AIG CEO Warns Taxpayers, Investors

Published by: Kelly Curtis on 31st Mar 2011 | View all blogs by Kelly Curtis
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AIG CEO Warns Taxpayers, Investors

Bob Benmosche, CEO of AIG, warned taxpayers Thursday that the Federal Reserve's decision not to accept the company's $15.7 billion offer to repurchase a bundle of mortgage-backed securities could end up resulting in a stiff loss for US taxpayers.  The central bank declined the offer on Wednesday, choosing to sell the securities in a competitive process over a yet-to-be-disclosed amount of time.

The securities in question are 800 residential mortgage-backed securities contained in a special purpose investment vehicle called Maiden Lane II.  The Fed's rejection is a blow to the insurer, which wanted to bring the high yield assets back onto its books to balance its long term insurance liabilities, a move Benmosche says would have enhanced the company's value to investors leading up to the company's re-IPO of the Treasury's 92 percent stake in AIG.

Maiden Lane II was initially set up in 2008 to move these assets off of AIG's books when the firm was in danger of collapsing.  The Fed purchased the securities at a steep discount from their face value.  While the assets are considered low grade, they have performed well since Maiden Lane II was established, having paid interest and reduced principle on the underlying mortgages.  AIG claims its buyout offer would have netted the Fed a cool $1.5 billion in profit on the investment.

But with investors' willingness to take risks returning, there is significant interest from Wall Street for the securities.  While this fact means the Fed could get some strong bids for some of these securities, Benmosche wonders if the Fed will be able to find buyers for all of them.

“There is a concern about its ability to sell some of the riskier assets, “ Benmosche said, adding that the Fed may be left holding the worst of the assets.  The executive says he estimated that Treasury would realize a profit of $10 billion, with a good deal of that coming from the sale of government-owned shares of the company.  But without Maiden Lane II's assets to back up AIG's insurance liabilities, Benmosche says investors won't view the company as favorably, meaning the Treasury could end up just breaking even or possibly even lose money once the stock is sold and final numbers are calculated.

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