Overheard on Maiden Lane

"When the market was in its last throes,
We bought AIG CDOs.
With the passage of time
Their value did climb,
So gainfully we may dispose."

With the sale of $3.4 billion of toxic mortgage debt, the role of the New York Fed in the $182 billion rescue of AIG came to an end last week. As Maiden Lane III LLC repaid the last of its $24.3 billion loan from the Federal Reserve Bank of New York, the Fed could celebrate a $6.6 billion gain to the public from this rescue program. Created during the dark days of 2008, the three Maiden Lane limited liability companies were set up by the Fed to stabilize the derivative markets in which AIG was a major player, as well as facilitate the takeover of Bear Stearns by JP Morgan.

According to Bloomberg, "AIG’s rescue in 2008 swelled to include a $60 billion credit line from the New York Fed, as much as $52.5 billion for two Maiden Lane programs and a Treasury investment of up to $69.8 billion." Maiden Lane III LLC combined the New York Fed's $24.3 billion loan with $5 billion of equity from AIG, to buy $29.3 billion of collateralized debt obligations (CDOs) on which the insurer had written credit default swaps. At a time when the CDOs' values were plummeting, this allowed the swaps to be canceled, thus stabilizing AIG's potential liabilities. It also bought the luxury of time for the mortgage market to recover before selling the CDOs. Over the ensuing four years, the market recovered enough to close out the Maiden Lane programs gainfully.