Fed Snubs AIG's Offer to Buy RMBS - Analyst Blog
April 01 2011 - 7:45AM
Zacks
Finally, the Federal Reserve Bank of New York (FRBNY) turned
down American International Group Inc.’s (AIG)
offer to repurchase its $15.7 billion residential mortgage-backed
securities (RMBS) on Maiden II. This is a special-purpose
investment vehicle that the company had handed over to FRBNY as
collateral mortgage bonds during the peak of its financial
crisis.
The FRBNY has however decided to hold competitive bidding on the
RMBS rather than handing them back to AIG. The bidding procedure is
expected to help boost FRBNY’s earnings. Moreover, given the
improvement in the yield of the RMBS driven by the ongoing economic
revival, many bidders are showing interest in this investment.
For similar reasons, the buyback by AIG at this point would have
proved to be a lucrative investment. Hence, the company’s
management is quite disappointed with FRBNY’s decision.
Nevertheless, beginning next week, FRBNY plans to sell these
securities in blocks and pieces over time, whereby
BlackRock Inc. (BLK) is appointed to manage the
sale process.
Meanwhile, the Financial Times reported that Credit
Suisse AG (CS), Morgan Stanley (MS) and
Barclays plc (BCS) are among the potentially
interested bidders.
Earlier this month, AIG had offered repurchase of about 800 RMBS
at about 50 cents on the dollar. When AIG was formed in December
2008, it had about $20.5 billion of RMBS under Maiden II, which has
now declined to $15.9 billion.
The repurchase would have helped the US government to earn about
$1.5 billion from the company’s bailout loan. Additionally, the
repayment of Maiden II loan could reduce AIG’s loan obligations
toward the US government to roughly $26 billion from $39 billion at
2010 end and the initial debt chunk of approximately $182 billion
in 2008. This could have been quite an impressive progress.
The government's $26 billion comprises preferred interests in
AIA Group worth $11.3 billion held by the Treasury, a different
Maiden Lane III vehicle that holds interests in collateralized debt
obligations, and an undrawn line of credit. Besides, the debt
repayment can help ease the process of public offering of 92% stake
of Treasury in AIG, which is expected by May this year.
Overall, uncertainty prevails on how successfully FRBNY will be
able to unload this RMBS portfolio, where AIG has already set a bar
of $15.7 billion, in an attempt to maximize its returns.
AMER INTL GRP (AIG): Free Stock Analysis Report
BARCLAY PLC-ADR (BCS): Free Stock Analysis Report
BLACKROCK INC (BLK): Free Stock Analysis Report
CREDIT SUISSE (CS): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
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