The Rescue of American International Group Module D: Maiden Lane II

Abstract

In September 2008, American International Group (AIG) faced increasing difficulty in returning cash collateral to counterparties looking to terminate, rather than roll over, their securities lending agreements, in part because the company had invested the collateral in residential mortgage-backed securities (RMBS), which were becoming illiquid. The Federal Reserve Bank of New York (FRBNY) provided liquidity to the company, including through the Securities Borrowing Facility (SBF), which allowed for the repayment of cash collateral but did not address the falling values of the RMBS. In November 2008, the Federal Reserve Board authorized the creation of Maiden Lane II (ML II), a special-purpose vehicle that would utilize a $1 billion equity contribution from AIG and a $19.5 billion senior loan from the FRBNY to purchase the illiquid RMBS. ML II would repay the loan with the proceeds from the eventual sale of the RMBS. Upon the establishment of ML II, the SBF was terminated. ML II helped to lessen AIG’s exposure to the illiquid RMBS market and avert a downgrade, both of which ultimately contributed to AIG’s stabilization.

Keywords: AIG, asset purchase, Federal Reserve Bank of New York, Maiden Lane II, residential mortgage-backed securities, securities lending, senior loan

JEL Classification: G01,G28