Monthly Report on Credit and Liquidity Programs
and the Balance Sheet

Lending in Support of Specific Institutions

Recent Developments

• As presented in Table 24, net income including changes in valuation for the quarter ended June 30, 2009, resulted in improvements to the fair value asset coverage of FRBNY loans to Maiden Lane and Maiden Lane III LLCs, while a net loss further reduced the coverage of the loan to Maiden Lane II LLC.
• 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 27 and 28, in the second quarter of 2009 those repayments totaled about $2.6 billion.
• Certain additional information on the portfolio composition of the Maiden Lane, Maiden Lane II, and Maiden Lane III LLCs, based on the June 30, 2009, revaluations, will be presented in the next monthly report.

Table 24. Fair Value Asset Coverage
($ millions)

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. 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.

Table 25. Maiden Lane LLC Outstanding Principal Balance of Loans
($ millions)

American International Group (AIG)

Recent Developments

• Consistent with U.S. GAAP, as of July 29, 2009, the reported value of the AIG revolving credit extension has been reduced by a $1.3 billion adjustment for loan restructuring. This adjustment is related to the most recent loan modification, announced on March 2, 2009, which eliminated the existing floor on the interest rate. In accordance with GAAP, 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.
• As shown in Table 26, the balance on the AIG revolving credit facility fell slightly during this reporting period, as a small net drawdown and quarterly recapitalization of interest was offset by the loan restructuring allowance.
• AIG second quarter results: On August 7, 2009, AIG reported its first quarterly profit since the third quarter of 2007, as certain of its businesses stabilized and the company’s results reflected positive valuation changes. For the quarter ended June 30, 2009, AIG reported net income attributable to AIG of $1.8 billion, including net income attributable to AIG common shareholders of $311 million or $2.30 per diluted common share, compared with a net loss of $5.4 billion or $41.13 per diluted share in the second quarter of 2008. Second quarter 2009 adjusted net income was $2.0 billion, compared with an adjusted net loss of $1.3 billion in the second quarter 2008. In its second quarter 10-Q filing, AIG announced that it has extended its commitment to support American General Finance Corporation (AGF) and International Lease Finance Corporation (ILFC) through August 15, 2010. AIG disclosed that in addition to their cash flows from operations and proceeds from potential asset sales and securitizations, both companies will require support from AIG to meet their existing obligations. Also disclosed in the filing was management’s acknowledgement of the FRBNY and the U.S. Treasury’s commitment to the orderly restructuring of AIG and their commitment to continue to work with AIG to maintain its ability to meet its obligations as they come due. On July 31, 2009, Moody’s Investor Services downgraded AGF and ILFC (senior unsecured to Baa3 from Baa2, short term to Prime-3 from Prime-2) and placed the ratings on review for further possible downgrade.
• Updates on asset divestitures: During the first six months of 2009 and through July 31, 2009, AIG entered into agreements to sell or complete the sale of operations and assets, excluding AIG Financial Products Corp. (AIGFP) assets, that had aggregate assets and liabilities with carrying values of $31.2 billion and $23.8 billion, respectively, at June 30, 2009, or the date of sale or in the case of Transatlantic Holdings, Inc., deconsolidation. Aggregate net proceeds from these sales transactions, including proceeds applied to repay intercompany loan facilities, are expected to be approximately $8.0 billion. These transactions are expected to generate approximately $4.6 billion of aggregate net cash proceeds to repay outstanding borrowings and reduce the amount of the FRBNY revolving credit facility, after taking into account taxes, transaction expenses, and capital required to be retained for regulatory or ratings purposes. Gains and losses recorded in connection with the disposals of businesses include estimates that are subject to subsequent adjustment. 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 divestiture transactions since June 30, 2009, were as follows:
  • On July 1, 2009, AIG announced that it had closed the sale of 21st Century Insurance Group to Farmers Insurance Group, Inc., a subsidiary of Zurich Financial Services for $1.9 billion, consisting of $1.7 billion in cash and $200 million in face amount of subordinated, euro-denominated capital notes. AIG also announced that it had agreed to sell 100 percent of its ownership interest in Inversora Pichincha S.A. and Interdinco S.A., which comprise AIG’s consumer finance operations in Colombia, to Banco Pichincha, C.A. of Ecuador and other parties. Terms of the transaction were not disclosed.
  • On July 28, 2009, AIG announced that it had completed the sale of a majority of the U.S. life insurance premium finance business of AIG Credit Corp. and A.I. Credit Consumer Discount Company (A.I. Credit) to First Insurance Funding Corp. (FIFC), a subsidiary of Wintrust Financial Corporation of Lake Forest, Illinois, for approximately $679.5 million in cash. If certain conditions are met, FIFC will purchase certain specified additional life insurance premium finance assets for $61.2 million.
  • On July 29, 2009, AIG announced that it had entered into an agreement under which it will combine its consumer finance business in Poland, conducted through AIG Bank Polska S.A., into the Polish consumer finance business of Santander Consumer Finance S.A., which is conducted through Santander Consumer Bank, S.A. (SCB). In exchange, AIG will receive a 30 percent equity interest in SCB. At closing, all of the AIG intercompany debt facilities related to these entities will be repaid, and AIG will not be responsible for the future funding of the combined consumer finance businesses.
• AIGFP is engaged in a multi-step process of unwinding its businesses and portfolios. In connection with that process, certain 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 asset divestiture amounts shown above. The FRBNY has waived the requirement under the FRBNY Credit Agreement that the proceeds of these specific pending sales be applied as a mandatory prepayment under the FRBNY Facility, which would result in a permanent reduction of the FRBNY’s commitment to lend to AIG. Instead, the FRBNY has given AIGFP permission to retain the proceeds of these completed sales, and has required that such proceeds received from certain future sales be used to voluntarily prepay the FRBNY Facility, with the amounts prepaid available for future reborrowing subject to the terms of the FRBNY Facility.
• On July 15, 2009, AIG announced that it will accelerate steps to position American Life Insurance Company (ALICO) as an independent entity and seek an initial public offering and public listing in New York.
• On July 27, 2009, AIG announced that it had formed the special-purpose vehicle (SPV) into which it intends to contribute the equity of AIU Holdings (AIU Holdings, Inc. and AIU Holdings LLC, collectively "AIU Holdings"), subject to receipt of applicable regulatory approvals. The SPV will consist of AIU Holdings’ Commercial Insurance, Foreign General Insurance, and Private Client Group businesses. The new company will operate under the brand name of Chartis.
• Management updates:
  • On August 4, 2009, AIG announced that its Board of Directors had elected Robert H. Benmosche President and Chief Executive Officer. Mr. Benmosche was also elected a member of the Board of Directors, and assumed his new roles on August 10, 2009, with the retirement of Chairman and Chief Executive Officer Edward M. Liddy.
  • On August 6, 2009, AIG announced that its Board of Directors had elected AIG Director Harvey Golub Non-Executive Chairman of the Board. Mr. Golub assumed his new role on August 10, 2009, succeeding retiring Chairman and CEO Edward M. Liddy.

