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Fed Sells Last of AIG Rescue Bonds, Taxpayers Reap Gains

Source: WSJ - Serena Ng & Al Noon

Posted on 29 Feb 2012

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The Federal Reserve Bank of New York on Tuesday sold the last distressed mortgage bonds from an entity that aided the bailout of American International Group Inc., reaping a $2.8 billion gain for U.S. taxpayers on the sales over the past year and closing a controversial chapter in the central bank's response to the financial crisis.

Tuesday's deal represented the third and final bulk sale from a portfolio of securities known as Maiden Lane II, which originally acquired roughly $40 billion in mortgage bonds from an AIG business known as securities lending in 2008. The New York Fed still has other troubled securities from the AIG bailout on its balance sheet.

The gain meant the New York Fed made more money from selling Maiden Lane II piecemeal over time, versus what AIG offered to pay for all the bonds a year ago. The insurer's bid, which the regional Fed bank rejected, had promised a $1.5 billion profit for taxpayers, excluding accrued interest of $580 million which was included in the Fed's profit calculation.

The last bonds were bought by Credit Suisse Group AG, which beat out four other Wall Street dealers in an auction for residential mortgage-backed securities with an unpaid principal balance of $6 billion. The Swiss bank likely paid more than 50 cents on the dollar for the bonds, given the gains reported by the New York Fed.

The sale will also send roughly $1.3 billion in proceeds to AIG, which in 2008 provided $1 billion to support Maiden Lane II. Earlier this month, a bulk sale of bonds to Goldman Sachs Group Inc. ensured that the New York Fed would be fully repaid on its $19.5 billion loan it providedto the vehicle during the crisis.

Investor interest in once-toxic bonds backed by pools of home loans has been strong this year. In an earlier sale in January, Credit Suisse paid about $3.1 billion, or about 44 cents on the dollar, for Maiden Lane II securities with a face value of $7 billion.

Goldman then paid over $3.4 billion, or about 55 cents on the dollar, for $6.2 billion in bonds from the vehicle. The dealers sold most of the securities to investment firms.