American International Group, Inc. (AIG) announced December 2, 2008 via its website that a
financing entity recently created by the Federal Reserve Bank of New
York (FRBNY) and designed to mitigate AIG's liquidity issues in
connection with its credit default swaps and similar derivative
instruments (CDS) written on multi-sector collateralized debt
obligations (CDOs) has been launched. The new entity, "Maiden Lane* II, LLC", which was
announced on November 10, is designed to purchase CDOs on which AIG
Financial Products Corp. (AIGFP) has written CDS contracts. AIGFP has been publicized in the press as the AIG subsidiary company at the eye of the storm.
To date, the
new entity has entered into agreements with AIGFP's CDS counterparties
to purchase approximately $53.5 billion principal amount of CDOs. To
date, $46.1 billion principal amount of such CDOs have been purchased,
and the associated notional amount of CDS transactions have been
terminated in connection with such purchases.
AIG has provided $5 billion in equity funding, and the FRBNY will
provide up to approximately $30 billion in senior funding to the
financing entity, of which approximately $15.1 billion has been funded
to effect purchases of CDOs. The entity will collect cash flows from the
assets it owns and pay a distribution to AIG for its equity interest
once principal and interest owing to the FRBNY on the senior loan have
been paid down in full. Upon payment in full of the FRBNY's senior loan
and AIG's equity interest, all remaining amounts received by the entity
will be paid 67 percent to the FRBNY and 33 percent to AIG.
Federal Reserve Board Press Release November 10, 2008
* for those who may be curious, Maiden Lane is major street in the New York City financial district.
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