NU Online News Service, June 12, 1:18 p.m. EDT
The Federal Reserve Board suffered paper losses of almost $9 billion, or 19 percent, in the first quarter of 2009 on risky securities it took over from American International Group last year, according to a new report.
The data was disclosed in a report the agency agreed to release monthly on the value of assets it has acquired as part of its efforts to shore up the economy.
These securities are being held in facilities known as Maiden Lane II and III by the New York Federal Reserve Bank. Maiden Lane is a small street adjacent to its N.Y. offices.
The securities were purchased by the federal government as part of the effort to close down AIG's securities lending unit, shore up AIG's balance sheet and reduce the company's need for cash to collateralize its loss-ridden and extensive securities lending operations.
The securities are appraised at fair value, because the Fed plans to hold them to maturity in hopes they will ultimately be worth their face value.
According to the report, the value of securities–primarily residential mortgage backed securities of various types owned by its life insurance units and taken over the government late last year–dropped 14 percent.
Maiden Lane II was an arrangement completed last December. Under the deal, the Fed and AIG both have an equity interest in the facility, but most of the gains will accrue to the Fed when the securities are sold.
These instruments ranged from AAA-rated securities to MBS backed by subprime loans. They were purchased by AIG's securities trading unit and collateralized by highly-rated bonds, such as Treasury securities held by AIG's various life insurance subsidiaries.
According to the Fed report, the securities had a "fair value" of $19.9 billion as of Dec. 31, 2009, declining to $16.668 billion as of March 31.
The losses from securities acquired by the Fed from AIG's infamous Financial Products unit and housed in what is known as Maiden Lane III were even steeper.
The Fed said the fair value of the securities were $27 billion as of Dec. 31, dropping to $20.665 billion on March 31, or 23.5 percent.
The heaviest losses were in so-called "high grade" asset backed securities. These were valued at $18.77 billion as of March 31, a value that had declined to $13,565, or 28 percent, as of March 31, according to the report.
In the report, issued on Wednesday, the agency argued that its actual losses for the quarter were less, because it deducted from the decline in fair value, the interest it received from the securities.
However, that does not change the fact that if sold in the open market, the Fed's appraisers still valued the securities as being worth less, as of March 31, than they were on Dec. 31.
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