The New York Federal Reserve (Fed) has reported that it earned about $4.68 billion from American International Group Inc.’s (AIG) Maiden Lane II, an investment portfolio containing residential mortgage-backed securities (RMBS), in the second quarter of 2011. The Maiden II was acquired by the Fed from AIG at the peak of the financial crisis.
The notional worth of these securities was $9.4 billion. Accordingly, the sale represented about $10 billion of debt, at about 47 cents on the dollar. These were part of the $31 billion debt, which AIG had offered to buy for 51 cents on the dollar in March this year but was rejected by the Fed.
Moreover, the majority of the RMBS was sold to broker-dealers in nine sales that took place between April and June this year. These primarily included Merrill Lynch, Pierce, Fenner, & Smith units of Bank of America Corp. (BAC), which purchased a chunk of $1.14 billion of debt followed by Citigroup Inc. (C) that acquired $699.4 million. Meanwhile, Royal Bank of Scotland Plc’s (RBS) RBS Securities purchased $541.1 million and Credit Suisse Group (CS) acquired $419.1 million.
In 2008, the Fed had put $20 billion into Maiden Lane to help buy residential mortgage-backed securities from AIG, which had a face value of $39.5 billion at that time. The total notional value of the Maiden Lane II portfolio is more than $30 billion.
During the same period, the sub-prime mortgage market remained essentially frozen and these assets were high-yielding and were most likely to be sold to private equity groups, hedge funds and insurance groups.
The fair value of the portfolio at the end of 2010 reached $15.9 billion, according to the Fed’s web site. However, Fed rejected AIG’s bid of $15.7 billion to buy back the portfolio. The Fed reasoned on March 30 that the public interest in maximizing returns and maintaining market stability would be better served by selling the assets competitively. Hence, it started vending bonds from the RMBS portfolio since April 2011.
Meanwhile, the Fed has planned to slow the rate of sale going ahead, given the recent sluggishness in market activities that have recently lowered the value of such subprime mortgage securities by almost 20%. This was due to the recent over-supply of subprime securities owing to the ongoing de-risking activities implemented by many organizations that finally led to the decline in demand and prices in the market. Hence, the Fed has decided to wait and make value investments as best as it possibly can.
Based on these factors, the Fed was able to sell only 36 of the 73 bonds offered for sale in the beginning of last month. The 73 bonds carried a face value of $3.8 billion. Failure to dispose all bonds again stems from the fact that most of these bonds were backed by prime and so-called Alt-A mortgages while the remaining senior bonds were backed by sub-prime and home-equity collateral, wherein the over-supply dampened the demand and therefore the prices of these bonds.
Additionally, the Fed has decided to disclose the number and type of bonds sold each month, but not the price paid. Every quarter it will provide a total dollar figure of the assets sold along with the names of firms that bought the securities.
Furthermore, the Fed will not be disclosing what these firms paid until all of Maiden Lane II’s assets are sold. Within three months of the final sale, the Fed will disclose the names of buyers of these securities, the price they paid and the price Fed paid when it bought the securities from AIG in 2008.
However, the receipt of final approval from Taiwan’s Financial Supervisory Commission (FSC), last week, to sell AIG’s Nan Shan Life Insurance unit to the Ruen Chen Group for $2.16 billion, has moved AIG a step closer to unshackling itself from government control.
