The Federal Reserve has been repaid for its roles in the U.S. government bailout of American International Group Inc. (AIG:US) in 2008 and the rescue of Bear Stearns Cos. earlier that year.
The central bank’s $53.1 billion of loans to vehicles called Maiden Lane and Maiden Lane III, created to help save the companies, were paid back with interest, the Federal Reserve Bank of New York said today in an e-mailed statement. A separate entity, Maiden Lane II, finished being unwound through sales of mortgage assets earlier this year.
“This is a major milestone for the bank and for the public,” New York Fed President William C. Dudley said in the statement. “The Maiden Lane entities were established to protect the U.S. economy at a time of great economic stress, and I am pleased we were able to accomplish that policy objective and be fully repaid.”
Taxpayers remain at risk in the wake of the September 2008 bailout of AIG, once the world’s largest insurer, which swelled to $182.3 billion in value. The Treasury Department still owns 61 percent of the New York-based company and needs to sell the shares (AIG:US) at an average price of $28.72 apiece to break even. The Fed may still generate profits as it disposes of remaining assets in the vehicles.
The district bank this year has been selling mortgage debt acquired in the AIG bailout after halting a series of 2011 auctions following a selloff in credit markets. AIG has said it’s been among buyers. The Fed has continued to sell assets from the Bears Stearns-tied Maiden Lane.
The repayment of the Fed’s loans may help inform future central bank strategies, said Robert Eisenbeis, a former research director at the Atlanta Fed and now chief monetary economist at Sarasota, Florida-based Cumberland Advisors Inc.
“There’s been a lot of precedent set in terms of the extent to which the Fed will feel free to use a lot of different methods” to aid markets during crises, Eisenbeis said in a telephone interview.
AIG advanced 2.4 percent to $31.03 in New York trading. It has gained 34 percent this year.
The government’s cost basis for its shares in the insurer was $47.5 billion, excluding unpaid dividends and fees of $1.6 billion. The Treasury recovered more than $17 billion in three share sales, cutting its stake from 92 percent. That leaves an investment of about $30 billion. AIG retired a Fed credit line last year.
AIG SunAmerica Chief Executive Officer Jay Wintrob said yesterday that proceeds from asset auctions were sufficient to repay the Fed for its loans to Maiden Lane III.
“We’re pleased that the Federal Reserve has decided to cash in now and capitalize on the strong demand,” Wintrob said at a conference held by Morgan Stanley in New York.
The Fed took unprecedented steps in 2008 in a bid to thwart the deepest financial crisis since the Great Depression. Its assumption of assets in AIG’s bailout followed a template used in the rescue of Bears Stearns through that investment bank’s emergency sale to JPMorgan (JPM:US) Chase & Co.
Maiden Lane was created with $30 billion of Bear Stearns assets, including mortgage securities and loans, that JPMorgan didn’t want to take on as it agreed to buy the 85-year-old company for $2 a share in March 2008. Bear Stearns faced a funding squeeze that had led the Fed to offer to lend $13 billion through JPMorgan earlier that month. Its sales price was later raised to $10 a share, or about $2.3 billion.
The Fed created Maiden Lane II to buy about $39 billion in residential-mortgage securities owned by AIG, as well as Maiden Lane III to purchase $62.1 billion in collateralized debt obligations. The debt was purchased at about half its face value, reflecting markdowns AIG had already taken, with the Fed lending the facilities a total of $43.8 billion.
Maiden Lane III was used 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 including Goldman Sachs Group Inc. (GS:US) and Societe Generale SA.
The facility bought the CDOs that AIG insured from the companies, sparing the Wall Street firms from losses and sparking criticism from lawmakers who called it a “backdoor bailout” of banks. The move drew reviews by the Troubled Asset Relief Program’s special inspector general and the Government Accountability Office.
Sales of $19.2 billion of Maiden Lane II assets to Credit Suisse Group AG and Goldman Sachs in January and February helped the Fed unwind that vehicle at a profit of $2.8 billion. The bonds in Maiden Lane II packaged individual home loans, while the CDOs in Maiden Lane III sliced mainly mortgage-backed securities into new debt with varying risks.
The New York Fed is scheduled to auction tomorrow $5.2 billion of CDOs in Maiden Lane III created by TCW Group Inc. under former chief investment officer Jeffrey Gundlach, according to its website and data compiled by Bloomberg. TCW managed almost twice as many CDOs that ended up in Maiden Lane III as anyone else.
As the rest of the Maiden Lane III assets get sold, AIG will receive the first $5 billion of proceeds following the repayment of the Fed’s loan, about $600 million in accrued interest, and then one-third of additional money, according the New York Fed’s website and Wintrob.
“That will provide funding for the company to pursue buybacks,” Josh Stirling, an analyst at Sanford C. Bernstein & Co., said by phone.
JPMorgan’s $1.2 billion subordinate loan to Maiden Lane will be repaid first with the proceeds of sales of its remaining assets, after which the Fed will receive the rest, according to the website.
Dealers acquiring the CDOs in the central bank’s sales have been reworking the debt before reselling it to investors.
Deutsche Bank AG and Barclays Plc unwound $7.5 billion of commercial-mortgage CDOs they bought in April to sell the underlying holdings, while Bank of America Corp. split an $850 million class of a CDO tied to better-quality home loans it acquired last month into two pieces, with a $510 million slice receiving an investment-grade rating of BBB from DBRS Inc., according to data compiled by Bloomberg and a statement from the grader.
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