The Federal Reserve is sitting on billions of dollars in paper profits from its controversial effort to unwind credit insurance contracts that AIG provided to banks such as Goldman Sachs, people familiar with the matter said.
The Fed rescue has generated criticism because the banks received 100 cents on the dollar for credit insurance they bought from AIG on collateralised debt obligations – financial instruments that promise the buyer cash flows from pools of bonds or loans. This had led to claims that AIG's rescue was a “backdoor bail-out” of big banks.
However, the central bank is in a position to reap profits from this part of the rescue, which involved the purchase of the underlying CDOs by a New York Fed-financed vehicle, called Maiden Lane III, so that the insurance contracts written on them could be terminated.