Fed Helps AIG Take Risky Loans Off its Balance Sheet

Capital liquidity protection for American International Group is underway as the insurer and the U.S. government reached an agreement Tuesday to clear its debt obligations of $53.5 billion in bad mortgage loans.

A financing entity funded by the Federal Reserve Bank of New York and AIG has purchased $46.1 billion in complex debt securities insured by AIG.

According to an AIG press release, the company has provided $5 billion in equity funding, and the New York Fed will provide up to $30 billion in senior funding to the financing entity, of which approximately $15.1 billion has been funded to effect purchases of Collateralized Debt Obligations.

The step was the latest in a series of measures to bail out the insurance giant. The financial entity responsible for helping AIG purchase debt securities was revealed last month as part of a broader restructuring plan for AIG’s bailout, originally comprised of a $85 billion bridge loan and $37.8 billion in Fed financing ("AIG Gets $37 Billion More From Government," Oct. 10).

AIG also agreed to purchase another $7.4 billion in CDOs. To date, $46.1 billion worth of CDOs insured by AIG have been purchased. The deal also stipulated that credit default swaps be terminated.

This deal is part of the Federal Reserve’s agreement to buy up to $70 billion of toxic CDOs that underlie credit default swaps for the company.

Without the credit swaps, AIG cannot afford to keep posting additional collateral.

According to a filing with the U.S. Securities and Exchange Commission, the insurer’s responsibility for posting collateral on the $53.5 billion in insured mortages has been suspended and will resume for underlying assets that can’t be obtained.

To hold mortgage assets linked to AIG, the Fed has created two funds – Maiden Lane II LLC and Maiden Lane III LLC.

One fund will hold the assets underlying the company’s credit-default swaps, and the other entity will be for mortgage liabilities from a securities lending portfolio that caused additional losses for AIG.

CNN Money notes that AIG is also looking to sell its global operations, which total about $1 trillion in assets, to repay the government. The company hopes to keep a majority stake in its property and casualty businesses and foreign life insurance unit.