Monday, April 30, 2012

Annals of AIG - Maiden Lane III

Current Status, April 30, 2012

On April 26, 2012, the FRBNY announced the sale of the MAX CDO holding from Maiden Lane III in a competitive bidding process.

The New York Fed announcement included everything BUT the sale proceeds, which will be announced as part of the quarterly report scheduled to be released on July 16, 2012.

However, enough information is known to have a reasonably good idea of what the CDO holdings sold for as well as the status of the Maiden Lane III transactions.

The biggest obstacle is to organize the information in one place. The New York Fed actually does a good job with this, but insist on withholding data in advance of their established reporting scheme.

Structure of the Special Purpose Vehicle:

At inception, AIG put up an equity interest of $5 billion, and the FRBNY loaned $24.3 billion to purchase $29.3 billion in CDO's  from AIG. $29.3 billion was the fair value at the time of purchase,

If the CDO's were simply held to maturity, then the loans and interest would be paid off based on the priority of claims (FRBNY senior, AIG junior), and any profits would be split 2/3 to the FRBNY, 1/3 to AIG.

MAX CDO valuation as of 12/31/2011

Commercial Real Estate CDOs : 

                                                                     Face Value                    Fair Value @ 12/2012

MAX 2007-1 A1                                         2,096,537                      1,162,320
MAX 2008-1 A1                                         5,403,463                      2,995,680
Total                                                             7,500,000                      4,158,000

Maiden Lane as of 4/25/2012

Current Status of Maiden Lane III LLC

If we assume that the FRBNY got $5 billion for the MAX Commercial Real Estate CDO's, and assume no change in the Fair Value estimate at April 25th, then:

1. The current outstanding Senior Loan Balance with Accrued Interest will be paid down from $8.701 billion to $3.781 billion.

2. ThePortfolio Holdings at fair value are reduced by $5 billion to $14.805 billion.

3. The coverage ratio of the FRBNY's loan approximately 4.

4. Assuming that the accrued interest owed AIG is $700 million, then the estimated profit is $5.4 billion, to be divided $3.6 billion to the FRBNY and $1.8 billion to AIG.

5. AIG will receive $7.5 billion, which includes their equity interest of $5 billion, $ .7 billion interest, and $1.8 billion profit.

If MAX CDO's sold for more than was assumed in the April 25th estimate, then AIG may split additional profits.

After the April 26th Sale:

The sale of the MAX Commercial Real Estate CDO's has substantially reduced the uncertainty regarding the likelihood of both the FRBNY and AIG fully recovering their contributions to ML III as well as accrued interest.

In addition, the successful sale sets the stage for future sales which may materially speed up the final resolution of ML III.

AIG has stated that they intend to use the proceeds of ML III to repurchase stock from the Treasury as it unwinds its equity interest in AIG. The earlier ML III is fully unwound, the sooner Treasury can divest its equity interest in AIG.

Financial Impact of ML III

AIG carries ML III at fair value. Per the AIG 10K (page 64),  ML III has had the following impact:

The cumulative change in fair value is about $2 billion. This is a significant portion of the favorable re-estimation of AIG's total proceeds from ML III.

At 12/2012, per the AIG 10K (page 47), the total shareholder equity was $104,951. ML III, booked at roughly $7 billion, is a significant component of shareholder equity, as well as any capital ratios using shareholder equity.


Almost all of the pieces of this transaction are publicly known.  However, the supporting documentation is scattered. The entirety of the published material lends a sense of the reduced risk remaining regarding ML III as well as the potential for favorable surprises regarding the timing of unwinding this entity.