Monthly Report on Credit and Liquidity Programs
and the Balance Sheet

Lending in Support of Specific Institutions

Recent Developments

• Net income, including changes in valuation, for the Maiden Lane, Maiden Lane II, and Maiden Lane III LLCs was $329 million, $1,758 million and $3,730 million, respectively, for the quarter ended September 30, 2009. As presented in Table 24, these changes resulted in improvements to the fair value asset coverage of loans of the Federal Reserve Bank of New York (FRBNY) to the Maiden Lane LLCs.
• Cash flows generated from the Maiden Lane II and Maiden Lane III portfolios are used to pay down the loans from the FRBNY. As shown in Tables 29 and 32, those repayments totaled about $3.8 billion in the third quarter of 2009.

Table 24. Fair Value Asset Coverage
Millions of dollars

Background

In the current financial crisis, the Federal Reserve has extended credit to certain specific institutions in order to avert disorderly failures that could result in severe dislocations and strains for the financial system as a whole and harm the U.S. economy. In certain other cases, the Federal Reserve has committed to extend credit, if necessary, to support important financial firms.

Bear Stearns and Maiden Lane LLC

In March 2008, the FRBNY and JPMorgan Chase & Co. (JPMC) entered into an arrangement related to financing provided by the FRBNY to facilitate the merger of JPMC and the Bear Stearns Companies Inc. In connection with the transaction, the Federal Reserve Board authorized the FRBNY, under Section 13(3) of the Federal Reserve Act, to extend credit to a Delaware limited liability company, Maiden Lane LLC, to fund the purchase of a portfolio of mortgage-related securities, residential and commercial mortgage loans, and associated hedges from Bear Stearns. The LLC will manage its assets through time to maximize the repayment of credit extended to the LLC and to minimize disruption to the financial markets. In the second quarter of 2008, the FRBNY extended credit to Maiden Lane LLC. Details of the terms of the loan are published on the FRBNY website (www.newyorkfed.org/markets/maidenlane.html). The assets of Maiden Lane LLC are presented weekly in Tables 1, 9, and 10 of the H.4.1 statistical release. Additional details on the accounts of Maiden Lane LLC are presented in Table 4 of the H.4.1 statistical release.

Information about the assets and liabilities of Maiden Lane LLC is presented as of September 30, 2009, in Tables 25 through 27 and Figure 2. This information is updated on a quarterly basis.

Table 25. Maiden Lane LLC Outstanding Principal Balance of Loans
Millions of dollars

Table 26. Maiden Lane LLC Summary of Portfolio Composition, Cash/Cash Equivalents, and Other Assets and Liabilities
Millions of dollars

Table 27. Maiden Lane LLC Securities Distribution by Type and Rating (in percent)
Percent, as of September 30, 2009

Figure 2. Maiden Lane LLC Securities Distribution as of September 30, 2009

American International Group (AIG)

