MBS Holders: Look What AIG and Fed Are Planning

Five key quotes from American International Group’s Q308 conference call: (AIG)

Clarifying the federal help AIG is getting:

We presently have an $85 billion, two-year bridge loan facility from the Federal Reserve Bank in New York against which $61 billion is currently outstanding. That $61 billion carries a LIBOR plus 8.5 and the commitment fee of 2% and the fee on the undrawn portion of 8.5%. Clearly, these terms are not sustainable.

We have $37.8 billion securities lending facility from the Federal Reserve of New York, with $19.9 billion currently outstanding and as noted earlier this amount is fully collateralized, it's a liquidity facility not a loan.

We are participating in the government's commercial paper funding facility… We have an approved line of $20.9 billion, with $8 billion currently outstanding.

The Fed buys AIG mortgage-backed securities:

We and the Federal Reserve Bank of New York are creating a new financing entity that will be capitalized with $1 billion of funding from AIG and up to $22.5 billion of funding from the Federal Reserve. This entity will acquire substantially all of the RMBSs from AIG's securities lending program. [Now] AIG's remaining exposure to losses from its U.S. securities lending program will be limited to declines in market value prior to the closing of this entity and our $1 billion of funding.

... and CDOs/CDSs (credit default swaps):

We and the Federal Reserve Board will create a second financing entity that will purchase up to approximately $70 billion face amount of multi-sector CDOs on which AIG has written credit default swaps. Approximately 95% of the write-downs AIG financial products has taken to-date is in its CDS portfolio, these were the ones related to the multi-sector CDO. AIG will provide up to $5 billion in subordinated funding, and the Federal Reserve will provide up to $30 billion in senior funding to the financing entities.

We will earn a return on the equity that we've invested in the vehicle. We'll then share… in the upside of that.

AIG signed an agreement with the U.S. government essentially transferring them a 79% stake in the company. The move is to stanch the outflow of cash from the company, but analysts worried that if and when the market for mortgage-backed securities revives, the government may make a lot of money from the RMBS it holds, but AIG will not:

The deal is, not fixed in concrete forever. As you can see the movement we made from the first transaction to the second one, is a rather quantum improvement... What these two arrangements do is they stop the cash out flows for the most part.

The biggest problem remains: How will the pricing work?

Q: So the CDO holders not being made whole here… You are buying the CDO for $0.50 on the dollar? Is that what you expect to happen here?

A: No… the CDO is being purchased at a negotiated rate. And… the Fed is heavily involved in that negotiation.

Q: Are [you] saying that the Fed is going to be strong on holders? What is motivation of the CDO holder to accept less than par... because you're saying, look, I am going to offer this to you, take or leave it and if the CDO holder says, I'll leave it, what do you do about it?

A: Yes, they can also the tear the credit default swap upside... I think there the structure has been designed in a way that's balanced in terms of the various stakeholders motivations and incentives. So we believe this structure will be successful in accomplishing the restructuring and the de-risking of the AIG portfolio.

Q: It is fair to say that there is going to be... a little bit of execution risk here in your ability to get the holders of the CDOs to accept what you are offering them.

 

Comments

[jimmy46:]

At last someone has a plan to unwind some of this financial garbage !

MER sold some of this junk willingly at 22¢ on the dollar.

I'm sure other holders will take the opportunity to clean their books.

2008 Nov 11 02:08 PM