SOARD OF GOVERNORS

QF THE

FECEAAL RESEAVE SYSTEM

WASHINC:;TO~. D, C. 20551

BEl< S. B!:RN NKE:

CHAIRM ..

October 14, 2008

The Honorable Christopher J. Dodd

Chairman
Committee on Banking, Housing,
and Urban Affairs
United States Senate
Washington, D.C. 20510

Dear Mr. Chairman:

Pursuant to section 129(a) of the Emergency Economic Stabilization Act of

2008, enclosed is a report with respect to the Board's authorization on October 7, 2008,

under section 13(3) of thc Federal Reserve Act (12 U .S.C. § 343) of the establishment by

the Federal Reserve Bank of New York of the Commercial Paper Funding Facility.

Sincerely,

;2/k-­
Enclosure

IdeDticalletters also sent to: Ranking Member Richard Shelby, Senate Committee on
Banking, Housing, and Urban Affairs; Chairma~ Barney Frank and Ranking
Member Spencer Bachus, House Committee OD Financial Services.
 Report Pursuant to Section 129 of the

Emergency Economic Stabilization Act of 2008:

Commercial Paper Funding Facility

Overview

On October 7, 2008, the Board of Govemors of the Federal Reserve System

(Board), with the support of the Treasury Department and by the unanimous vote
of its five members, approved under section 13(3) of the Federal Reserve Act
(12 U.S.C. § 343) the establishment by the Federal Reserve Bank of New York
(the Reserve Bank) of the Commercial Paper Funding Facility (CPFF). The CPFF
complements the Federal Reserve's existing credit facilities to help provide
liquidity to term funding markets. The CPFF would provide a liquidity backstop to
U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will
purchase three~month unsecured and asset-backed commercial paper directly from
eligible issuers.

Background and Details on the CPFF

Commercial paper is an important source of short-term funding for large

financial and nonfinancial businesses. In addition, the asset-backcd commercial
paper (ABCP) market is an important source of funding for smaller businesses that
do not have direct access to capital markets. In particular, businesses can finance
their receivables by selling them to an ABCP program. At the end of 2007, there
was nearly $950 billion in unsecured commercial paper and ncarly $840 billion in
ABCP outstanding.

The commercial paper market has been under considerable strain in recent
weeks as money market mutual funds and other investors, themselves often facing
liquidity pressures, have become increasingly reluctant to purchase commercial
paper, especially at longer-dated maturities. As a result, in the period leading up to
October 7th, the volume of outstanding commercial paper had shrunk, interest rates
on longer-term commercial paper had increased significantly, and an increasingly
high percentage of outstanding paper had to be funded on an overnight, rather than
on a term, basis. A large share of outstanding commercial paper is issued or
sponsored by financial intermediaries, and their difficulties placing commercial
paper also made it morc difficult for thosc intermediaries to play their vital role in
meeting the credit needs of businesses and households. These factors, when

combined with the ongoing stresses in other parts of the credit markets, presented
significant risks to the ability of businesses and households to obtain funding and
to economic conditions in the United States.

In light of the foregoing, the Board determined that unusual and exigent
circumstances existed that warranted approval of the CPFF. As previously
announced, the Treasury Department also informed the Board that it believed
establishment of the CPFF was necessary to prevent substantial disruptions to the
financial markets and the economy. For these reasons, the Treasury Department
made a special deposit of $50 billion at the Federal Reserve Bank ofNew York in
support of the facility.

By eliminating much of the risk that eligible issuers will not be able to repay
investors by rolling over their maturing commercial paper obligations, the CPFF
will encourage investors to once again engage in term lending in the commercial
paper market. Added investor demand should lower commercial paper rates from
their current elevated levels and foster issu!1nce oflonger-term commercial paper.
An improved commercial paper market will enhance the ability of financial
intermediaries to accommodate the credit needs of businesses and households.

Structure and Basic Terms. The CPFF is structured as a credit facility to a

special purpose vehicle (SPY) authorized under section 13(3) of the Act. The
Board expects that the Spy and the CPFF will be operational around October 27,
2008. The following provides an overview of the terms and conditions that are
expected to govern the CPFF at this time. The Board and Reserve Bank continue
to work monitor the commercial paper and financial markets and to consult with
market participants and, accordingly, the terms and conditions governing the
facility may be modified in the future if appropriate.

