American International Group Inc. (NYSE: AIG) disclosed in a filing today that four affiliates applied for participation in the Federal Reserve Bank of New York’s Commercial Paper Funding Facility.  It is harder to tell which is more surprising: the billion of cumulative capital or the fact that this looks more like a financial shuffle.

The following company units may issue up to these amounts of commercial paper under the funding program:

• AIG Funding Inc. $6.9 billion
• International Lease Finance Corp. $5.7 billion
• Curzon Funding LLC $7.2
• Nightingale Finance LLC $1.1 billion

What is interesting is that it looks like funding general operations isnot the point.  The funds generated from the commercial paper issuancewill be used to refinance AIG’s outstanding commercial paper as itmatures, to meet other working capital needs, and to make voluntaryprepayments under AIG’s $85 billion credit facility with the FederalReserve Bank of New York.

Some might consider this borrowing from Peter to repay Paul.  But allin all, you might want to think of it more like internal debtarbitrage.  In older days this would be outright silly, but right now anything that lowers any cost of funds or puts off the maturity dates of short-term or long-term debt is what firms have to do.  The hope is that a normalization returns to the market.

Jon C. Ogg
October 30, 2008

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