Table 26. AIG Revolving Credit Facility

Background

On September 16, 2008, the Federal Reserve announced that it would lend to AIG to provide the company with the time and flexibility to execute a value-maximizing strategic plan. Initially, the FRBNY extended an $85 billion line of credit to the company. The terms of the credit facility were 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 table 9 of the H.4.1 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. More detail on these two 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 October 8, 2008, the FRBNY was 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.)

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 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 to be formed to hold the outstanding common stock of American International Assurance Company Ltd. (AIA) and 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. 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 of 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 2 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 2. 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 release.

Table 27. Maiden Lane II LLC Outstanding Principal Balance of Senior Loan and Fixed Deferred Purchase Price
($ millions)

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).

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 release.

Table 28. Maiden Lane III LLC Outstanding Principal Balance of Senior Loan and Equity Contribution
($ millions)

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). Because the FRBNY has not extended credit to Citigroup under this arrangement, the commitment is not reflected in the H.4.1 statistical release.

Bank of America

On January 16, 2009, the Treasury, the Federal Reserve, and the FDIC jointly announced that the U.S. government would provide support to Bank of America to support financial market stability. The terms of the support are provided on the Federal Reserve Board's website (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 this planned support--specifically, a residual financing arrangement authorized for the company 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. Because the Federal Reserve has not extended credit to Bank of America under this arrangement, the commitment is not reflected in the H.4.1 statistical release.

Return to top