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Federal Reserve of New York Squares an Account with AIG

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The Federal Reserve Bank of New York today ended one chapter from the bailout of American International Group, selling a group of mortgage-backed securities that closed out its Maiden Lane II facility.

The FRBNY said it sold securities with a face value of of $6.2 billion from its Maiden Lane II LLC (“ML II”) portfolio through a competitive process to Goldman Sachs & Co.

AIG said it would decline comment on the sale at this time.

The Fed said that the proceeds from this sale and a Jan. 19 sale to Credit Suisse will enable the repayment of the entire remaining outstanding balance of the senior loan from the New York Fed to ML II on the next payment date in early March. The original amount of the senior loan was $19.5 billion.

The Fed created two facilities in November 2008 to provide $44 billion in cash to AIG in late 2008 that paid off a part of a loan made earlier. The facilities were called Maiden Lane II and Maiden Lane III.

They constituted the second Fed effort to bail out AIG.

Earlier, the Fed on Sept. 16, 2008 provided $85 billion in cash to AIG in return for 79.9 percent of its stock.

The Maiden Lane facilities were backed with approximately $79 billion in MBS and collateralized debt obligations of various quality purchased by AIG Financial Products and backed by high quality bonds held by AIG in its life insurance subsidiaries, whose assets were also guaranteed by its property and casualty operating subsidiaries.

The ML II facility involved residential mortgage-backed securities of various grades from prime to sub-prime. The original loan to Maiden Lane II was $19.5 billion. The face value of the securities the loan collateralized was their interests in a pool of $39.3 billion.

The Maiden Lane III facility involved collateralized debt obligations from AIG Financial Products Corp. The original amount funded by the FRBNY was $24.3 billion.

The Fed received a request in 2011 from AIG to buy back the facilities, but the Fed decided in March 2011 that it could get a better deal by selling them directly. Its first sale of a group of securities from the two facilities did not get the price the Fed desired, and a result in a decline in the overall credit-backed securities market, Trepp LLC, which tracks these transactions, said at the time the first securities were sold.

However, when the Fed responded to an unsolicited offer from Credit Suisse Securities (USA) LLC in January to BlackRock Solutions (the investment manager for ML II) to buy ML II assets, the market easily absorbed the paper.

Tom Fink, senior vice president and managing director of Trepp said today that, “Maiden Lane II is a facility that the NY Fed set up to hold collateral received from AIG when it loaned AIG TARP money. The bonds were primarily subprime residential mortgage bonds and [their sale] will have little impact on the CMBS market.”

The five broker-dealers who made bids were Barclays Capital Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co., Morgan Stanley & Co. LLC, and RBS Securities Inc., the Fed said. The broker-dealers were selected based on the strength of each of their recently submitted reverse inquiries for large parcels of the portfolio, the Fed said.

William C. Dudley, President of the New York Fed, said, “I am pleased with the continued interest in these assets and am especially gratified that the New York Fed’s loan to ML II will be repaid as a result of the sale announced today.”