Thursday’s story, that the Timothy Geithner-headed Federal Reserve Bank of New York tried to cover up certain details of mega-insurer AIG’s bailout in 2008, has finally prompted some responses from US Treasury — where Geithner is now head.
The below, for instance, was told to the Wall Street Journal:
Treasury spokeswoman Meg Reilly said what has been overshadowed is the fact that the government expects to be repaid in full, with interest, on the money it provided to buy the AIG-linked securities.
“Somehow that fact that the government’s loan is ‘above water’ gets lost in all the consternation,” Ms. Reilly said. The outstanding loan balance stood at $18.6 billion at the end of December, while the fair market value of the securities portfolio was $22.6 billion, according to Treasury figures.
That is the $25bn loan made to AIG (via Maiden Lane III) by the Federal Reserve Bank of New York. In return for the loan, the FRBNY got a bunch of assets backing CDOs from the insurer’s counterparties — they now form the SPV Maiden Lane III, managed by BlackRock.
And it’s interesting that the Fed is claiming the loan to be above water, in effect saying that the assets are worth more than $25bn put in. The Fed’s most recent report (to end of September 2009) puts the fair value of Maiden Lane III’s assets at $23.5bn — just short of that $25bn — but an improvement from the $22.5bn reported at the end of June.
Now, a lot might have changed since September; Prices on some CDOs have improved as appetite for structured finance returned, but there remains a huge question mark over the fair value pricing being used by the Fed (via manager selected BlackRock).
Note for instance, that the official, ratings on the Maiden Lane CDOs have been sliding steadily towards the non-investment grade bracket, yet their reported fair value improved between the end of September and the end of June:
So it’s probably inevitable that the Treasury’s “above water” claim is raising eyebrows. Notably from structured finance specialist, Janet Tavakoli, who’s been on the AIG bailout case for months.
She says:
. . . the FRBNY should immediately release the details of all of the Maiden Lane III assets backing that loan and show the current prices BlackRock has placed on them. Based on the current market, it is extremely likely that the loan is underwater.
The assets backing the loan are so-called super senior and AAA rated collateralized debt obligations (CDOs). Similar CDOs trade for under ten cents on the dollar, not close to the average price of 35 cents for the loan’s assets shown in a recent Fed report. The Fed claims prices climbed 4.5%. Yet in the secondary market, prices have dropped…
If the Treasury wants to publicly claim the loan is not underwater, now is the time to prove it…
Related links:
A swooning maiden lane and the Fed’s CRE exposure - FT Alphaville
Goldman’s collateral damage – FT Alphaville
Weird waterfalls and the synthetic CDO stumper – FT Alphaville
The uncomfortable position of UBS – FT Alphaville