The Spy will serve as a funding backstop to facilitate the issuance of term
commercial paper by eligible issuers. The Federal Reserve has committed to lend
to the SPY at the target federal funds rate (currently ].5 percent). Draws on the
facility will be on an overnight basis. There is no aggregate cap on the amount of
funds the Federal Reserve may lend to the SPY to support the CPFF. However, as
a practical matter, the aggregate amount of loans that potentially could be made to
the Spy is limited to the sum of the maximum amounts of commercial paper that
eligible issuers may sell to the SPY, as described below under "Limits per Issuer."

Assets Eligible to be Purchased by the SPV. The Spy will purchase

directly from eligible issuers 3-month U.S. dollar-denominated commercial paper

2
at a spread over the 3-month overnight index swap (OlS) rate. The spread will be
equal to 300 basis points for ABCP and 100 basis points for unsecured commercial
paper. In addition, unsecured commercial paper will pay a 100 basis points per
annum additional fee that win be waived if the issuer provides a collateral
arrangement for the commercial paper that is acceptable to the Reserve Bank or
obtains an indorsement or guarantee of its obligations on the commercial paper that
is acceptable to the Reserve Bank.

Commercial paper (including ABCP) purchased by the Spy must be rated at

least A-IIP-IfFI by a major Nationally Recognized Statistical Rating Organization
(NRSRO) and, if rated by multiple major NRSROs, must be rated at least
A-IIP-IIFI by two or more major NRSROs. The Spy will only purchase
commercial paper issued by U.S. issuers (including U.S. issuers with a foreign
parent).

Security for Advances. The CPFF includes several tenns designed to ensure
that the debt obligations discounted by the Federal Reserve under the CPFF are
"indorsed or otherwise secured to the satisfaction of the Federal reserve bank"
providing the funds, as required by section 13(3) of the Act. 1 An advances to the
Spy will be made with full recourse to the Spy and will be secured by all the
assets of the SPY. In situations where the obligations acquired by the Spy are
ABCP, the Federal Reserve's advances also will be secured by the assets that
support the commercial paper. As noted above, issuers of commercial paper that is
not ABCP will pay an additional fee, provide acceptable collateral. or have the
paper indorsed. Moreover, at the time of its registration to use the CPFF, each
issuer must pay a facility fee equal to 10 basis points of the maximum amount of
its commercial paper the Spy may own (borrowing limits are discussed below).
All fees will be retained by the Spy to provide an additional cushion against
losses.

I Specifically, the Board consistently has viewed the term "discount" under section 13(3) ofthe

Act to include a Reserve Bank extension of credit to an individual, partnership or corporation (a

loan to an individual, partnership or corporation by a Reserve Bank on the note of the borrowing
individual or entity) as well as a purchase by a Reserve Bank of third-party notes held by an
individual, partnership Or corporation (IPC). See Board Circular X-7215-a, "Discounts for
Individuals, Partnerships and Corporations," 18 Federal Reserve Bulletin 518-519 (Aug. 1932)
(Reserve Bank may discount for IPCs notes "which are the obligations of other parties actually
owned by such [!PCs], and indorsed by them, or the promissory notes of such [IPCs] indorsed by
other parties whose indorsements are satisfactory to the [Reserve Bank]").
3
 Limits per issuer. To prevent the potential for abuse of the facility by
eligible issuers, and to help ensure that the facility is available to meet the needs of
a wide range of eligible issuers, the amount of commercial paper that a single
eligible issuer may sell to the Spy is subject to a cap. Specifically, the maximum
amount of a single issuer's commercial paper the Spy may own at any time will be
the greatest amount of U.S. dollar-denominated commercial paper the issuer had
outstanding on any day between January 1 and August 31,2008. The spy will not
purchase additional commercial paper from an issuer whose total commercial
paper outstanding to all investors (including the Spy) equals or exceeds the
issuer's limit.

