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 II LLC and Maiden Lane III LLC portfolios are used to pay down the Federal Reserve Bank of New York's (FRBNY) loans to those LLCs. For the first quarter of 2010, repayments totaled approximately $2.0 billion, as presented in tables 18 and 21. Until June 26, 2010, cash flows from the Maiden Lane LLC portfolio were reinvested primarily in agency mortgage-backed securities (MBS).
• 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 distributions of the proceeds realized on the asset portfolio held by Maiden Lane LLC, after payment of certain fees and expenses, now occur on a monthly basis unless otherwise directed by the Federal Reserve. The monthly distributions are used to cover the expenses and repay the obligations of the LLC, including the principal and interest on the loan extended by the FRBNY. According to the priority established in the terms of the transaction, payments by Maiden Lane LLC from the proceeds of the asset portfolio holdings will be made in the following order: operating expenses of the LLC, amounts owed to counterparties under related derivative contracts, principal due to the FRBNY, interest due to the FRBNY, principal due to JPMorgan Chase & Co., and interest due to JPMorgan Chase & Co. Any remaining funds will be paid to the FRBNY.

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 merger 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. The LLC is managing 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 at www.newyorkfed.org/markets/maidenlane.html.

Table 13. Fair Value Asset Coverage
Millions of dollars

The assets of Maiden Lane LLC are presented weekly in tables 1, 10, and 11 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 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 March 31, 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 March 31, 2010

Figure 2. Maiden Lane LLC Securities Distribution as of March 31, 2010

American International Group (AIG)

Recent Developments

• The balance on the AIG revolving credit facility decreased by $1.4 billion between May 26 and June 30, 2010, as presented in table 17A. The decline was primarily attributable to principal repayments and reductions, which outpaced principal drawdowns on the facility.
• As of June 30, 2010, the maximum principal amount of credit available under the AIG revolving credit facility was reduced from $34.0 billion to approximately $33.7 billion in connection with the sale of common stock of CME Group, Inc. and the sale of AIG United Guaranty Mortgage Insurance Company Canada.
• On July 14, 2010, AIG announced the resignation of Harvey Golub, Chairman of AIG's Board of Directors, effective immediately. AIG board member Robert S. (Steve) Miller succeeded Golub as Chairman. Miller recently served as the Executive Chairman of Delphi Corporation, and has served in a number of corporate restructuring situations, including as Chairman and Chief Executive Officer of Bethlehem Steel Corp. (2001-03), and as Chairman and Chief Executive Officer of Waste Management, Inc. (1997-99).

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 at 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 10 and 11 of the H.4.1 statistical release.

Table 17A. AIG Revolving Credit Facility
Billions of dollars

Table 17B. Preferred Interests in AIA Aurora LLC and ALICO Holdings LLC
Billions 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 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 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 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, 2009. 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 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.

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.

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 SPVs, AIA Aurora LLC and ALICO Holdings LLC, formed to hold the outstanding common stock of AIG's largest foreign insurance subsidiaries, AIA Group, Limited (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 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 the H.4.1 statistical release, accrued but unpaid dividends on the preferred interests in the two SPVs are included in "Other Federal Reserve assets" in table 1, and in "Other assets" in tables 10 and 11.

On March 1, 2010, AIG announced the signing of a definitive agreement for the sale of AIA to Prudential plc 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 May 17, 2010, Prudential announced a rights offering to raise approximately $20 billion in order to fund part of the cash portion of the purchase price, and announced plans to raise the remaining $5 billion through an offering of subordinated debt securities. AIG agreed to subscribe for and receive up to $1.9 billion of the subordinated debt securities, in lieu of receiving an equivalent amount of cash, in the event the entire subordinated debt offering could not be placed with other investors. In early June 2010, Prudential plc announced its intention to not proceed with the transaction.

On June 1, 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. 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.

On March 8, 2010, AIG announced the signing of a definitive agreement for the sale of ALICO to MetLife, Inc. for approximately $15.5 billion, including $6.8 billion in cash and the remainder in equity securities of MetLife, subject to closing adjustments. 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 the SPV that holds ALICO. The transaction was approved by the boards of directors of both AIG and MetLife, and is 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 intends 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. Excess cash proceeds and proceeds from AIG's efforts to monetize the securities received in the transaction will be used to redeem any outstanding preferred interests and then to repay outstanding amounts borrowed under the revolving credit facility with the FRBNY.

In March 2010, the maximum amount available under the AIG revolving credit facility was reduced from $34.4 billion to approximately $34.1 billion in connection with AIG's sale of equity interests in its subsidiary, CFG Colombia, and the sale of a portion of its asset management business, PineBridge Global Investments LLC, to Pacific Century Group, an Asia-based private investment firm. On May 6, 2010, the maximum amount available under the AIG revolving credit facility was further reduced, from $34.1 billion to approximately $34.0 billion, in connection with the sale of HighStar Port Partners, L.P.

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

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 the RMBS of approximately $20.8 billion, which was substantially below par value.³ 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. Details of the terms of the loan are published on the FRBNY website at www.newyorkfed.org/markets/maidenlane2.html.

The net portfolio holdings of Maiden Lane II LLC are presented in tables 1, 10, and 11 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 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 March 31, 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 March 31, 2010

Figure 4. Maiden Lane II LLC Securities Distribution as of March 31, 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 the CDOs of approximately $29.6 billion, which was substantially below par value.⁴ 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. Details of the terms of the loan are published on the FRBNY website at 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 net portfolio holdings of Maiden Lane III LLC are presented in tables 1, 10, and 11 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 March 31, 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 March 31, 2010

Figure 5. Maiden Lane III LLC Securities Distribution as of March 31, 2010

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