Yesterday, the New York Federal Reserve (Fed) reported that it sold the total American International Group Inc.‘s (AIG) Maiden Lane II LLC, thereby recovering all of $19.5 billion taken as a loan by the US government in this investment vehicle. The sale has also maximized public interest by about $2.8 billion from the total sale so far. However, the net proceeds from the latest sale will be released in April this year.
Maiden Lane II is an investment portfolio containing residential mortgage-backed securities (RMBS), which was acquired by Fed from AIG during the peak of financial crisis. Under the terms of the Maiden Lane II vehicle, once the insurer’s principal and interest are repaid, any additional money the Fed makes from the sale of Maiden Lane II assets will be split between the Fed and AIG – five-sixths to the Fed and one-sixth to AIG.
Accordingly, the Fed sold the last tranche of RMBS carrying face value of $6 billion to Credit Suisse Group AG (CS), who won the bid yesterday. The competitive bid was also participated by Morgan Stanley (MS), Royal Bank of Scotland Plc‘s (RBS) RBS Securities, Barclays Capital plc (BCS) and Merrill Lynch of Bank of America Corp. (BAC). The Fed had appointed BlackRock Inc. (BLK) to manage this RMBS portfolio.
This marked the third auction in 2012, whereby a total of about $13 billion of AIG’s RMBS were sold to Credit Suisse (about $7 billion) and Goldman Sachs Group Inc. (GS) (about $6.2 billion). Last week, AIG was also able to repurchase some of these RMBS worth about $2 billion.
Before this, in the second quarter of 2011, the Fed had raised about $4.68 billion from these securities, whose notional value was nearly $10 billion. Moreover, majority of the RMBS were sold to broker-dealers in nine sales that took place between April and June 2011. These primarily included Merrill Lynch, Pierce, Fenner, & Smith units of Bank of America, which purchased a chunk of $1.14 billion of debt followed by Citigroup Inc. (C) that acquired $699.4 million. Meanwhile, RBS Securities purchased $541.1 million of the securities and Credit Suisse acquired $419.1 million.
In 2008, the Fed had put $19.5 billion into Maiden Lane to help buy residential mortgage-backed securities from AIG, the fair value of which reduced to $15.9 billion at the end of 2010, according to the Fed’s web site. However, the Fed rejected AIG’s bid of $15.7 billion to buyback the portfolio in March 2011. The Fed reasoned that the public interest in generating utmost 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.
However, the Fed still has the original Maiden Lane portfolio, which was created to facilitate JPMorgan Chase & Co. (JPM) in purchasing Bear Stearns. The Fed also has the Maiden Lane III portfolio, which contains collateralised debt obligations (CDOs) that were held by AIG’s counterparties, which were bought by the Fed to terminate credit default swaps (CDS) issued by AIG. Nevertheless, the lucrative sale of Maiden II raises optimism for a profitable sale of other investment vehicles.
Zacks Investment Research