AIG Winding Down Troublesome Financial Products Operation

February 17, 2009

By year end, American International Group Inc. expects to have largely wound down a money-losing financial products unit that was the cause of its near-collapse last year, said Gerry Pasciucco, hired three months ago to oversee the closure.

“2009 is when we largely expect to do this,” said Pasciucco, a former Morgan Stanley executive who was named interim chief operating officer of the unit, AIG Financial Products (AIGFP), last November.

To wind down the business, AIGFP must find buyers for complex derivatives or other ways of getting transactions off its books — a process complicated by strained market conditions but not impossible, Pasciucco said in a telephone interview late on Friday.

“We still are able to execute our plan in this market,” he said. “We have reduced our positions (or trades) by 25 percent” since November, he added.

Pasciucco told Reuters it was possible some assets better suited to a “run-off scenario” may linger on the firm’s books beyond 2009, but are expected to be few in number. These could either be managed by the parent company, AIG, or a skeleton staff of 20 or fewer within AIGFP, he added.

AIG, once the world’s biggest insurer, is winding down the unit after posting $42.5 billion in losses over the past year, largely as a result of bets that AIGFP took on toxic mortgage debt. A broad probe into the firm’s business dealings by U.S. and UK regulatory and law enforcement agencies has ensued.

To save itself from bankruptcy, AIG had to take a $150 billion government lifeline that is to be repaid partly through the sale of global assets.


Pasciucco said the first order of business at AIGFP is to shed its riskiest assets. Part of this process has been government-assisted.

Last December, a federal fund was established to purchase collateralized debt obligations from AIGFP counterparties, helping to clear it of credit derivative obligations, or CDOs, that had triggered costly collateral requirements.

Still, AIGFP retains some CDOs on its books, said Pasciucco. “We would not consider that (book) unwound,” he said, adding: “We continue to actively look at it to see if there are better options to running it off.”

On Friday, AIGFP closed the sale of certain assets in its energy and infrastructure business for $60.5 million. The firm also reached an agreement last month to sell a commodity index business to UBS AG.

Pasciucco said it was possible but far from certain that AIG could participate in a government plan still to be rolled out that would be a marketplace for the sale of asset-backed securities to private parties, backed by a government guarantee.

AIGFP, which operated separately from the insurance operations that AIG is best known for, sold credit-default swaps and other hedging and investment products covering currencies, energy, equities and interest rates to clients around the globe.

AIGFP has about 370 employees in Wilton, Connecticut, London, Paris, Tokyo, Hong Kong and an administrative office in India.

It will reduce its operations in Asia first, although the timing is still being finalized, said Pasciucco.

The company’s headquarters in Wilton and large offices in London and Paris will remain open longer, he added.

“It is early in the process but we are trying to reduce the complexity, reduce the number of the people we need, reduce the risk,” said Pasciucco. “We are making progress.”

(Reporting by Lilla Zuill; Editing by Carol Bishopric, Gary Hill)

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