBNY extended a $19.5 billion loan to ML II to fund its portion of the purchase price of the securities. The facility purchased $39.3 billion face value of the RMBS directly from AIG subsidiaries (domestic life insurance companies). As part of the ML II transaction, the $37.8 billion Securities Borrowing Facility established in October before was repaid and terminated. As of August 17, 2011, ML II owed $7.3 billion in principal and interest to FRBNY. In addition, FRBNY announced plans to create a second facility—ML III—to purchase multisector CDOs on which AIGFP had written CDS contracts. This facility was aimed at facilitating the restructuring of AIG by addressing one of the greatest threats to AIG’s liquidity position. In connection with the purchase of the CDOs, AIG’s CDS counterparties agreed to terminate the CDS contracts, thereby eliminating the need for AIG to post additional collateral as the value of the CDOs fell. The Federal Reserve Board authorized FRBNY to lend up to $30 billion to ML III. In November and December 2008, FRBNY extended a $24.3 billion loan to ML III. AIG also paid $5 billion for an equity interest in ML III, which would absorb the first $5 billion of any losses. As of August 17, 2011, ML III owed $11.2 billion in principal and interest to FRBNY. When the two AIG Maiden Lane facilities were created, FRBNY officials said that the FRBNY loans to ML II and ML III were both expected to be repaid with the proceeds from the interest and principal payments, or liquidation, of the assets in the facilities. The repayment is to occur through cash flows from the underlying securities as they are paid off. Accordingly, FRBNY did not set a date for selling the assets; rather, it has indicated that it is prepared to hold the assets to maturity if necessary.