American International Group Inc. is considering repaying part of its U.S. bailout by handing over stakes in the mortgage-linked bonds that pushed the company to the brink of collapse, said three people with knowledge of the plan.
The assets are in Maiden Lane II and Maiden Lane III, entities created in 2008 as part of the U.S. effort to remove toxic securities from the New York insurer. AIG's proposal reflects its confidence in a rebound in value of these holdings, said the people, who declined to be identified.
"The only reason they look good now is because the Fed has ramped up the market with its policies," said Christopher Whalen, a managing director at Institutional Risk Analytics. As long as Federal Reserve Chairman Ben S. Bernanke "is willing to print money, as he has been, the Maiden Lanes will do just fine."
AIG Chief Executive Officer Robert Benmosche has said AIG would pay down a Federal Reserve credit line with the planned divestitures of two non-U.S. life divisions and then turn to its Treasury Department obligations. The insurer has hired Citigroup Inc. and Bank of America Corp. to explore options for repaying loans within its $182.3 billion bailout.
AIG has been in talks with the Treasury about the potential plan, one of the people said. The agency considers the proposal to be in its early stages, according to the person. The U.S. got nearly an 80% stake in AIG after its initial 2008 rescue.
Under terms of the deal removing mortgage-backed securities from its balance sheet, AIG contributed $6 billion to fund the Maiden Lane entities and is entitled to a share of proceeds after the Fed is repaid the more than $40 billion it loaned. The insurer booked a $751 million gain on its stake in Maiden Lane III in the first quarter as the securities rebounded.
AIG spokesman Mark Herr, Andrew Williams of the Treasury and Jack Gutt of the Federal Reserve Bank of New York declined to comment.
AIG was forced in September 2008 to take a bailout after it was unable to meet collateral calls to banks including Goldman Sachs Group Inc. and Societe Generale SA. The banking companies had bought protection from AIG against default on collateralized debt obligations.
The Fed and AIG later agreed to create Maiden Lane III to buy $62.1 billion in CDOs and Maiden Lane II to buy about $39 billion in residential-mortgage-backed securities owned by AIG. These actions forestalled a credit-rating downgrading of AIG that would have spurred more collateral calls.
The securities were bought at about half their face value, reflecting markdowns AIG had already taken.
Banks got payments from Maiden Lane III to retire the guarantees and were allowed to keep collateral, making them whole on the assets.
Joseph Cassano, the former head of the AIG unit that sold the CDO guarantees, testified last month to the Financial Crisis Inquiry Commission that Maiden Lane III was "performing" as borrowers repaid their loans and that he expected few defaults.
Maiden Lane III is valued at $22.9 billion and has $15.5 billion in principal remaining to be repaid to the Fed, according to the central bank's data. Maiden Lane II is valued at $15.5 billion and has about $14 billion to repay.
The Treasury believes the portfolios, particularly Maiden Lane III, have value, according to one of the people, who would not say how much debt the government would be willing to forgive in exchange for AIG's minority stake.