Recent Developments

• As shown in Table 28, the balance on the AIG revolving credit facility increased to $44.8 billion over the reporting period, as loan drawdowns outpaced loan repayments.
• AIG third quarter results: On November 6, 2009, AIG reported a profit in the third quarter of 2009, as certain of its businesses continue to stabilize, and the company's results reflected positive market valuation changes. For the quarter ended September 30, 2009, AIG reported net income attributable to AIG of $455 million (including net income attributable to AIG common shareholders of $92 million) compared with a net loss of $24.5 billion in the third quarter of 2008. Third quarter 2009 adjusted net income was $1.9 billion, compared with an adjusted net loss of $9.2 billion in the third quarter of 2008.
• As announced earlier in the year, the FRBNY will receive preferred interests in American International Assurance Company LTD (AIA) and American Life Insurance Company (ALICO) special purpose vehicles (SPVs). These transactions are expected to be consummated in the fourth quarter of 2009. As a result of these transactions, there will be a $25 billion reduction in the balance and the amount available under the FRBNY revolving credit facility. On a related note, the U.S. Securities and Exchange Commission recently ruled that it would not object to AIG's proposal to classify as permanent equity the Federal Reserve's preferred interests in the SPVs for AIA and ALICO.
• In October 2009, the Office of the Special Master for TARP Executive Compensation communicated to AIG acceptable standards for 2009 compensation for AIG's senior executive officers and most highly compensated employees. The standards place a cap on annual cash salary and restructure compensation packages so that the majority of a covered AIG executive's base salary will be paid in the form of `stock units’ that reflect the value of a `basket’ of four AIG insurance subsidiaries. The Special Master has advised AIG to reduce retention payments due to employees at AIG Financial Products Corp. (AIGFP) in 2010. Final details of the compensation packages will be determined by AIG within these standards and will be subject to the approval of the Office of the Special Master.
• Update on asset divestitures: During the first nine months of 2009 and through October 30, 2009, AIG entered into agreements to sell, or completed the sale of, operations and assets that as of September 30, 2009 (or the date of sale or, in the case of Trans atlantic Holdings, Inc., deconsolidation) had aggregate carrying values of $86.3 billion in assets and $69.2 billion in liabilities. These transactions are expected to generate approximately $5.6 billion of aggregate net cash proceeds that will be available to repay outstanding borrowings and reduce the amount of the FRBNY facility, after taking into account taxes, transaction expenses, settlement of intercompany loan facilities, and capital required to be retained for regulatory or ratings purposes. These figures exclude actions at AIG Financial Products Corp. (AIGFP), which are discussed separately below. Gains and losses recorded in connection with the dispositions of businesses include estimates that are subject to subsequent adjustments. Based on the transactions thus far, AIG does not believe that such adjustments will be material to future results of operations or cash flows. Noteworthy asset divestitures were as follows:
  • On September 5, 2009, AIG entered into an agreement to sell a portion of its investment advisory and asset management business for approximately $296 million in cash, plus additional future consideration that includes a performance note and a continuing share of carried interest.
  • On October 12, 2009, AIG entered into an agreement to sell the 97.6 percent share of Nan Shan Life Insurance Company, Ltd. (Nan Shan) held through its subsidiaries to a consortium for approximately $2.2 billion. As a result of this transaction, AIG expects to meet the criteria for "held-for-sale" accounting with respect to Nan Shan and recognize a loss of approximately $1.4 billion net of taxes in the fourth quarter of 2009.
• Status of unwinding AIGFP:
  • On August 11, 2009, AIGFP completed the sale of its energy and infrastructure investment assets, realizing aggregate net proceeds in excess of $1.9 billion. In connection with the AIGFP wind-down process, certain other assets have been sold or are under contract to be sold. The proceeds from these sales will be used to fund AIGFP's wind-down and are not included in the amounts described above under asset divestitures.
  • AIGFP reduced the notional amount of its derivative portfolio by 28 percent from approximately $1.6 trillion at December 31, 2008, to approximately $1.1 trillion at September 30, 2009. During the third quarter of 2009, the derivative portfolio was reduced 13 percent from approximately $1.3 trillion at June 30, 2009.
  • AIGFP reduced the number of trade positions in its portfolio by 43 percent from approximately 35,000 at December 31, 2008, to approximately 20,000 at September 30, 2009. During the third quarter of 2009, the number of trade positions was reduced 12 percent from approximately 22,500 at June 30, 2009.

Table 28. AIG Revolving Credit Facility
Billions of dollars

Background

On September 16, 2008, the Federal Reserve, with the full support of the Treasury Department, announced that it would lend to AIG to prevent a disorderly failure of this systemically important firm, protect the financial system and the broader economy, and provide the company time to restructure its operations in an orderly manner. Initially, the FRBNY extended an $85 billion line of credit to the company. The terms of the credit facility are disclosed on the Board's website (www.federalreserve.gov/monetarypolicy/bst_supportspecific.htm). Loans outstanding under this facility are presented weekly in Table 1 of the H.4.1 statistical release and included in "Other loans" in Tables 9 and 10 of the H.4.1 statistical release.

