–US Tsy Offl: Seek to Sell AIG Interests Once Equity Value Enhanced

By Brai Odion-Esene

WASHINGTON (MNI) – The Federal Reserve and U.S. Treasury anticipate
loans made to battered insurance giant AIG under the Revolving Credit
Facility in 2008 — including interest and commitment fees — will be
fully repaid, the central bank’s top lawyer said Wednesday.

In a hearing on the financial assistance provided to AIG under the
Troubled Asset Relief Program, Fed General Counsel Scott Alvarez said
AIG already has made significant progress in its plans to sell assets to
repay the facility.

He noted the announcement in March 2010 to sell AIA and ALICO to
Prudential Plc and MetLife, Inc., respectively, for aggregate
consideration of about $51 billion.

“The proceeds of these sales will be used first to redeem the
Federal Reserves preferred interests in AIA and ALICO, along with
accrued dividends,” he said, “The remaining amounts will be used to pay
down outstanding balances under the Revolving Credit Facility.”

In addition, Alvarez said the Fed anticipates proceeds of the
liquidation of the RMBS and CDOs held by Maiden Lane II and Maiden Lane
III, will be sufficient to fully repay principal and interest on the
Federal Reserve loans to those entities.

“The extended maturities of the Federal Reserve loans provide an
opportunity to dispose of the assets of each entity in an orderly manner
over time and to collect interest on the assets prior to their sale,
other disposition, or maturity,” he said.

Alvarez also noted that AIG has a $1 billion subordinated position
in Maiden Lane II and $5 billion subordinated position in Maiden Lane
III, available to absorb first any loss that ultimately may be incurred
by either entity.

Jim Millstein, Treasury’s chief restructuring officer for the
Treasury, agreed with Alvarez, telling the panel, “we expect AIG will
sell sufficient assets at fair prices to pay off obligations” to the New
York Federal Reserve Bank.

In his prepared testimony, Millstein added that the assets of
Maiden Lane II and III will continue to generate cash flows sufficient
to repay the loans that the New York Fed made to those entities.

Treasury also expects AIG will streamline its business portfolio
and reduce its debt to a level that is consistent with a A-rated
company, he said.

“This will enhance the value of the taxpayers’ equity interests in
AIG, and the Treasury will then seek to sell these interests as soon as
practicable.”

Also appearing before the Congressional Oversight Panel are Thomas
Baxter and Sarah Dahlgren, both executive vice presidents at the New
York Fed, general counsel and special investments management
respectively.

In a joint written testimony, they said the Maiden Lane II and
Maiden Lane III assets continue to generate substantial proceeds.

They added that while the New York Fed may direct its investment
manager to sell Maiden Lane II and III assets into the market at any
time, as a practical matter, “the value maximizing strategy has been
largely to hold the assets to maturity while collecting interest income,
and principal repayments.”

Currently, the hold-to-maturity expected proceeds of each LLCs
portfolio are greater than the LLCs debt to the New York Fed, they
said, noting that as of May 20, 2010, the balance on the New York Feds
senior loan to Maiden Lane II was $14.9 billion (inclusive of accrued
interest), while the total asset value was $15.8 billion.

The balance on the New York Fed’s Senior Loan to Maiden Lane III
was $16.6 billion (inclusive of accrued interest), while the total asset
value was $23.4 billion.

So the LLCs have repaid approximately $13.1 billion of the loans
made to them by the Fed, and the officials said based on the current
performance of both portfolios, “it is anticipated that the proceeds
from both portfolios will exceed the principal and interest due on the
New York Fed’s Senior Loans to both Maiden Lane II and Maiden Lane III.”

They expect to recover the New York Fed’s principal and interest on
the loans to the LLCs, and on the Fed Facility, the funds ultimately
coming from the cash proceeds of the AIA and ALICO transactions, cash
AIG generates as it monetizes the non-cash sales proceeds of the AIA and
ALICO transactions, the divestiture of certain non-core assets, and
profit derived from AIGs core operating businesses.

Alvarez used the tail-end of his testimony to reiterate how the
crisis with AIG underlines why a resolution regime that allows the U.S.
government to unwind systemically important nonbank financial firms is
needed.

It also emphasizes the need for a consolidated supervisor of
systemically important firms, he said, one empowered to require the
firm to adopt enhanced capital, liquidity, risk management and other
standards that address both the risks the firm assumes and the risks it
poses to the financial system.

“We are encouraged that Congress is near completion of important
landmark legislation that effectively addresses both of these concerns,”
Alvarez concluded.

** Market News International Washington Bureau: 202-371-2121 **

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