American International Group Inc. (NYSE: AIG) on Thursday offered to pay $15.7 billion for a portfolio of mortgage-backed securities the Federal Reserve Bank of New York acquired when it bailed out the collapsing insurer during the financial crisis.
The New York Fed set up the fund, named Maiden Lane II, in 2008 to buy from AIG about 800 securities that were backed by subprime home loans.
"The conditions that necessitated Maiden Lane II in the first place have been resolved," AIG said in a letter Thursday to the New York Fed. The company said it is now more stable and can match the assets with "appropriate longer-term insurance liabilities, not shorter-term liabilities."
AIG originally purchased the mortgage-backed securities with collateral from Wall Street banks in securities-lending deals. When the housing market collapsed, AIG couldn't reimburse banks that wanted their collateral back. The Fed bought the bonds at a deep discount for about $22.5 billion to remove the assets from AIG's balance sheet.
AIG has been preparing the offer for more than a year, as bond values have rallied since market lows in April 2009. The Maiden Lane II bond values have partially recovered, but are still trading at around 53 cents on the dollar. AIG plans to use cash from its life-insurance units and other insurance businesses to fund the deal.
"It certainly does strike me as an unexpected use of AIG's cash," Clark Troy, a senior analyst for research and advisory firm Aite Group, told Bloomberg News. "AIG wouldn't be doing this if the valuation wasn't conservative."
Analysts said AIG stands to gain billions from the deal, and Maiden Lane II's holdings could yield as much as 10% for the insurer.
"The company would essentially trade $15.7 billion of cash from its investment portfolio for $15.9 billion of much higher-yielding securities" in the fund through the proposed buyback, John Hall, a Wells Fargo & Co. (NYSE: WFC) analyst, wrote in a report Friday.
The portfolio had a "fair value" of $15.9 billion at the end of 2010, according to Fed data, with a face value of $30 billion. Most of the bonds have floating interest rates and are likely to keep receiving interest and principal payments from mortgages backing them for four to five years.
If the Fed accepts the offer it would reap a profit of $1.5 billion.
"It shows you how far we have come from the fall of 2008," Jesse Litvak, a managing director at Jefferies & Co., told Reuters. "I also think that this is far from being final, and I imagine a lot of others are scrambling to see what the value of this portfolio could really be worth."
If the deal went through, it would also mean AIG would be fully repaid on its Maiden Lane II loan. AIG still owes the Fed $12.8 billion on a loan for the fund and AIG has already contributed $1 billion to it. Per an agreement in 2008, both the Fed and AIG would receive a portion of the portfolio's profits, with taxpayers getting about 83% and AIG the remainder.
On Friday the Fed had not indicated if it would accept the offer.
"Any decision on a possible disposition of these assets will be made in a way that maximizes the proceeds to the taxpayer and that is consistent with the goal of fostering financial stability," the Fed wrote in a statement.
AIG received a bailout of $182.3 billion, and the U.S. government still owns a 92% stake in the insurer. If this deal went through, the total amount of U.S. taxpayer assistance would be down to $72 billion. AIG has repaid about $40 billion in recent months from asset sale proceeds.
The U.S. Treasury, which provided up to $69.8 billion in aid, is expected to start selling its stake of the company in May. The government owned a 79.8% stake in December when it converted preferred shares into AIG common stock, increasing its stake to 92%. It plans to unload additional AIG stock over the next two years.
AIG stock is down 24% this year. The stock rallied as much as 3.6% Thursday after the bond offer news, and rose 2% Friday.
China's Play for AIG
Unpublished diplomatic cables released to Reuters this week showed that China's insurance regulator may have been using information on AIG to help Chinese rivals bid for its assets while it struggled in the financial crisis' wake.
The cables, obtained by WikiLeaks, showed that the Chinese Insurance Regulatory Commission (CIRC) forced AIG's operations in China to open their books on a daily basis after receiving bailout funds in 2008. CIRC then shared AIG's information with Chinese competitors and tried to convince them to buy the firm's assets.
"CIRC appears to be mixing its role as a regulator of China-based insurance companies with intentions to support domestic Chinese insurers," the U.S. consulate in Shanghai wrote in a cable from Oct. 22, 2008. "That CIRC would coordinate closely with domestic Chinese insurance firms is no surprise, but the situation here appears to take this a step farther, with CIRC actively eliciting information from AIG that would be helpful to AIG's Chinese competitors in acquiring parts of AIG's business."
AIG executives in September 2008 told officials in Shanghai they were summoned to Beijing a day after the bailout to explain the situation. They said Chinese regulators threatened to pull AIG's licenses if the company did not cooperate and disclose any other support arrangements.
AIG executives later that month told consular officials in Shanghai that CIRC had held a meeting of local insurers to gauge interest in buying AIG, and at least one company seemed interested. The cable did not mention who that buyer was.
In October 2008, AIG said CIRC was favoring China Life Insurance Company Ltd. (NYSE ADR: LFC) to buy the troubled insurer, but it's unclear how far the situation progressed.
The Chinese regulator released a statement supporting its behavior toward AIG and calling any other suggestions "a serious departure from the facts or sheer fabrication."
Despite its alleged efforts, China did not acquire any of AIG's assets. MetLife Inc. (NYSE: MET) bought some of AIG's Asian operations while others went to the public through an initial public offering (IPO) of AIA Group.
News and Related Story Links:
- Bloomberg News:
AIG Offers $15.7 Billion to Buy Securities From Rescue Fund
- The Wall Street Journal:
AIG Offers to Buy Back Bonds
AIG bid to buy back mortgage bonds may buoy market
- Bloomberg News:
AIG's Bond Buyback May Bring Billions in Benefits: Chart of Day
- Money Morning:
AIG to Borrow from Treasury as Part of Exit Plan
As AIG crumbled, China stepped in as broker