AIG terminates $46.1 billion of credit-default swaps (CDS)

AIG announced on Tuesday that an off balance sheet vehicle created by the Federal Reserve Bank of New York (FRBNY) has purchased $46.1 billion of its toxic collaterised debt obligations (CDOs).

The facility, which was established on November 10, will purchase up to $70 billion of AIG's faltering multi-sector CDOs on which AIG had written CDS contracts, terminating the CDS contracts in the process. Thus far, in addition to the $46.1 billion already moved off of the company's balance sheet, the entity has entered into agreements to purchase an additional $7.4 billion of CDOs from the beleaguered insurer.

According to a spokesperson at AIG, the termination of an additional $11.2 billion of exposure to multi-sector CDOs is pending and dependent on the successful structuring of termination and purchase agreements.

As a part of the original bailout scheme for AIG, the FRBNY hammered out a deal to provide an $85 billion bridge loan in exchange for a 79.9% stake in the company, and also agreed to borrow up to $37.8 billion of the insurer's investment-grade fixed-income securities in return for cash collateral.

The off balance sheet vehicle was set up with $5 billion in equity funding from AIG and $15.1 billion from the FRBNY to purchase CDOs; the FRBNY plans on contributing up to $30 billion in funding to the scheme.

The entity will collect cash flows from the assets that it obtains and pay a distribution to AIG for its equity interest once the principal and interest owed to the FRBNY are paid in full.

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