The maximum amount of CP that could be financed by the facility is

approximately $1.8 trillion, which is the sum of the limits across eligible issuers.
Because the facility is designed to be a backup source of funding, the actual
amount that will be fmanced may be considerably less.

Termination date. The Spy will cease purchasing commercial paper on

Apri130, 2009, unless the Board agrees to extend the facility. The Federal Reserve
will continue to fund the spy after such date until the SPY's underlying assets
mature.

Expected Costs. In light of the high-quality commercial paper to be

acquired by the spy and the security to be provided the Federal Reserve to support
any advances made to the SPY, the Board does not expect at this time that
advances under the CPFF will result in any losses to the Federal Reserve or the
taxpayer.

 3
SOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D. C. 20551

BEN 5. BERNANKE
I:j-tAIRMAN

October 28, 2008

The Honorable Barney Frank

Chairman
Committee on Financial Services
House of Representatives
Washington, D.C. 20515

Dear Mr. Chairman:

Pursuant to section 129(a) of the Emergency Economic Stabilization Act of

2008 (EESA), enclosed is a report with respect to the Board's authorization on October 21,

2008, under section 13(3) of the Federal Reserve Act (12 U.S.C. § 343) of the

establishment by the Federal Reserve Bank. of New York of the Money Market Investor

Funding Facility.

Sincerely,

;2;2c­
Enclosure

Identical letters also sent to: Ranking Member Spencer Banens, Honse Financial
Services Committee; and Chairman Christopher Dodd and Ranking Member Richard
Shelby, Committee on Banking, Housing, and Urban Affairs.
 Report Pursuant to Section 129 of the

Emergency Economic Stabilization Act of 2008:

Money Market Investor Funding Facility

Overview

On October 21,2008, the Board of Governors of the Federal Reserve

System (Board), by the unanimous vote of its five members, approved under
section 13(3) of the Federal Reserve Act (12 U.S.C. § 343) the establishment of the
Money Market Investor Funding Facility (MMIFF). The MMIFF complements the
Federal Reserve's existing credit facilities by helping provide liquidity to money
market investors and thereby increasing the availability of credit. The MMIFF will
be a credit facility provided by the Federal Reserve Bank of New York (the
Reserve Bank) to a series of special purpose vehicles established by the private
sector (PSPVs) in accordance with the terms described below. Each PSPV will
purchase eligible money market instruments from eligible money market investors
using financing from the MMIFF and from the issuance of asset-backed
commercial paper (ABCP) to investors.

Background and Details on the MMIFF

Prime money market mutual funds are an important source of financing for
financial institutions and non-financial businesses. Certificates of deposit,
commercial paper, and bank notes ("money market instruments") issued by large
financial institutions make up a substantial part of the holdings of prime money
market mutual funds.

The money markets have been under considerable strain since mid­
September, when prime money market mutual funds began to experience high
levels of redemption requests. The redemptions placed considerable pressure on
the liquidity of these mutual funds. As a result, prime money market mutual funds
have sold a large amount of money market instruments and have become
increasingly reluctant to purchase additional money market instruments, especially
at longer-dated maturities. Accordingly, interest rates on longer-term money
market instruments have risen significantly, and an increasingly high percentage of
outstanding money market instrwnents are issued on an overnight basis. A large
share of outstanding money market instruments are issued by financial
intermediaries, and their difficulties borrowing in the short-term debt markets also
 -2­

,have made it more difficult for them to play their vital role in meeting the credit
needs of businesses and households. These factors, when combined with the
ongoing stresses in other parts of the credit markets, have presented significant
risks to fmancial stability and economic conditions in the United States.

In light of the foregoing, the Board determined that unusual and exigent
circumstances existed that warranted approval of the MMIFF. By facilitating sales
of money market instruments in the secondary market, the MMIFF is designed to
reduce the liquidity risk faced by U.S. money market mutual funds and other U.S.
money market investors, and thereby encourage such investors to once again
engage in purchases of term money market instruments. Improved money market
conditions will enhance the ability of banks and other fmancial intermediaries to
accommodate the credit needs of businesses and households.

