Monthly Report on Credit and Liquidity Programs
and the Balance Sheet

Lending in Support of Specific Institutions

Quarterly Developments

• Cash flows generated from the Maiden Lane LLC, Maiden Lane II LLC, and Maiden Lane III LLC portfolios are used to pay down the FRBNY's loans to those LLCs. For the third quarter of 2010, repayments totaled approximately $3 billion, as presented in tables 14, 18, and 21.

Background

During the financial crisis, the Federal Reserve 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 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 acquisition of JPMC and The Bear Stearns Companies Inc. (Bear Stearns). 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 partially fund the purchase of a portfolio of mortgage-related securities, residential and commercial mortgage loans, and associated hedges from Bear Stearns. In the second quarter of 2008, the FRBNY extended credit to Maiden Lane LLC. The LLC manages its assets through time to maximize the repayment of credit extended to the LLC and to minimize disruption to the financial markets.

The two-year accumulation period that followed the closing date for Maiden Lane LLC ended on June 26, 2010. Consistent with the terms of the Maiden Lane LLC transaction, the distribution of the proceeds realized on the asset portfolio held by Maiden Lane LLC, after payment of certain fees and expenses, will occur on a monthly basis going forward unless otherwise directed by the Federal Reserve. The monthly distributions will be used to cover the expenses and repay the obligations of the LLC, including the principal and interest on the loan from the FRBNY.

Table 13. Fair value asset coverage of FRBNY loan
Millions of dollars

The assets of Maiden Lane LLC are presented weekly in tables 1, 8, and 9 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. Details of the terms of the loan, as well as information on the holdings of the Maiden Lane LLC, including the CUSIP number, descriptor, and the current principal balance or notional amount outstanding for nearly all of the holdings of Maiden Lane LLC with the exception of residential whole loans, is published on the FRBNY website at www.newyorkfed.org/markets/maidenlane.html.

Information about the assets and liabilities of Maiden Lane LLC is presented as of September 30, 2010, in tables 14 through 16 and figure 2. This information is updated on a quarterly basis.

Table 14. Maiden Lane LLC outstanding principal balance of loans
Millions of dollars

Table 15. Maiden Lane LLC summary of portfolio composition, cash and cash equivalents, and other assets and liabilities
Millions of dollars

Table 16. Maiden Lane LLC securities distribution by sector and rating
Percent, as of September 30, 2010

Figure 2. Maiden Lane LLC securities distribution as of September 30, 2010

AIG

Recent Developments

• On January 14, 2011, AIG, the Treasury, and the FRBNY closed the Recapitalization. As a result, the revolving credit facility extended to AIG and the preferred interests in AIA Aurora LLC and ALICO Holdings LLC were fully repaid, and the FRBNY's commitment to lend any further funds was terminated. This section provides background information on the assistance provided to AIG.

Background

On September 16, 2008, the Federal Reserve, with the full support of the Treasury, 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 Federal Reserve's website at www.federalreserve.gov/monetarypolicy/bst_supportspecific.htm. Loans that were drawn under this facility are presented in table 1 of the weekly H.4.1 statistical release.

Table 17A. AIG revolving credit facility
Millions of dollars

Table 17B. Preferred interests in AIA Aurora LLC and ALICO Holdings LLC
Millions of dollars

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 LLCs, Maiden Lane II LLC and Maiden Lane III LLC, were created, and the line of credit extended to AIG was reduced from $85 billion to $60 billion. (On October 8, 2008, the FRBNY was authorized to extend credit under a special securities borrowing facility to certain AIG subsidiaries. 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 further 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 March 2009 restructuring is available at www.federalreserve.gov/newsevents/press/other/20090302a.htm.

On April 17, 2009, the FRBNY implemented the March 2, 2009, loan restructuring adjustment. The interest rate on the loan to AIG, the three-month Libor plus 300 basis points, was modified by removing the existing interest rate floor of 3.5 percent on the Libor component. Consistent with 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 was intended to recognize the economic effect of the reduced interest rate and was recovered as the adjustment amortized over the remaining term of the credit extension.

The lending under this facility was 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 were guaranteed by certain domestic, nonregulated subsidiaries of AIG with more than $50 million in assets.

On June 25, 2009, the FRBNY entered into agreements with AIG to carry out two transactions previously approved and announced on March 2, 2009, as part of the restructuring of the U.S. government's assistance to AIG. These transactions were completed on December 1, 2009. Under these agreements, the FRBNY received preferred interests in two special purpose vehicles (SPVs), AIA Aurora LLC and ALICO Holdings LLC, formed to hold the outstanding common stock of AIG's largest foreign insurance subsidiaries, American International Assurance Company, Ltd (AIA) and American Life Insurance Company (ALICO). In exchange, upon the closing of each transaction and the resulting issuance of preferred interests, the outstanding balance of, and amount available excluding capitalized interest and fees to AIG under, the revolving credit facility was reduced by $25 billion. Specifically, the maximum principal amount available was reduced from $60 billion to $35 billion. By establishing the AIA and ALICO SPVs as separate legal entities, these transactions positioned AIA and ALICO for future initial public offerings (IPOs) or sale.

