American International Group, Inc. (AIG) announced on December 2, 2008, through its website, the launch of a financing entity created by the Federal Reserve Bank of New York (FRBNY) to address AIG's liquidity challenges related to credit default swaps (CDS) and similar derivative instruments written on multi-sector collateralized debt obligations (CDOs). The new entity, Maiden Lane II, LLC, initially announced on November 10, is intended to purchase CDOs tied to CDS contracts issued by AIG Financial Products Corp. (AIGFP), the AIG subsidiary widely reported as being at the center of the crisis.
To date, the new entity has entered into agreements with AIGFP's CDS counterparties to purchase approximately $53.5 billion principal amount of CDOs. To date, $46.1 billion principal amount of such CDOs have been purchased, and the associated notional amount of CDS transactions have been terminated in connection with such purchases.
AIG has contributed $5 billion in equity funding, while the FRBNY will provide up to $30 billion in senior funding to the financing entity, of which $15.1 billion has already been utilized for purchasing CDOs. The entity will generate cash flows from its owned assets and distribute payments to AIG for its equity interest after the principal and interest on the FRBNY's senior loan have been fully repaid. Once the FRBNY's senior loan and AIG's equity interest are paid in full, any remaining proceeds will be allocated 67% to the FRBNY and 33% to AIG.
Federal Reserve Board Press Release November 10, 2008
* For those who may be curious, Maiden Lane is a prominent street located in the Lower Manhattan Financial District of New York City.
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