Federal Reserve Rejects AIG Securities Buy-Back Bid

AIG had offered to purchase the securities, valued at $21.7 billion at par, for $15.7 billion.

The Fed says that after "careful review," the N.Y. Fed and the Board of Governors of the Federal Reserve System "judged that the public interest in maximizing returns from any sale and promoting financial stability would be better served by an alternative approach to realizing value that is also more consistent with normal market practice."

It says it is doing so in "light of improved conditions in the secondary market for non-agency residential mortgage backed securities (RMBS), and a high level of interest by investors."

"We are highly disappointed in the Fed's decision, which may prevent AIG from delivering on its goal that U.S. taxpayers earn a profit on their investment in AIG," says Mark Herr, AIG spokesman. "That the Fed, which has been such a constructive partner over the last two years, would hurt the very company in which U.S. taxpayers own a 92 percent stake, is very difficult to understand."

AIG had been seeking to buy back the securities since last September, AIG president and CEO Robert Benmosche said last week on CNBC. Company comments on the decision echo this sentiment.

"Since the fall of 2010, based on numerous discussions with the New York Fed, [AIG] had anticipated that we would have the opportunity to buy these assets at a fair price by January 2011 and earn a return on them for the benefit of the U.S. taxpayer," says Herr. "Now, we must make up for lost time and lost earnings—all of which hurts U.S. taxpayers."

The N.Y. Fed adds that it believes "that conditions are right for ML II to begin more extensive asset sales while taking appropriate care at all times to avoid market disruption.

"In light of this decision, the New York Fed has changed the investment management objective for ML II consistent with such sales," the statement adds.

"Severe obstacles are not new to us, and we remain resolute in our goals to restore AIG to full independence from government support and that U.S. taxpayers recoup at least every dollar they have invested in the company," says Herr. "We are a strong company, and every one of our 63,000 employees has been working nonstop to repay U.S. taxpayers since the day they lent us money. We have made such enormous progress—repaying more than $36 billion in government obligations this year, including to the New York Fed—and will continue to take all the right steps to strengthen our company and earn investor confidence."

The sale of the securities will be conducted through BlackRock Solutions, the N.Y. Fed's investment manager. Amongst the companies said to be competing with AIG are Barclay's Bank and Swiss Re.

The securities were part of a total of more than $75 billion in subprime RMBS held by AIG's life insurance subsidiaries and collateralized by Treasury securities and other prime paper held as reserves by its life subsidiaries.