On March 1, 2010, AIG announced the signing of a definitive agreement for the sale of AIA to Prudential plc (Prudential) for approximately $35.5 billion, including approximately $25 billion in cash, $8.5 billion in face value of equity and equity-linked securities, and $2.0 billion in face value of preferred stock of Prudential, subject to closing adjustments. AIG stated that the cash portion of the proceeds from the sale would be used to fully redeem the approximately $16 billion of preferred interests held by the FRBNY in the SPV that holds AIA, and to repay approximately $9 billion of its borrowing under the revolving credit facility with the FRBNY. The transaction was approved by the boards of directors of both AIG and Prudential, and was expected to close by the end of 2010, subject to approval by Prudential shareholders, regulatory approvals, and customary closing conditions.

On March 8, 2010, AIG announced the signing of a definitive agreement for the sale of ALICO to MetLife, Inc. (MetLife) for approximately $15.5 billion, including $6.8 billion in cash and the remainder in equity securities of MetLife, subject to closing adjustments. In connection with this agreement, AIG stated that the cash portion of the proceeds from this sale would be used to redeem an equivalent amount of the approximately $9 billion of preferred interests held by the FRBNY in ALICO. The transaction was approved by the boards of directors of both AIG and MetLife, and was expected to close by the end of 2010, subject to the approvals of certain domestic and international regulatory bodies and to customary closing conditions. AIG has stated that it intended to monetize the securities received in the ALICO transaction over time, subject to market conditions, following the lapse of certain minimum holding periods set forth in the definitive agreement entered into with MetLife on March 8, 2010.

In early June 2010, in response to efforts by Prudential to negotiate for a lower purchase price of $30.4 billion, AIG announced that it would not consider modification to the agreed-upon terms (described above) of the transaction. Subsequently, Prudential announced its intention to not proceed with the transaction. On June 3, 2010, Prudential and AIG confirmed that the parties had agreed to terminate the definitive agreement for the sale of AIA, as provided for in the sale agreement.

AIG announced plans to conduct an IPO of AIA by seeking a listing of AIA on the Hong Kong Stock Exchange in July 2010.

On September 30, 2010, AIG announced an agreement with the Treasury, the FRBNY, and the trustees of the AIG Credit Facility Trust (the "Trust") on a comprehensive recapitalization plan (the "Recapitalization") designed to facilitate repayment of all its obligations to American taxpayers.³ The measures included:

• an accelerated repayment of the outstanding balance (including all accrued interest and fees) on the AIG revolving credit facility and termination of that facility,
• a draw by AIG of up to $22 billion of undrawn Series F funds available to the company under the TARP to purchase an equal amount of the FRBNY's preferred interests in the AIA and ALICO SPVs,
• the transfer by AIG of the preferred interests purchased from the FRBNY to the Treasury as consideration for the draw on the available Series F funds, and
• the conversion of the AIG preferred stock currently owned by the Treasury and the Trust into common equity of AIG.

Also on September 30, 2010, AIG announced a definitive agreement to sell its Japan-based life insurance subsidiaries, AIG Star Life Insurance Co., Ltd. and AIG Edison Life Insurance Company, to Prudential Financial, Inc. for a total purchase price of $4.8 billion, comprising $4.2 billion in cash and $0.6 billion in the assumption of third-party debt. The transaction was subject to receipt of regulatory approval and was expected to close in the first quarter of 2011.

On October 29, 2010, AIG completed the IPO of AIA, raising total gross proceeds of $20.5 billion. On November 1, 2010, AIG completed the sale of ALICO to MetLife for approximately $16.2 billion, including gross cash proceeds of $7.2 billion and the remainder in securities of MetLife. AIG stated that it intended to monetize the MetLife securities received in the transaction over time, subject to market conditions and following the lapse of certain lock-up provisions specified in the definitive agreement entered into with MetLife, to provide additional funds to repay the government.

On December 27, 2010, AIG announced that it had obtained a total of $3 billion in 364-day and 3-year bank credit facilities. AIG also announced that Chartis, a wholly owned subsidiary, had obtained a $1.3 billion 1-year letter-of-credit facility. The facilities became available upon closing of the Recapitalization.

Pending closing of the Recapitalization, the FRBNY held the cash proceeds from certain AIG asset dispositions as agent. The FRBNY began to hold as agent net cash proceeds from the IPO of AIA on October 29, 2010, and the sale of ALICO on November 1, 2010. The funds that were held by the FRBNY as agent from the disposition of AIG assets are included in table 1 of this report and in table 1 of the H.4.1 statistical release. On December 8, 2010, AIG announced a definitive agreement with ALICO Holdings LLC, AIA Aurora LLC, the FRBNY, the Treasury, and the Trust regarding the Recapitalization announced on September 30, 2010. The December 8 definitive agreement superseded the agreement in principle, dated September 30, and included forms of several other agreements governing the Recapitalization.