On November 10, 2008, the Federal Reserve and the Treasury announced a restructuring of the government's financial support to AIG. As part of this restructuring, two new limited liability companies (LLCs) were created, Maiden Lane II LLC and Maiden Lane III LLC, and the line of credit extended to AIG was reduced from $85 billion to $60 billion. (On October 8, 2008, the FRBNY had been authorized to extend credit to certain AIG subsidiaries against a range of securities. This arrangement was discontinued after the establishment of the Maiden Lane II facility.) More detail on these LLCs is reported in the remainder of this section. Additional information is included in Tables 5 and 6 of the H.4.1 statistical release.

On March 2, 2009, the Federal Reserve and the Treasury announced an additional restructuring of the government's assistance to AIG, designed to enhance the company's capital and liquidity in order to facilitate the orderly completion of the company's global divestiture program. Additional information on the restructuring is available at www.federalreserve.gov/newsevents/press/other/20090302a.htm.

On April 17, 2009, the FRBNY implemented a loan restructuring adjustment that was previously approved and announced on March 2. The interest rate on the loan to AIG, which is the three-month LIBOR plus 300 basis points, was modified by removing the existing interest rate floor of 3.5 percent on the LIBOR rate. Consistent with U.S. generally accepted accounting principles (GAAP), as of July 29, 2009, the reported value of the AIG revolving credit extension was reduced by a $1.3 billion adjustment to reflect the loan restructuring. This restructuring adjustment is intended to recognize the economic effect of the reduced interest rate and will be recovered as the adjustment is amortized over the remaining term of the credit extension. The Federal Reserve expects that the credit extension, including interest and commitment fees under the modified terms, will be fully repaid.

On June 25, 2009, the FRBNY entered into agreements with AIG to carry out two transactions previously approved and announced on March 2, as part of the restructuring of the U.S. government's assistance to AIG. Under these agreements, the FRBNY will receive preferred equity interests in two special-purpose vehicles formed to hold the outstanding common stock of American International Assurance Company Ltd. (AIA) and American Life Insurance Company (ALICO), two life insurance subsidiaries of AIG. In exchange, upon the closing of each transaction and the resulting issuance of preferred equity, the FRBNY will reduce the outstanding balance and amount available to AIG under the revolving credit facility by $25 billion. The closing of each transaction is expected to occur by the end of 2009, pending the completion of the necessary regulatory approval processes. These transactions, when consummated, will position both AIA and ALICO for future initial public offerings, depending on market conditions. Subject to certain conditions, proceeds from any public offerings by the companies must first be used to redeem the FRBNY's preferred interests, until the preferred interests have been redeemed in full.

The interest rate on the loan to AIG is the three-month LIBOR rate plus 300 basis points. The lending under this facility is secured by a pledge of assets of AIG and its primary nonregulated subsidiaries, including all or a substantial portion of AIG's ownership interest in its regulated U.S. and foreign subsidiaries. Furthermore, AIG's obligations to the FRBNY are guaranteed by certain domestic, nonregulated subsidiaries of AIG with more than $50 million in assets.

Figure 3 shows the amount of credit extended to AIG over time through the credit facility, including the principal, interest, and commitment fees, along with the facility ceiling.

Figure 3. AIG Revolving Credit

Maiden Lane II LLC

Under Section 13(3) of the Federal Reserve Act, the Federal Reserve Board authorized the FRBNY to lend up to $22.5 billion to a newly formed Delaware limited liability company, Maiden Lane II LLC, to fund the purchase of residential mortgage-backed securities (RMBS) from the securities lending portfolio of several regulated U.S. insurance subsidiaries of AIG. On December 12, 2008, the FRBNY loaned about $19.5 billion to Maiden Lane II LLC. Details of the terms of the loan are published on the FRBNY website (www.newyorkfed.org/markets/maidenlane2.html).

