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Sarah,

We met with Govs. Kohn and Warsh today to update them on the package of measures being prepared for AIG.

The governors asked two questions in the meeting that we did not know the answers to. I expect these are issues that someone on your team is already working
on, but we would like to get the latest information from you so we can get back to the governors with answers.

1. Who is overseeing the tear-up process on the COS? There are two issues here, concessions and Goldman.

Concessions: the worry is that giving the counterparties par in exchange for the underlying COO security might be giving them a gift - they no longer have AIG
credit risk, and whatever CVA they have taken against potential future exposure to AIG will be released upon tear-up. If a counterparty has not received all the
collateral it has called for, the tear-up eliminates current exposure also. On the other hand, AIG is now receiving government support so the perceived credit risk of
AIG is less. Also, AIG needs to get the CDS torn up to put its problems behind it, so its bargaining power may be weak. If I understand the current version of the
proposed structure, any concessions will result in an excess amount left in the escrow account which pays down the Fed's senior note. This may reduce AIG's
incentive to bargain for the best concession possible. Is Morgan Stanley or some advisor from our side embedded in the tear-up negotiations to track these
issues?

Goldman: is a special case because their CDS with AIG are a naked short position and they don't own the bonds. If the CDS are just torn up at current mark-to-
market, the value of that mark influences the cash Goldman will receive in a way that is not the case for the counterparties who own the bonds and will be
receiving par. The Fed, Goldman's senior management, and Treasury all have an interest in making sure the negotiation of the mark between AIG and Goldman is
done in a fair way. However, the normal procedure might be for the negotiations to be done between someone at AIGFP and their counterpart on a trading desk at
Goldman. A Goldman trader may not share the perspective of Goldman's senior management and may attach higher value to an extra billion dollars of P&L that
could affect his or her 2008 bonus, even if that carries significant reputation risk for Goldman as a firm. Again, is Morgan Stanley or some advisor involved here
and aware of the issue? Is there a contingency plan to approach Goldman at a more senior level if roadblocks start appearing in the negotiations?

2. What public disclosures will be made of the mark-to-market on ML II and ML III once they are consolidated on FRBNY's balance sheet?

The governors were concerned that the market could attach a disproportionate significance to any public disclosure of "the Fed's" marks on the nonagency RMBS
and ABS COO portfolios once ML II and ML III are consolidated onto FRBNY's balance sheet. Do we have a strategy for that? Would the disclosure be the same
as Maiden Lane LLC (quarterly disclosure of fair value of the holdings of ML II and ML III on the H.4.1)?

Three more questions that are mine, not the governors.

1. Given all the public hue and cry about the transit authorities whose tax-motivated lease transactions are in danger of unwinding due to AIG's downgrade below
AAA, are there other similar transactions that we should know about (and alert the governors about)? I assume this transaction was part of the AIGFP TOG
portfolio; do what know what else lurks there?

2. What is the status of the FP winddown?

3. Can we have an update on the asset disposal process?

Thanks,
Mike

CONFIDENTIAL FRBNY-TOWNS-Rl-147945