Structure and Basic Terms. The Board expects that the MMIFF will be
operational in the next several weeks. The following provides an overview of the
terms and conditions that are expected to govern the MMIFF at this time. The
Board and Reserve Bank continue to monitor the money markets and to consult
with market participants and, accordingly, the terms and conditions governing the
facility may be modified in the future.

Under the MMIFF, the Reserve Bank will provide senior secured funding to
.a series ofPSPVs to finance the purchase of eligible assets from eligible investors
at amortiz~d cost. Initially, there will be five PSPVs. Eligible assets and eligible
investors are described in more detail below. Each PSPV will fmance its
purchases of eligible assets by selling ABCP and by borrowing under the MMIFF.
The PSPV will issue to the seller of the eligible asset subordinated ABCP equal to
10 percent of the asset's purchase price. The ABCP will be rated at leastA-lfP­
lIFI (the highest short-term rating category) by two or more major nationally
recognized statistical rating organizations (NRSROs). The Reserve Bank will lend
to each PSPV, on a senior secured basis, 90 percent of the purchase price of each
eligible asset. The PSPVs will hold the eligible assets until they mature, and
proceeds from the assets will be used to repay the Federal Reserve loan and the
ABCP. First losses in a PSPV will be absorbed by the holders of the ABCP issued
by the PSPV.

Assets Eligible to be Purchased by a PSPV. Each PSPV will purchase only

U.S. dollar-denominated certificates of deposit, bank notes, and commercial paper
with a remaining maturity of 90 days or less. Each of the five PSPVs will purchase
debt instruments issued by ten financial institutions designated in its operational
 -3­

documents. Each of these fifty financial institutions will have a short-tenn debt
rating of at least A-llP-llFl from two or more major NRSROs.

The fifty financial institutions were chosen by representatives of the U.S.

money market mutual fund industry. The financial institutions were chosen
primarily because they are among the largest issuers of highly rated short-tenn
liabilities held by money market mutual funds, but also with an objective of
achieving geographical diversification in each PSPV. The financial institutions
include most of the largest global North American and European financial
institutions.

This eligible asset framework was devised to accommodate the requirements

of investors and the NRSROs.

Concentration Limits for Eligible Assets. At the time of a PSPV's purchase

from an eligible investor of a debt instrument issued by one of the 50 financial
institutions, debt instruments issued by that financial institution generally may not
constitute more than 15 percent of the assets of the PSPV.

Investors Eligible to Sell Assets to a PSPV. Eligible investors initially will

include U.S. money market mutual funds that are registered under the Investment
Company Act of 1940 and that operate in accordance with SEC ;Rule 2a-7 issued
under that act. Over time, eligible investors may include other U.S. money market
investors.

Limits per Eligible Investor. The MMIFF program documents will not limit
how much a single investor may sell to a PSPV. SEC Rule 2a-7 under the
Investment Company Act of 1940 and the SEC's interpretations thereof, however,
may place quantitative limits on the ability of money market mutual funds to sell
assets to the PSPVs.

Maximum Size ofthe MMIFF. The initial set of five PSPVs will be
authorized, in total, to purchase a maximum amount of $600 billion in eligible
assets. Because the Reserve Bank will provide 90 percent ofthe financing for the
PSPVs, Federal Reserve lending could total $540 billion.

Terms ofFederal Reserve Lending. The Reserve Bank will lend to the
PSPVs at the primary credit rate, currently 1.75 percent. In order to reduce the
interest rate risk of the PSPVs, however, the Reserve Bank will subordinate its
right to receive certain amounts of potential interest payments. Specifically, if the
 -4­

primary credit rate rises above 2.25 percent, the Reserve Bank's right to receive
interest above 2.25 percent will be subordinated to the rights of the ABCP holders
to receive principal and interest. Any accumulated income in a PSPV not
distributed to the ABCP investors will accrue to the Reserve Bank.

Security for Federal Reserve Advances. The Reserve Bank loans under the
MMIFF will be fully collateralized by all the assets of the PSPVs. As noted above,
these assets will be short-tenn, high-credit-quality debt instruments. In addition,
the ABCP issued by each PSPV and held by the investors will be subordinated to
the Reserve Bank loans and will absorb approximately the first ten percent of any
losses incurred by the PSPV. Moreover, any excess spread earned by the PSPVs
will be retained in the PSPVs and will serve as a further buffer against loss.

