Zacks_Analysts' Blog : Fed Snubs AIG's Offer to Buy RMBS - Analyst Blog

Finally, the Federal Reserve Bank of New York (FRBNY) turned down American International Group Inc.’s (AIG) offer to repurchase its $15.7 billion residential mortgage-backed securities (RMBS) on Maiden II. This is a special-purpose investment vehicle that the company had handed over to FRBNY as collateral mortgage bonds during the peak of its financial crisis.

The FRBNY has however decided to hold competitive bidding on the RMBS rather than handing them back to AIG. The bidding procedure is expected to help boost FRBNY’s earnings. Moreover, given the improvement in the yield of the RMBS driven by the ongoing economic revival, many bidders are showing interest in this investment.

For similar reasons, the buyback by AIG at this point would have proved to be a lucrative investment. Hence, the company’s management is quite disappointed with FRBNY’s decision. Nevertheless, beginning next week, FRBNY plans to sell these securities in blocks and pieces over time, whereby BlackRock Inc. (BLK) is appointed to manage the sale process.

Meanwhile, the Financial Times reported that Credit Suisse AG (CS), Morgan Stanley (MS) and Barclays plc (BCS) are among the potentially interested bidders.     

Earlier this month, AIG had offered repurchase of about 800 RMBS at about 50 cents on the dollar. When AIG was formed in December 2008, it had about $20.5 billion of RMBS under Maiden II, which has now declined to $15.9 billion.

The repurchase would have helped the US government to earn about $1.5 billion from the company’s bailout loan. Additionally, the repayment of Maiden II loan could reduce AIG’s loan obligations toward the US government to roughly $26 billion from $39 billion at 2010 end and the initial debt chunk of approximately $182 billion in 2008. This could have been quite an impressive progress.

The government's $26 billion comprises preferred interests in AIA Group worth $11.3 billion held by the Treasury, a different Maiden Lane III vehicle that holds interests in collateralized debt obligations, and an undrawn line of credit. Besides, the debt repayment can help ease the process of public offering of 92% stake of Treasury in AIG, which is expected by May this year.

Overall, uncertainty prevails on how successfully FRBNY will be able to unload this RMBS portfolio, where AIG has already set a bar of $15.7 billion, in an attempt to maximize its returns.