AIG Terminates $16 Billion In Credit Default Swaps To Reduce Risks

New York, NY (AHN) - Shares of American International Group Inc. (NYSE: AIG) drop Wednesday in afternoon trading after the New York based company said it has sold $16 billion worth of multi-sector collateralized debt obligations, which led the company to near collapse.

Maiden Lane III LLC, a financing entity recently created by the Federal Reserve Bank of New York and AIG, has bought the collateralized debt obligations insured by the insurance giant through credit-default swap contracts.

To date, the fund, created last month, has bought CDOs that have a face value of about $62.1 billion, according to AIG in a statement released on Wednesday.

As a result, the associated credit default swap contracts and similar instruments (CDS) written by AIG Financial Products Corp. have been terminated.

The latest action has mitigated AIG's liquidity issues in connection with its CDS and similar exposures on Multi-Sector CDOs.

AIG's Chief Executive Officer Edward Liddy has been increasing the firm's capital base by disposing of many of its businesses as the insurer seeks to repay a U.S. government rescue loan of $152.5 billion.

Maiden Lane III paid about $6.7 billion to the investors for the securities in the latest purchases.

The counterparties were also able to keep around $9.2 billion in collateral previously posted by AIG in respect of the terminated CDS, leading to the reimbursement of the assets at face value to them.

As previously announced, AIG provided $5 billion in equity funding, and the Fed has agreed to provide up to approximately $30 billion in senior funding, to Maiden Lane III.

The fund will collect cash flows from the assets it owns and pay a distribution to AIG for its equity interest once principal and interest owing to the Fed on the senior loan have been paid down in full.

After payment of the Fed's senior loan and AIG's equity interest, all remaining amounts received by ML III will be paid 67 percent to the FRBNY and 33 percent to AIG.

AIG "continues to analyze" ways to eliminate its exposures to around $12.3 billion in contracts it sold to investors, including remaining physically-settled CDS and 'cash-settled' or 'pay-as-you-go' CDS in respect of protected baskets of reference credits.

Shares of the company $0.02 or 1.29 percent to $1.53 at 12:33 p.m. in composite trading on the New York Stock Exchange on Wednesday, after falling to $1.52 earlier in the day. The stock has traded as low as $1.25 and as high as $60.04 in the last 52-week period.