On January 14, 2011, AIG, the Treasury, and the FRBNY closed the Recapitalization. Upon closing, the cash proceeds from certain asset dispositions, including the IPO of AIA and the sale of ALICO, were used first to repay in full the amount then outstanding under the AIG revolving credit facility, including accrued interest and fees, and then to redeem a portion of the preferred interests in AIA Aurora LLC and ALICO Holdings LLC previously received by the FRBNY in exchange for an equivalent reduction of the amount of debt outstanding on the revolving credit facility. AIG purchased the remaining preferred interests from the FRBNY, including all accrued dividends, through a draw on the Treasury's Series F preferred stock commitment and transferred the preferred interests purchased from the FRBNY to the Treasury as consideration for the draw on the available Series F funds. As a result of the closing of the Recapitalization, the revolving credit facility was fully repaid, and the FRBNY's commitment to lend any further funds was terminated.

Under the AIG revolving credit facility, all net cash proceeds received from the sale by AIG of its subsidiaries or businesses (other than sales in the ordinary course of business) were applied to pay down outstanding borrowings under the facility (and related accrued and unpaid interest), unless otherwise waived by the FRBNY. Additionally, the maximum principal amount of available credit to AIG under the revolving credit facility was reduced by the amount of net cash proceeds applied to pay the principal amount of outstanding borrowings under the facility, unless otherwise waived by the FRBNY. Between March and December 2010, the maximum principal amount available under the AIG revolving credit facility was reduced from $34.4 billion to approximately $24.5 billion primarily in connection with AIG's sale of interests in several subsidiaries and other assets. As a result of the closing of the Recapitalization, the revolving credit facility was fully repaid, and the FRBNY's commitment to lend any further funds was terminated.

Figure 3 presents 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

Pursuant to authority granted by the Federal Reserve Board under Section 13(3) of the Federal Reserve Act, the FRBNY, on December 12, 2008, lent approximately $19.5 billion to a newly formed Delaware limited liability company, Maiden Lane II LLC, to partially fund the purchase of residential mortgage-backed securities (RMBS) from the securities lending portfolio of several regulated U.S. insurance subsidiaries of AIG. Maiden Lane II LLC acquired the RMBS, which had an aggregate par value of approximately $39.3 billion, at the then-current market value of approximately $20.8 billion, which was substantially below par value.⁴ The full portfolio of RMBS held by Maiden Lane II LLC serves as collateral for the Federal Reserve's loan to Maiden Lane II LLC. AIG's insurance subsidiaries also have a $1 billion subordinated position in Maiden Lane II LLC that is available to absorb first any losses that may be realized.

The net portfolio holdings of Maiden Lane II LLC are presented in tables 1, 8, and 9 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. Details on the terms of the loan, as well as information on the holdings of the Maiden Lane II LLC, including the CUSIP number, descriptor, and the current principal balance or notional amount outstanding for all the positions in the portfolio, is published on the FRBNY website at www.newyorkfed.org/markets/maidenlane2.html.

Information about the assets and liabilities of Maiden Lane II LLC is presented as of September 30, 2010, in tables 18 through 20 and figure 4. This information is updated on a quarterly basis.

Table 18. Maiden Lane II LLC outstanding principal balance of senior loan and fixed deferred purchase price
Millions of dollars

Table 19. Maiden Lane II LLC summary of RMBS portfolio composition, cash and cash equivalents, and other assets and liabilities
Millions of dollars

Table 20. Maiden Lane II LLC securities distribution by sector and rating
Percent, as of September 30, 2010

Figure 4. Maiden Lane II LLC securities distribution as of September 30, 2010

Maiden Lane III LLC

Pursuant to authority granted by the Federal Reserve Board under Section 13(3) of the Federal Reserve Act, the FRBNY in November and December 2008, lent approximately $24.3 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. Maiden Lane III LLC acquired these CDOs, which had an aggregate par value of approximately $62.1 billion, at the then-current market value of approximately $29.6 billion, which was substantially below par value.⁵ The full portfolio of CDOs held by Maiden Lane III LLC serves as collateral for the Federal Reserve's loan to Maiden Lane III LLC. An AIG subsidiary also has a $5 billion subordinated position in Maiden Lane III LLC that is available to absorb first any losses that may be realized. 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 net portfolio holdings of Maiden Lane III LLC are presented in tables 1, 8, and 9 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 on the holdings of the Maiden Lane III LLC, including the CUSIP number, descriptor, and the current principal balance or notional amount outstanding for all the positions in the portfolio, is published on the FRBNY website at www.newyorkfed.org/markets/maidenlane3.html.

Information about the assets and liabilities of Maiden Lane III LLC is presented as of September 30, 2010, in tables 21 through 23 and figure 5. This information is updated on a quarterly basis.

Table 21. Maiden Lane III LLC outstanding principal balance of senior loan and equity contribution
Millions of dollars

Table 22. Maiden Lane III LLC summary of portfolio composition, cash and cash equivalents, and other assets and liabilities
Millions of dollars

Table 23. Maiden Lane III LLC securities distribution by sector, vintage, and rating
Percent, as of September 30, 2010

Figure 5. Maiden Lane III LLC securities distribution as of September 30, 2010

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