AIG Gains As New York Fed Ending $62 Billion Auction: Mortgages
The c of New York’s role in the $182.3 billion rescue of American International Group Inc. (AIG) is ending on a high.
The central bank is planning to sell $3.4 billion in toxic mortgage debt today that it inherited four years ago when it bailed out AIG, once the world’s largest insurer. The assets are the last batch from its Maiden Lane III LLC portfolio created to purchase $62.1 billion of collateralized debt obligations tied to risky residential- and commercial-mortgage securities that helped sink AIG when property markets tumbled.
Demand for subprime mortgage debt and CDOs has jumped this year as the housing recovery strengthened and the Fed extended programs to keep borrowing costs low. AIG has received more than $6 billion in proceeds through July from the auctions and may get another $1.9 billion this month, helping Chief Executive Officer Robert Benmosche, 68, buy back shares from majority owner the U.S. Treasury Department. The insurer is now entitled to receive one-third of the proceeds from sales since the central bank fully recovered its investment in June and AIG’s equity contribution was repaid last month.
“People will debate forever if the bailouts worked and how they should have happened, but you can say the Treasury has been a good owner of AIG,” Josh Stirling, an analyst at Sanford C. Bernstein & Co. said in a telephone interview. “These auctions are good for the Treasury because the Fed selling its interest in Maiden Lane III has allowed AIG to raise liquidity, with which it can support the Treasury by buying back stock.”
Joe Norton, an AIG spokesman declined to comment.
Treasury Stake
AIG’s rescue in 2008 swelled to include a $60 billion credit line from the New York Fed, as much as $52.5 billion for two Maiden Lane programs and a Treasury investment of up to $69.8 billion. The Treasury has since cut its stake in AIG to 53 percent from 92 percent by selling shares, the credit line has been repaid and Maiden Lane II, created to buy about $39 billion in residential-mortgage securities was unwound earlier this year through asset sales.
Maiden Lane III was created to purchase CDOs to cancel credit-default swaps that AIG had sold to protect counterparties against losses, sparing firms including Societe Generale SA (GLE) and Goldman Sachs Group Inc. (GS) from damages and sparking criticism from lawmakers who called it a “backdoor bailout” of banks.
The debt was purchased at about half its face value, reflecting markdowns AIG had already taken. The rescue was among measures the U.S. government and central bank undertook in 2008 to try and thwart the deepest financial crisis since the Great Depression.
In total, they spent, lent or committed as much as $12.8 trillion, including the Troubled Asset Relief Program to bolster banks and automakers.
Bloomberg
