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Financial Planning > Behavioral Finance

AIG Sells More CDOs

By Allison Bell

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NU Online News Service

Maiden Lane III L.L.C. has bought $16 billion in collateralized debt obligations from American International Group Inc.

Maiden Lane III, New York, is a financing entity controlled by the Federal Reserve Bank of New York.

The block of CDO business that Maiden Lane III acquired includes “multi-sector CDOs” linked to credit default swaps written by AIG’s AIG Financial Products Corp. unit.

CDS contracts and similar instruments associated with the multi-sector CDOs have now been terminated, according to AIG, New York.

AIG Financial Products “continues to analyze possible means of eliminating its exposures to the approximately $2.6 billion of remaining physically settled CDS and approximately $9.7 billion of ‘cash-settled’ or ‘pay-as-you-go’ CDS in respect of protected baskets of reference credits (which may also include single-name CDS in addition to securities and loans),” AIG says.

The counterparties for the $16 billion in CDOs recently purchased by Maiden Lane III received $6.7 billion in new net payments and also took possession of $9.2 billion in collateral previously supplied by AIG Financial Products in connection with the CDS arrangements, AIG says.

Maiden Lane III earlier bought about $46 billion in CDOs, and the CDS instruments associated with those CDOs also have been terminated, AIG says.

AIG Financial Products has received about $2.5 billion in payments from Maiden Lane III in connection with the multi-sector CDO sales, AIG says.

Financial market turmoil has disrupted the market for the mortgage-backed securities inside the multi-sector CDOs.

AIG notes that many of the borrowers who took out the mortgage loans inside the CDOs are continuing to make their payments.

Maiden Lane III will start by using the payments to pay the New York Fed and AIG back for the money they have invested in Maiden Lane III.

The New York Fed has agreed to lend up to $30 billion to Maiden Lane III, according to AIG and the New York Fed.

AIG has received a stake in the entity in exchange for supplying $5 billion in equity funding.

Once the New York Fed and AIG get back the cash they have invested in Maiden Lane III, Maiden Lane III will pay 67% of any remaining cash flow to the New York Fed and 33% to AIG, AIG says.

The New York Fed also has helped AIG create a second financing entity, Maiden Lane II L.L.C., that is using $1 billion from AIG and up to $22.5 billion from the New York to help AIG shut down its securities lending operations.

A third New York Fed entity with a similar name, Maiden Lane L.L.C., has no connection with the efforts to help AIG and is being used to unwind some operations of Bear Stearns & Company Inc., New York.

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