Fed Repays AIG's Maiden III Share

In a positive turn of events, the Federal Reserve (Fed) returned $5.0 billion to American International Group Inc. (AIG - Analyst Report) that was deployed by the latter as equity in the Maiden III portfolio. The portfolio comprised $62.1 billion of collateralized debt obligations (CDOs) that were held by AIG’s counterparties.

The Fed had established the Maiden III securities portfolio in 2008 to terminate credit default swaps (CDS) issued by AIG. Thereafter, AIG had put in $5.0 billion into the securities fund, while $24.3 billion of cash were furnished by the Fed. Along with this, AIG was also paid an interest of $0.56 billion that were due against the contribution, totaling AIG’s repayment from the Fed to $5.56 billion.

Meanwhile, last month, the Fed got rid of all the problem securities of the Maiden III portfolio as it sold off the remaining $1.9 billion bad assets to Merrill Lynch Pierce Fenner & Smith Inc., a unit of Bank of America Corp. (BAC - Analyst Report). Maiden III is the last of the assets that remains unpaid under the loan issued by the government.

With the sale of these assets last month, AIG completed the repayment of the Fed’s loan. According to the terms laid by the Fed, two-thirds of the profits from future Maiden III asset sales will go to the Fed henceforth. The remaining one-third shall go to AIG.

Overall, AIG has come a long way in repaying its $182.3 billion government bailout loan that was granted to the company during the peak of financial crisis in September 2008. Although the company is one of the last ones to repay the government, AIG’s loan amount has contracted to about $30 billion now, which has been achieved with the implementation of strategic and vigorous asset disposal program and raising funds from the market through debt and equity.

While AIG is yet to attain complete capital flexibility, we expect the company to benefit from its scale of operations, focus on core businesses and economic recovery. Moreover, the lucrative sale of Maiden II and Maiden III so far, raises optimism for a profitable sale of other securities in future.

Going forward, AIG is scheduled to release its second quarter results after the closing bell on August 2, 2012. The Zacks Consensus Estimate pegs the second quarter earnings at 60 cents, down about 16% over year-ago quarter. Currently, AIG carries a Zacks Rank #2, which translates into a short-term Buy rating.