AIG Sells Mortgage-Backed Securities to Fed Vehicle (Update2)

By Erik Holm
Bloomberg News
December 15, 2008

Dec. 15 (Bloomberg) -- American International Group Inc. sold residential mortgage-backed securities with a face value of $39.3 billion to a government-funded facility as the U.S. seeks to limit losses at companies that did business with the insurer.

AIG will receive about $19.8 billion for the assets, which were held by the insurer's securities-lending program, the New York-based firm said today in a statement. The facility was mostly funded by the Federal Reserve Bank of New York, which may collect the majority of profits if it sells assets for more than the purchase price, according to a regulatory filing. The insurer paid $1 billion to the fund, said AIG spokesman Nicholas Ashooh.

The Fed has committed as much as $152.5 billion to rescue AIG from insolvency and minimize "disruption to the financial markets." AIG stumbled when it lent securities to investors and used the cash it got back as collateral to buy mortgage-backed securities that plunged in value. When the investors asked for the collateral back, AIG wasn't immediately able to pay.

"The creation and launch of this financing entity will eliminate the liquidity issues associated with AIG's U.S. securities-lending program," Chief Executive Officer Edward Liddy said in the statement.

The securities-lending program has been "terminated," the statement said. Today's deal replaces a $37.8 billion credit facility announced by the Fed Oct. 8 to help AIG meet its collateral requirements.

Competing insurers Chubb Corp. and MetLife Inc. have also curtailed their own securities lending programs.

Credit-Default Swaps

The government rescue package includes a $60 billion loan, a $40 billion investment, as much as $30 billion to purchase assets underlying credit-default swaps sold by the insurer, and the money for securities lending. AIG posted four straight quarterly losses totaling about $43 billion on bad bets on the housing market, including credit-default swaps protecting fixed-income investors against losses.

The insurer, which agreed to turn over an 80 percent stake in exchange for the government rescue, has declined 97 percent this year in New York Stock Exchange composite trading. AIG slipped 6 cents today to $1.74.

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