The Federal Reserve Bank of New York on Thursday sold the last toxic assets it acquired from the bailout of American International Group Inc., closing the book on its most controversial intervention during the financial crisis with a large gain to taxpayers.
The regional Fed bank said it reaped $6.6 billion in profits from selling complex mortgage securities that it took on in late 2008 to stem AIG's cash bleed. The securities, known as collateralized debt obligations, were chiefly responsible for the New York-based insurer's near-collapse and government bailout after their market values plunged during the financial crisis.
The sales end one of the most contentious elements of the government's efforts to stabilize the financial system as markets were seizing up and banks and other financial institutions were collapsing. The rescue of AIG and the New York Fed's purchases of mortgage securities that AIG previously owned or insured saw tens of billions of taxpayer aid flow from the insurer to banks in the U.S. and overseas.
The Fed's moves were criticized from some quarters as a backdoor bailout for banks that exposed U.S. taxpayers to undue risks. But from the outset, Fed officials including Chairman Ben Bernanke said they were acting to protect the country from financial meltdown and expected to be fully repaid on loans provided to support AIG.
"It's a happy ending with the Fed making a handsome profit -- but the purpose of the purchases was to stabilize the financial system and not to make money," said Sung-Won Sohn, an economics professor at California State University, Channel Islands.
The U.S. Treasury and Federal Reserve together committed up to $182.3 billion to support AIG at the height of the crisis, and at its peak the New York Fed lent over $90 billion to the company and investment vehicles that purchased AIG-linked assets. The regional Fed bank has been fully repaid on its various loans.
With the wind-down of Maiden Lane III, the government's remaining tie to AIG is a $24.2 billion investment under the Treasury's Troubled Asset Relief Program. Treasury expects to recoup that amount and more by selling the 53% stake it still holds in the insurance company.
All told, the bailout of AIG has yielded over $18 billion in interest, fees and profits.
The beaten-down AIG bonds have become some of the hottest buys as investors from insurance companies to hedge funds have been scouring the credit markets for high-yielding assets amid the low interest-rate environment.
The gains from the portfolio known as Maiden Lane III added to the $2.85 billion in gains registered after the New York Fed earlier this year completed sales of other bonds backed by subprime loans and other risky mortgages from another AIG-related investment vehicle.
The final Maiden Lane III profit of $6.6 billion was helped by an increasing appetite for the complex mortgage-linked assets in the portfolio amid signs of stability in commercial and residential real estate.
The New York Fed began selling assets in the Maiden Lane III portfolio in April. The vehicle originally held about $62 billion in face value of securities it acquired for about 47 cents on the dollar in 2008.
The demand for yield has shrunk returns on subprime mortgage-backed securities to less than 7% this month from nearly 9% in June, Credit Suisse data show. The yield decline has led many buyers to the CDOs, once scorned for their role in disguising risks that helped trigger the worst housing crisis since the 1930s.
Among investors that found the yields attractive was AIG, where the company's life and property-casualty units both have massive investment portfolios. Chief Financial Officer David Herzog said earlier this month that AIG participated in a "vast majority" of the Maiden Lane III auctions and bought securities with a market value of $7.1 billion. The average yield of the bonds AIG purchased was 9.7%, according to a company presentation.
Proceeds from earlier auctions resulted in the full pay-down of a $24 billion loan the New York Fed provided to purchase the assets. With that obligation satisfied and a $5 billion equity contribution from AIG repaid, the insurer is entitled to one-third of the proceeds from the latest sale.
AIG can put the proceeds toward repurchases of its shares from Treasury. The insurer already has spent $8 billion buying back stock from Treasury this year, and has said it hopes to use funds raised from the Maiden Lane III sale and other asset dispositions to further reduce the government's stake.