Filed Under:Life Insurance, Life Products

AIG Gobbled Up Maiden Securities

(AP Photos/Mark Lennihan)
(AP Photos/Mark Lennihan)

American International Group has been an aggressive purchaser of securities it formerly owned that were held in facilities created by the Federal Reserve Bank of New York.

During its conference call with analysts Friday, AIG officials said the company has purchased a total of $9.9 billion of securities held in the Maiden Lane II and III portfolios.

Robert Benmosche, AIG president and CEO, and David Herzog, chief financial officer, said AIG has participated in most of the 12 auctions the Fed bank has used to sell the securities and that it has purchased $7.1 billion of those securities in auctions held in July.

The average yield of the bonds was 9.7%, according to the PowerPoint displayed during the conference call.

“We feel these are very good for this company on the yield basis going forward, especially in this lower interest rate environment,” Herzog said.

The Fed bank has said the securities sold in July were bought for an average 56 percent of face value.

Herzog said AIG was a winning bidder at a third of the auctions and that demand for the bonds are aggressive.

Securities held in the Maiden Lane II facilities were mortgage-backed securities originally owned by AIG’s life insurance subsidiaries.

This facility was closed out in April.

Amongst the securities held in this portfolio were $600 million in the first tranche of mortgage-backed securities issued by Freddie Mac, Benmosche and Herzog said.

Maiden Lane III originally contained $62 billion in face value of collateralized debt obligations (CDO) backed by mortgage-backed securities of various grades.

The Fed bank has said it has so far sold CDOs from Maiden Lane III with a total face value of roughly $39 billion.

According to a power presentation during the conference call, the average yield of the bonds purchased by AIG was 9.7%.

The securities are being held at both the corporate level and at the Chartis and SunAmerica operating life subsidiaries, AIG officials said.

They were established by the Fed to provide cash to AIG as it worked its way through a financial crisis starting in 2008.

Maiden Lane contained bonds AIG was forced to accept in exchange for cancelling credit default swaps (CDS) the company sold mainly to banks as insurance on the value of so-called “synthetic CDOs” they had purchased.

AIG had provided $30 billion in cash deducted from earnings to back the CDS as its credit ratings dropped. In order to finance the repurchase of the CDOs, the Fed provided $24. 4 billion in cash and AIG borrowed $5 billion.

Under the deal, once the Fed and AIG were paid back, the Fed would get two-thirds of the remaining proceeds, and AIG one-third. AIG would also receive accrued interest on the securities. As of that date, AIG indicated it had received $427 million reflecting its one-third stake in residual proceeds beyond the loan amount.

Last week, analysts John M. Nadel, Dan Farrell, Alex Levine and Nitin Chhabra of Sterne Agee said in an investor’s note that they now estimate that AIG could receive up to $9.3 billion as its share of proceeds of sale of securities held in the Maiden Lane III facility.

Earlier, the analysts had predicted that the total proceeds of the sale of assets from Maiden Lane III to AIG would be in the range of $7.1 billion.


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Nichole Morford

Nichole Morford
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