For Sale: AIG’s Mortgage-Backed Securities Being Auctioned Off

The Federal Reserve Bank of New York is auctioning off assets from Maiden Lane II, one of the limited liability companies it set up to aid American International Group Inc. in 2008.

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At the time, the FRBNY took the then-troubled assets from AIG’s balance sheet and loaned the company cash to conduct business.

AIG had offered $15.7 billion to buy back the assets, which are residential mortgage-backed securities, but the Fed rejected the idea on March 30.

“The public interest in maximizing returns from any sale and promoting financial stability would be better served by an alternative approach,” the FRBNY said in a statement.

In light of improved conditions in the secondary market for RMBS, “and a high level of interest by investors, the Federal Reserve believes that conditions are right” for Maiden Lane II to begin more extensive asset sales, the bank said.

At Oct. 31, 2008 inception, the Maiden Lane II paid $20.5 billion for the portfolio of assets with a face amount of about $39.3 billion.

The FRBNY is auctioning off small blocks of the assets at a time. On April 11, the FRBNY listed $1.2 billion in current face amounts of RMBS assets up for auction in the open market.

“Current face amount represents the most recent balance of principal outstanding on the assets and should not be confused with market value or the price Maiden Lane II paid to acquire the assets,” the FRBNY said.

Last week, the Fed sold about $1.3 billion of assets at auction, but AIG would rather see the assets sold as a single unit.

“AIG will continue to work with FRBNY on its new process to sell off piecemeal the Maiden Lane II assets. AIG continues to believe that AIG and the taxpayers, who own 92% of AIG, would be better served by public auction of the entire block of securities,” said Mark Herr, vice president of media relations for AIG.

However, “AIG will continue to work through this piecemeal bidding process,” Herr said in an email.

The FRBNY created Maiden Lane II and Maiden Lane III, which holds credit default swaps, as part of the $182 billion bailout of AIG.

AIG was in danger of failing in September 2008 when the FRBNY stepped in to provide the insurer with an emergency loan of up to $85 billion to prevent its “disorderly collapse, which could have had catastrophic consequences to the U.S. economy during the most damaging financial crisis in 70 years,” the FRBNY said.

That initial assistance was restructured over time, and was supplemented in November 2008 and April 2009 by additional financial assistance from the Treasury under the Troubled Asset Relief Program. The available bailout grew as high as $182 billion, but AIG never borrowed the full amount it was offered. Since then, it has been selling noncore assets to pay back what it owes (BestWire, March 9, 2011).

For instance, in March, AIG said it took some of the proceeds from the sale of American Life Insurance Co. to pay down another $6.9 billion in federal loans (BestWire, March 9, 2011). That was the fourth major payment AIG made to the government in 2011 and brings the total repaid this year to about $36 billion.

Most of AIG’s insurance subsidiaries currently have Best’s Financial Strength Ratings of A (Excellent).

On the afternoon of April 11, AIG’s (NYSE: AIG) stock was trading at $34.30 a share, down 0.55% from the previous close.

(By Meg Green, senior associate editor, BestWeek: Meg.Green@ambest.com)