American International Group will gain approximately $2.1 billion over its initial $5 billion investment in Maiden Lane III when the Federal Reserve Board of New York completes its sale of securities held in the facility.
The Fed created Maiden Lane III in 2008 to cancel credit-default swaps that AIG had sold to protect counterparties against losses. The insurer needed to be rescued after it was unable to meet collateral calls from banks that included Goldman Sachs Group Inc., Deutsche Bank, Paribas and Societe Generale SA.
The initial investments in Maiden Lane III consisted of $24.3 billion from the Fed and $5 billion from AIG.
However, the extra $2.1 billion AIG will see above the $5 billion it paid into Maiden Lane III does not necessarily represent a gain on the company’s investment, an analyst says, because the company had already taken markdowns of over $30 billion on its earnings to reflect payment of guarantees associated with the securities held in the facility.
Under the agreement in 2008 with the New York Fed that created Maiden Lane III, AIG gets its equity stake returned, interest on the loan, plus one-third of additional proceeds from sale of the securities beyond the $24.3 billion invested by the Fed. AIG estimates that it has received $600 million in interest on its loan.
John Nadel, an analyst at Sterne Agee in New York, estimates that the Fed is getting between 30 percent and 50 percent of the face value of the securities contained in the portfolio through sales to various investment-banking firms.
He adds that the latest disclosures from the Fed and AIG confirm his estimate that the total proceeds to AIG from Maiden Lane III asset sales will ultimately total about $7.1 billion, although full details are not expected until AIG reports its second-quarter earnings Aug. 2.