The assets of Maiden Lane II LLC are presented in Tables 1, 9, and 10 of the weekly H.4.1 statistical release. Additional detail on the accounts of Maiden Lane II LLC is presented in Table 5 of the H.4.1 statistical release.

Information about the assets and liabilities of Maiden Lane II LLC is presented as of September 30, 2009, in Tables 29 through 31 and Figure 4. This information is updated on a quarterly basis.

Table 29. Maiden Lane II LLC Outstanding Principal Balance of Senior Loan and Fixed Deferred Purchase Price
Millions of dollars

Table 30. Maiden Lane II LLC Summary of Portfolio Composition and Cash/Cash Equivalents
Millions of dollars

Table 31. Maiden Lane II LLC Asset Distribution by Sector and Rating
Percent, as of September 30, 2009

Figure 4. Maiden Lane II LLC Portfolio Distribution as of September 30, 2009

Maiden Lane III LLC

Under Section 13(3) of the Federal Reserve Act, the Federal Reserve Board authorized the FRBNY to lend up to $30 billion to a newly formed Delaware limited liability company, Maiden Lane III LLC, to fund the purchase of certain asset-backed collateralized debt obligations (ABS CDOs) from certain counterparties of AIG Financial Products Corp. (AIGFP) on which AIGFP had written credit default swaps and similar contracts. On November 25, 2008, the FRBNY loaned about $24.4 billion to Maiden Lane III LLC. Details of the terms of the loan are published on the FRBNY website (www.newyorkfed.org/markets/maidenlane3.html). Assets of the portfolio of the LLC will be managed to maximize cash flows to ensure repayment of obligations of the LLC while minimizing disruptions to financial markets.

The assets of Maiden Lane III LLC are presented in Tables 1, 9, and 10 of the weekly H.4.1 statistical release. Additional detail on the accounts of Maiden Lane III LLC is presented in Table 6 of the H.4.1 statistical release.

Information about the assets and liabilities of Maiden Lane III LLC is presented as of September 30, 2009, in Tables 32 through 34 and Figure 5. This information is updated on a quarterly basis.

Table 32. Maiden Lane III LLC Outstanding Principal Balance of Senior Loan and Equity Contribution
Millions of dollars

Table 33. Maiden Lane III LLC Summary of Portfolio Composition and Cash/Cash Equivalents
Millions of dollars

Table 34. Maiden Lane III LLC Asset Distribution by CDO Type/Vintage and Rating
Percent, as of September 30, 2009

Figure 5. Maiden Lane III LLC Portfolio Distribution as of September 30, 2009

Citigroup

On November 23, 2008, the Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) jointly announced that the U.S. government would provide support to Citigroup in an effort to support financial markets. The terms of the arrangement are provided on the Federal Reserve Board's website (www.federalreserve.gov/monetarypolicy/bst_supportspecific.htm). The FRBNY has not extended credit to Citigroup under this arrangement.

Bank of America

On January 16, 2009, the Treasury, the Federal Reserve, and the FDIC jointly announced that the U.S. government had agreed to provide certain support to Bank of America to promote financial market stability. Information concerning these actions is available on the Federal Reserve Board's website at www.federalreserve.gov/monetarypolicy/bst_supportspecific.htm.

On May 7, 2009, following the release of the results of the Supervisory Capital Assessment Program, Bank of America announced that it did not plan to move forward with a part of the package of supports announced in January 2009--specifically, a residual financing arrangement with the Federal Reserve and the related guarantee protections that would be provided by the Treasury and the FDIC with respect to an identified pool of approximately $118 billion in assets.

In September 2009, Bank of America paid an exit fee in order to terminate the term sheet with the Treasury, the Federal Reserve, and the FDIC. The term sheet was never implemented. The Federal Reserve's portion of the exit fee was $57 million.

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