, Termination Date. The PSPVs will cease purchasing assets on April 30,
2009, unless the Board agrees to extend the MMIFF. The Reserve Bank will
continue to fund the PSPVs after such date until the PSPVs' underlying assets
mature.

Expected Costs. In light of the high-credit-quality, short-tenn money

market instruments to be acquired by the PSPVs, the ten percent minimum equity
cushion in each PSPV, and the excess spread that is expected to accumulate in each
PSPV, the Board does not expect at this time that advances under the MMIFF will
result in any losses to the Federal Reserve or the taxpayer.
 BOARD OF GOVERNORS

OF THe:

FEDERAL RESERVE SYSTEM

WASHINGTON, D. Co 20551

BEN S. BERNANKE
CHAIRMAN

November 17, 2008

The Honorable Christopher J. Dodd

Chairman

Committee on Banking, Housing,

and Urban Affairs

United States Senate

Washington, D.C. 20510

Dear Mr. Chairman:

Pursuant to section 129(a) of the Emergency Economic Stabilization

Act of 2008 (EESA), enclosed is a report with respect to the Board's authorization
on November 10, 2008, under section 13(3) of the Federal Reserve Act (12 U.S.C.
§ 343), for the Federal Reserve Bank of New York to restructure the Federal
Reserve's existing credit facilities for American International Group, Inc. ("AIG")
and to establish two new credit facilities for AIG.
Sincerely,

11~
Enclosure

Identical letters also sent to: Ranking Member Richard Shelby, Senate Committee on
Banking, Housing, and Urban Affairs; and Chairman Barney Frank and Ranking
Member Spencer Bachus, House Committee on Financial Services.
 Report Pursuant to SeCtion 129 of the

Emergency Economic StabiliZation Act of 2008:

Restructuring of the Government's Financial Support to

the American International Group, Inc.

on November 10, 2008

Overview

On November 10,2008, the Board of Governors of the Federal Reserve

System (the "Board"), based on the unanimous vote of its five members,
announced its approval under section 13(3) of the Federal Reserve Act
(12 U.S.C. § 343) for the Federal Reserve Bank of New York (the "Reserve
Bank") to restructure the Federal Reserve's existing credit facilities for American
International Group, Inc. ("AIG") and establish two new credit facilities for AIG.
As discussed further below, these actions were taken in conjunction with the
Department of the Treasury (the "Treasury Department") as part of the
restructuring of the government's financial support to AIG. These new measures
establish a more durable capital structure, resolve liquidity issues, facilitate AIG's
execution of its plan to sell certain of its businesses in an orderly manner, promote
market stability, and protect the interests of the U.S. government and taxpayers.

Background

AIG is a large, diversified financial services company that, as of

September 30, 2008, reported consolidated total assets of slightly more than
$1 trillion and stockholders' equity of approximately $71 billion. AIG operates in
four general business lines through a number of subsidiaries: (i) general insurance,
(ii) life insurance and retirement services, (iii) fmancial services, and (iv) asset
management. In 2007, AIG's U.S. life and health insurance businesses ranked first
in the United States in terms of net premiums written ($51.3 billion) and third in
terms of total assets at year-end ($364 billion). For the same period, AIG's U.S.
property and casualty insurance businesses ranked second in the United States in
terms of net premiums written ($35.2 billion) and third in terms of total assets at
year-end ($124.5 billion). Certain ofAIG's regulated insurance subsidiaries also
operate a securities lending program under which the subsidiaries, with the
approval of their appropriate state insurance authority, pool together and lend out
high-quality, fixed-income securities owned by the insurance companies to third
parties in exchange for cash collateral. As of November 5, 2008, the total value of
securities lending payables was $34.2 billion.

1
 Through a wholly-owned subsidiary, United Guaranty Corporation (UGC),
AIG also provides private mortgage insurance for high loan-to-value first- and
second-lien residential mortgages. For the nine months ended September 30, 2008,
AIG's mortgage guaranty business had $872 million in net premiums written.

