Daniel Gross

AIG Rescue Component Closes – at $2.8 B Profit for Taxpayers

The rescue of stricken insurer AIG was one of the most complicated and expensive components of the crisis-era financial bailout plans. The Federal Reserve and Treasury lent money directly to the company, purchased shares in it, and lent money to vehicles that would remove toxic assets from AIG's balance sheet. All told, the aid amounted to about $180 billion.

The money has been coming back in bits and pieces, with the sale of assets and occasional payments to Treasury. Yesterday, a component of the rescue was formally wound down — at a profit to taxpayers.

Over the past few months, we've been documenting the progress the New York Fed has made in unwinding Maiden Lane II, one of the vehicles set up in late 2008 to help bail out AIG. The Fed lent money to Maiden Lane II so it could buy mortgage-backed securities from AIG, thus removing them from the firm's balance sheet. Maiden Lane II borrowed $19.5 billion, and used the funds to buy securities from AIG that had a face value of about $39.3 billion. (AIG agreed to defer payment of an extra $1 billion.) Basically, Maiden Lane II bought the bonds for 50 cents on the dollar.

The theory — hope, really — was that, over time, as the panic passed, Maiden Lane would collect interest payments from the mortgage-backed securities and then sell them to investors as they rose in value. The income gained from interest and from the sale of bonds could be used to pay down the loan. The remainder would be profit for the Federal Reserve and, ultimately, the taxpayer.

The strategy has worked. The blue line in the chart on this page shows how the loan balance has steadily declined since 2009. Last June, the New York Fed sold a chunk of securities held by Maiden Lane with a face value of about $1.8 billion. By the end of 2011, the balance of the loan to the New York Fed had been chopped down from $19.5 billion to $6.2 billion. In January, after Goldman Sachs had approached the New York Fed about buying a big tranche of the assets, it decided to hold an auction. It sold Maiden Lane II securities with a face value of $7 billion to Credit Suisse, and then in February sold securities with a face value of $6.2 billion to Goldman Sachs.

On Tuesday, the Federal Reserve Bank of New York reported that it sold the last of the holdings of Maiden Lane II — securities with a face value of about $6 billion — to Credit Suisse. Combined with earlier sales, the sales generated enough revenues to pay off the last of the $19.5 billion owed to the Fed, pay $1 billion to AIG and leave $2.8 billion leftover for the Fed as profits — which will be turned over to taxpayers and help reduce the deficit.

That's not the end of the story, of course. Treasury still owns a large chunk of AIG's publicly traded stock, on which it is still underwater.

Daniel Gross is economics editor at Yahoo! Finance.

Follow him on twitter @grossdm; email him at grossdaniel11@yahoo.com.

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