The Fed Debates Giving Up Those AIG Crap Assets

Read the following Reuters clip carefully. I would assume that - as a major news service - Reuters knows the difference between the U.S. government and the Federal Reserve. To carelessly interchange the two within this article is lazy journalism, in this writer's humble opinion, and really doesn't do much in the way of clarifying this story. I don't care if the point is to slap something on the wire, at least fucking try.

American International Group expects others to bid for the mortgage-backed securities that it has offered to pay $15.7 billion to buy back from the U.S. government, the insurer's chief executive told the Wall Street Journal.

AIG disclosed the offer it made to the Federal Reserve earlier this month. The insurer -- which nearly collapsed in the fall of 2008 partly because of the securities -- sold the assets to the Fed as part of its bailout.

In a report published in the Journal on Sunday, AIG CEO Robert Benmosche said the company understands that four banks have looked at the portfolio of assets.

He told the newspaper that at least one bid could emerge that exceeds his company's.

Here's my problem with that story. In September of 2009, AIG announced a plan for the Treasury to convert its AIG securities into common shares, which meant the government would hold a 92.1% stake in AIG. Yes, the same AIG that was failing miserably just two years before. The Treasury then also planned to buy out the Fed's interest in two AIG arms, leaving taxpayers holding the bag and the Fed free and clear except for these crap Maiden Lane assets even though they were the ones who made this shitty deal in the first place. Remember, the Fed and the Treasury are not to be carelessly interchanged; if they were the same thing, the Treasury wouldn't have to issue bonds to the Fed for the privilege of using Federal Reserve Notes. The plan was expected to be completed at the end of this year.

At the time of the announcement, Timmy the Tax Cheat seemed excited, saying "the exit strategy announced today dramatically accelerates the timeline for AIG's repayment and puts taxpayers in a considerably stronger position to recoup our investment in the company."

The Reuters story continues:

For more than a year, the insurer has been preparing the offer on the bonds, whose values have soared despite rising foreclosures on the underlying loans.


The New York Fed would make a profit of about $1.5 billion on the portfolio, AIG has said.

So the question one obviously asks if one has the background after reading that paragraph is: how is the New York Fed going to make a $1.5 billion profit on that portfolio, by unloading it on the federal government?

Meanwhile, over at the Wall Street Journal (from where the folks at Reuters got their inspiration for this clip), Serena Ng actually explains what is going on here in a way that doesn't read so lazy:

The Fed, analysts say, needs to determine whether AIG's offer represents the best price for the portfolio, or whether more value can be gotten either from holding the securities for a few more years or from selling some or all of them to other investors.

"This is an opportunity for the Fed to get rid of some particularly unappealing securities, but it needs to be an arms-length transaction," said Vincent Reinhart, a resident scholar at the American Enterprise Institute and a former senior Fed official. "The Fed is going to be more cautious than any other seller as there's a suspicion that a deal in the interest of AIG may not be in the best interest of the Fed."

AIG's $15.7 billion offer is close to the bonds' $15.9 billion "fair value," which is an estimate of what they could be sold for in an orderly market, according to a note on the Fed's web site.

And the price would represent a $1.5 billion profit for the Fed, which originally provided $19.5 billion to Maiden Lane II for the bonds. Since then, the bonds have generated about $7 billion in income, which has reduced the balance on the Fed's outstanding loan to Maiden Lane II to $12.8 billion.

Thank goodness, now that makes sense.

Allegedly, much of that $1.5 billion would be returned to Treasury in the money laundering scheme that is "Fed profit," whereupon any extra cash they make (no pun intended) that isn't spent on operating costs (all their Dirty Fed operatives are filed under SSG&A or Sketchy Selling, General and Admin) and dividends to shareholders (the very banks they regulate get a 6% cut as "shareholders" for those of you playing along at home) goes back to the Treasury. Which works out for Treasury so they have a few extra bucks to put towards the interest they have to pay the Fed on the FRNs.

See why this is a complicated transaction?

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


Bob English said...

Good thing for AIG it just hired away a NY Fed insider specializing in risk management (bond pricing specialist?).

“As is standard, he has agreed not to engage in business dealings with the FRBNY, the Federal Reserve Board or the U.S. Department of Treasury for six months.”

Good enuf for me.