In addition to its on-balance-sheet positions, AIG is a major participant in a

wide range of derivatives markets through its Financial Services division, and
particularly through its AIG Financial Products business unit (AIGFP), and is a
significant counterparty to a number of major national and international [mancial
institutions. For example, as of September 30, 2008, AIGFP had sold credit
default swaps (CDS) with a notional amount of$372 billion on super-senior
tranches of collateralized debt obligations (CDOs). Approximately $250 billion of
that notional amount represented transactions between AIG and banking
organizations that are designed to provide the financial institutions with regulatory
capital relief. These data represent declines of approximately $70 billion and
$57 billion, respectively, from the comparable exposures as of June 30, 2008. As
of September 30, 2008, AIGFP had $39 billion in borrowings outstanding,
including $13.6 billion through guaranteed investment agreements. A significant
portion of the guaranteed investment agreements and financial derivative
transactions entered into by AIGFP include provisions that require AIGFP, upon a
downgrade of AIG's long-term debt ratings, to post additional collateral or, with
the consent of the counterparties, assign or repay its positions or arrange a
substitute guarantee of its obligations by an obligor with higher debt ratings.

For the reasons discussed in the reports previously filed under section 129 of
the Emergency Economic Stabilization Act, the Board on September 16, 2008,
with the full support of the Treasury Department, authorized the Reserve Bank,
pursuant to section 13(3) of the Federal Reserve Act, to establish a revolving credit
facility for AIG under which the Reserve Bank could lend up to an aggregate
amount of $85 billion outstanding at any time ("September Facility"). As
described in the report filed under section 129 on November 3,2008, in light of the
facts and circumstances at the time, the Board determined that the potential
disorderly failure of AIG could add to already significant levels of financial market
fragility and lead to, among other things, substantially higher borrowing costs,
reduced household wealth, and materially weaker economic performance. The
September Facility was intended to assist AIG in meeting its obligations as they
came due and facilitate a process under which AIG would sell certain of its
businesses in an orderly manner, with the least possible disruption to the overall
economy.

2
 On October 6, 2008, the Board also authorized the Reserve Bank to engage
in securities borrowing transactions with AlGI through which the Reserve Bank
could lend up to $37.8 billion in cash to AIG in exchange for collateral in the fonn
of investment grade debt obligations (the "Securities Borrowing Facility"). The
Securities Borrowing Facility addressed the liquidity strains placed on AIG due to
the ongoing withdrawal of counterparties from securities borrowing transactions
and permitted AIG to use the remaining amounts of the September Facility for
other uses. The Secured Borrowing Facility also was designed to help alleviate the
pressure on AIG to liquidate immediately the portfolio of residential
mortgage-backed securities (RMBS) that was purchased with the proceeds of the
securities lending transactions. As of November 5, 2008, $19.9 billion in advances
were outstanding under the Securities Borrowing Facility.2 The reasons for and the
terms of this facility were described in the report filed under section 129 on
October 14, 2008.

The actions taken by the Federal Reserve in September and October 2008
helped address the immediate liquidity needs of AIG. These actions provided AIG
access to credit to meet its obligations as they came due and, thus, helped prevent a
disorderly failure of AIG, which would have posed substantial risks to both
financial stability and the broader economy.

Markets continue to be fragile and stressed, and liquidity pressures are very
high. Many asset classes continue to be illiquid or trade at severe discounts to their
intrinsic value. Since the various Federal Reserve facilities were authorized, AIG
continued to be negatively affected by the decline in value of mortgage-related

