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Fed Sells Maiden Lane III Bonds

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Approximately $7.5 billion in face value of the exotic securities backed by sub-prime mortgage loans that almost brought American International Group (AIG) under were sold Thursday through an auction by the Federal Reserve Bank of New York.

The securities, called collateralized mortgage obligations, are backed by junk-rated mortgages and were held by the New York Fed in a facility called “Maiden Lane III.”

It means that the end-game is being played on securities purchases by the Fed that were part of the federal government’s immense financial aid to the company in the fall and winter of 2008.

They were sold to a consortium that included Barclays Capital Inc. and Deutsche Bank Securities Inc. following a competitive bidding process.

They beat out two other groups, one consisting of Bank of America, Morgan Stanley and Nomura, and the other consisting of Citigroup, Goldman Sachs and Credit Suisse.

The securities sold by the Fed were termed “MAX,” because they were most speculative held in the Maiden Lane III facility.

The Fed would only say that the transaction “substantially reduces” the Maiden Lane III portfolio and that they were sold “at a desirable price.” 

William C. Dudley, president of the New York Fed, said “I am pleased with the level of interest and the results of this process, especially with the strength of the winning bid, which represents good value for the public and significantly exceeds the original price Maiden Lane III paid for these assets.”

He added that, “This successful sale marks another important milestone in the wind-down of our crisis-era intervention.”

The Fed said it would post the results in its regular monthly update of the value of the two facilities it continues to manage on behalf of AIG.

Maiden Lane III was created to provide $24.3 billion in cash to AIG in 2008.

The facility was populated by collateralized debt obligations (CDOs) estimated to have twice the fair market value. According to Fed and AIG filings, $16.068 billion of the loan has been paid off through the “process of the payment stream,” i.e., redemption of CDOs by the issuer or interest on the securities included in the portfolio, according to securities filings by AIG.

The current balance remaining on the loan is $8.996 billion. By contrast, the fair market value as of Dec. 31 of the securities included in the portfolio is $17.8 billion, 190 percent of the loan, according to Fed data.

The other facility, Maiden Lane II, is being closed down because the remainder of its securities were sold last month.

The Maiden Lane III securities were held by the AIG Financial Products Group. The Maiden Lane II facility involved residential mortgage-backed securities of various grades from prime to sub-prime that were collateralized by the reserves of AIG’s life insurance subsidiaries.

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.


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