American International Group will accrue between $3.8 billion and $5.8 billion as a result of the recent successful sale by the Federal Reserve Board of securities held in the Maiden Lane III facility, according to analysts at Sterne Agee in New York.
In an investor’s note Friday, Sterne Agee analysts John M. Nadel, Dan Farrell, Alex Levine and Nitin Chhabra also estimated that $20 billion (face amount) of collateralized debt obligations backed by mortgage-backed securities of various grade remain in the facility after all the latest sales in a favorable market.
The analysts estimate the $3.8 billion/$5.8 billion return to AIG is based on the fact that $5.6 billion represents AIG’s equity stake in the facility, and that $200 million more could accrue to AIG. That’s because under the original agreement, AIG gets one-third of the money gained from the sale of securities in the facility above its equity stake.
The analysts estimate that the securities, based on recent sales, will yield 30 to 50 percent of face value, and that AIG will get one-third of the total gained from the sale of those securities. The latest sales were from a $28.82 loan collateralized by debt obligations backed by MBS held in the so-called Maiden Lane III facility.
The approximate face value of the securities held in the Maiden Lane III portfolio was $62.1 billion. It reflected markdowns in value AIG had already taken against its earnings.
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 that included Goldman Sachs Group Inc., Deutsche Bank, Paribas and Société Generale SA.
The Fed initially provided AIG with $85 billion in cash in September 2008 in exchange for 79.9 percent of its stock.
The Fed later loaned AIG additional cash by taking securities held by its various subsidiaries as collateral. In this case, the securities were held by AIG’s Financial Products subsidiary.
The analysts said that the New York Fed successfully auctioned off about $7.4 billion of assets within Maiden Lane III over the past week. “While proceeds are unknown, we do know that 100% of these proceeds will go to AIG as it recoups its $5.6 billion equity investment in MLIII,” the analyst said.
The latest sale of Maiden Lane III securities fully repaid the Fed loan.
Sterne Agee analysts estimated that the last NY Fed sale of securities, including those made June 15, 25 and 28th, totaled about $12.5 billion in face value of securities.
“We estimate the aggregate face amount of securities sold, since the NY Fed's loan was fully repaid, totals about $12.5 billion (includes assets sold on June 15, 25 and 28th),” the analysts said in their investment note.