AIG Repurchase Bid Rejected by Fed

Decision reached to maximize returns in the public interest

AIG, which had attempted to repurchase the assets of Maiden Lane II, a package of securities it sold to the Federal Reserve in November 2008 when it needed to raise money, was rebuffed Thursday when the Fed said no to the deal.

As reported by NU Online News Service, the securities that made up the Maiden Lane II package were valued at $21.7 billion at par; AIG had offered to repurchase them for $15.7 billion. The Fed turned down the offer, saying in a statement that because of improving market conditions for the type of securities included in the package, after “careful review,” the N.Y. Fed and the Board of Governors of the Federal Reserve System “judged that the public interest in maximizing returns from any sale and promoting financial stability would be better served by an alternative approach to realizing value that is also more consistent with normal market practice.”

The decision, it added, was reached in “light of improved conditions in the secondary market for non-agency residential mortgage backed securities (RMBS), and a high level of interest by investors.”

AIG had been trying to rebuy the securities since last September. Mark Herr, AIG spokesman, said in the report, "Since the fall of 2010, based on numerous discussions with the New York Fed, [AIG] had anticipated that we would have the opportunity to buy these assets at a fair price by January 2011 and earn a return on them for the benefit of the U.S. taxpayer. Now, we must make up for lost time and lost earnings—all of which hurts U.S. taxpayers."

Herr added, “We are highly disappointed in the Fed’s decision, which may prevent AIG from delivering on its goal that U.S. taxpayers earn a profit on their investment in AIG. That the Fed, which has been such a constructive partner over the last two years, would hurt the very company in which U.S. taxpayers own a 92% stake, is very difficult to understand."

The New York Fed, apparently in an effort to realize the $6 billion difference between AIG’s offering price and the par value of the securities, said in a statement “that conditions are right for ML II to begin more extensive asset sales while taking appropriate care at all times to avoid market disruption. In light of this decision, the New York Fed has changed the investment management objective for ML II consistent with such sales.”

The sale will be conducted by BlackRock Solutions; reportedly, Barclay’s Bank and Swiss Re are among AIG’s competitors to acquire the securities.

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