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AIG Calls Swap Suit Ploy to Avoid a Big Payout

Source: WSJ

Posted on 18 Dec 2009

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A real-estate investment firm that sued American International Group Inc. (AIG) over a 25-year swap deal is taking part in a litigation "lottery" to avoid paying $1.2 billion to AIG, the insurer alleged in court papers filed late Thursday.

Lawyers for AIG asked a federal district court in New York to dismiss a lawsuit from Brookfield Asset Management Inc. In September the firm argued that the insurer's 2008 U.S. government bailout amounted to a default by AIG under an interest-rate derivative pact that units of both firms had entered into.

The legal tussle highlights some of the complex dealings that AIG's financial-products unit had with trading partners and the difficulty of untangling some of these arrangements following the U.S. rescue.

Amid the recent financial crisis, a growing number of firms have scrutinized and challenged the terms of their derivative agreements.

In 1990, Toronto-headquartered Brookfield and AIGFP entered into interest-rate swap agreements that were scheduled to terminate in 2015. A unit of Brookfield agreed to pay AIGFP a fixed annual interest rate of 9.61% on $200 million in debt, while AIG agreed to pay Brookfield a floating interest rate based on a benchmark called the London Interbank Offered Rate.

At the time the deal was struck, Libor was 8.25%. It has since dropped to 0.45%, putting Brookfield on the losing end of the trade and creating a $1.2 billion obligation to AIGFP, according to AIG's court filings. Of the $1.2 billion, $700 million has been accrued so far, AIG said.

Last December, Brookfield told AIG that it believed the insurer had defaulted under the terms of the swap agreements, freeing Brookfield of its financial obligations. In its September lawsuit, Brookfield said AIG's liquidity crisis in the fall of 2008, its consideration of a bankruptcy filing prior to the U.S. bailout, and steps its financial-products unit is taking to wind down its derivatives trading book triggered a default under the terms of their swap pact.

In its filing, AIG said the federal government rescue was meant to prevent AIG from defaulting on its obligations.

"Brookfield is desperately trying to evade a more than $1 billion obligation owed to AIG. We believe Brookfield's position is without merit and should be rejected," said Michael Carlinsky, an attorney for Quinn Emanuel Urquhart Oliver & Hedges LLP, who is representing AIG.

A spokesman for Brookfield didn't comment. AIG said it isn't aware of any other trading partner that has alleged it defaulted under swap agreements.

AIG said in its court filings that if it was deemed to have defaulted despite resolving its liquidity problems, the implications for many other similar contracts would be "staggering."