It appears that the Fed's solution to the derivatives problem is to unload it onto the taxpayer.
American International Group retired $16 billion in credit default swaps, the contracts that almost caused the company's collapse, after buying the underlying securities with help from the Federal Reserve.
The fund created by the Fed and AIG to protect the insurer's customers from losses has now purchased collateralized debt obligations with a face value of about $62.1 billion, the firm said in a statement.
The fund, called 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 more than $9 billion that AIG had posted in collateral, reimbursing them at face value for the assets. AIG "continues to analyze" ways to retire another $12.3 billion in contracts it sold, the company said.
AIG had to post collateral to investment banks including Goldman Sachs Group that purchased protection through swaps, pushing the insurer to the brink of bankruptcy in September. The government extended an $85 billion loan that month, and the bailout expanded to about $150 billion in November after the Fed created funds to limit losses tied to swaps and the firm's securities-lending program.
The Federal Reserve Bank of New York will provide as much as $30 billion to the fund retiring the swaps, with AIG contributing $5 billion.