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Retirement Planning > Social Security

Fed Sells Remaining Maiden Lane III Securities

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The remnants of securities contained in facilities created by the Federal Reserve Bank of New York to help bail out American International Group in 2008 were sold today, a key milestone in the company’s efforts to end the government’s equity interest in AIG.

Today’s sale of the remaining $3.4 billion face amount of collateralized debt obligations backed by mortgage-backed securities held in the Maiden Lane III facility “marks the end of an important chapter, our assistance to AIG, that was undertaken to stabilize the financial system in the midst of the financial crisis,” William Dudley, president of the New York Fed, says in a statement.

Analysts at Sterne Agee in New York project that AIG will gain perhaps $2.9 billion above the $5 billion it paid into Maiden Lane III, up from an earlier estimate of $2.1 billion because interest in the securities is high as they carry far higher yields than currently offered through the market.

That does not necessarily represent a gain on the company’s investment, an analyst says, because AIG had already taken markdowns of over $30 billion on its earnings to reflect payment of guarantees associated with the securities when the company turned them over to the Fed in late 2008.

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.

The prior securities sold from the Maiden Lane III portfolio yielded 56 percent of face value. It was not announced how much the Fed received for the last batch of securities.

But Dudley says the sale will result in a net gain for the benefit of the public of approximately $6.6 billion, including $737 million in accrued interest on the New York Fed’s loan to ML III.

In its August 6 earnings conference call with analysts, AIG president and CEO Robert Benmosche said AIG had purchased approximately $7.1 billion of the securities through the Fed auctions.

Today’s announcement on ML III follows the successful wind-down of Maiden Lane II in February and the January 2011 termination of the New York Fed’s extension of credit to AIG, which produced approximately $8.2 billion in interest and fees.

When taken together, the total net profit to taxpayers from the New York Fed’s assistance to AIG and AIG-related facilities was $17.7 billion, Dudley says.

The Federal Reserve Bank of New York provided a credit line of $182 billion in Sept. 2008, after it became clear that margin calls on credit default swaps issued by a unit of AIG could possibly force the company into bankruptcy. In return for the cash, AIG gave the FRBNY 79.9 percent of its equity.

Another key step in ending the government’s involvement in AIG is likely to occur early next month, when AIG is expected to offer the remaining 19 percent of American International Assurance, its Asian life insurance subsidiary, to the public. That is expected to yield $7.5 billion in cash, part of which AIG will likely to use to buy back stock in the company held by the Treasury Department, according to analysts.

Sterne Agee analysts say the sale, through an IPO, is likely to bring federal ownership of AIG from the current 53 percent to less than 50 percent.


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