1 Certain of AIG's regulated insurance subsidiaries operate a securities lending program under

which the subsidiaries, with the approval of their appropriate state insurance authority, pool
together and lend out high-quality, fixed-income securities owned by the insurance companies to
third parties in exchange for cash. The Board authorized the Reserve Bank to engage in
securities borrowing transactions with these regulated insurance companies, either directly or
through the pool established by such companies to conduct their securities lending program.
2 On October 7, 2008, the Board announced the creation of a Commercial Paper Funding
Facility (the "CPFF") to complement the Federal Reserve's existing credit facilities to help
provide liquidity to term funding markets. The CPFF involves the purchase, through a special
purpose vehicle with financing from the Federal Reserve, of three-month unsecured and
asset-backed commercial paper directly from eligible issuers. On October 27,2008, four AIG
affiliates applied for participation in the CPFF, on the same terms and conditions as other
non-AIG participants. AIG has stated that, as of November 5, 2008, these entities had borrowed
a total of approximately $15.2 billion under the CPFF. The proceeds ofparticipation in the
CPFF allowed AIG to make voluntary prepayments of credit extended under the September
Facility.
3
assets, particularly the RMBS acquired in connection with the securities borrowing
program operated by its insurance subsidiaries and the CDS protection that AIGFP
has written on multi-sector CDOs. These exposures together accounted for
approximately $19 billion of the $24.5 billion in losses recently announced by the
companyfor the third quarter of 2008.

In addition, the size and terms of the emergency credit provided under the
September Facility increased the company's leverage and lowered the company's
interest coverage ratio, two key metrics used by the credit rating agencies in
assessing the financial strength of an issuer. As of November 5, 2008, AIG had
approximately $61 billion outstanding under the September Facility, and
$19.9 billion in advances outstanding under the Securities Borrowing Facility.

The continued market turbulence has made it difficult for the company to
quickly realize the value of its operating assets through sales within the time frame
contemplated by the September Facility. Moreover, illiquidity in the markets for
various assets, as well as the continuing decline in the valuation of many financial
assets, including CDOs and RMBS, increased the strain on AIG from investments
and derivatives transactions based on these asset types.

In light of these and all other facts, the Board on November 10,2008, acting
in conjunction with the Treasury Department, announced the restructuring of the
Federal Reserve's credit facilities for AIG in order to keep the company strong and
facilitate its ability to complete its restructuring process successfully. As noted
above, these new measures establish a more durable capital structure, resolve.
liquidity issues, facilitate AIG's execution of its plan to sell certain of its businesses
in an orderly manner, promote market stability, and protect the interests of the U.S.
government and taxpayers.

In authorizing the September Facility, the Board found that the disorderly
potential failure of AIG posed significant systemic consequences in light of fragile
market conditions at that time. Subsequently, market conditions worsened steadily,
which has led to heightened systemic risk concerns throughout the financial
system. While some of the risks that would be posed by a failure of AIG have
decreased somewhat over that time period,3 counterparties around the world

3 For example, money market mutual funds no longer have material exposures to AIG's
unsecured commercial paper, and AIG's counterparties on guaranteed investment agreements
and financial derivatives have smaller exposures as a result of additional collateral posted by
AIG. '

4
continue to have significant exposure to AIG and market conditions continue to be
fragile and sensitive to the potential disorderly failure of AIG.

Capital Investment by the Treasury Department

In conjunction with the actions authorized by the Board, the Treasury

Department announced that it will acquire $40 billion in newly-issued Senior
Preferred Stock of AIG, using funding from the Troubled Asset Relief Program
("TARP") established by the Emergency Economic Stabilization Act of 2008.
This investment constitutes an important part of the restructuring actions by
providing new equity capital to AIG, a tool that was not available to the U.S.
government at the time the Federal Reserve established the September Facility and
the Securities Borrowing Facility.4

Board's Authorizations

In conjunction with the Treasury Department's investment authorization, the

Board announced that it had authorized the Reserve Bank, pursuant to
section 13(3) ofthe Federal Reserve Act, to take the following actions with respect
toAIG:

1. Restructure the September Facility;

2. Extend up to $22.5 billion in secured credit to a newly formed limited

liability company for the purpose of partially funding the acquisition by the
vehicle from AIG of approximately $23.5 billion (market value) in RMBS
purchased by AIG with the cash collateral received through the securities
. lending operations of AIG's regulated insurance subsidiaries; and

3. Extend up to $30 billion in secured credit to a separate, newly formed

limited liability company for the purpose of partially funding the acquisition
by the vehicle from the current counterparties of AIGFP of up to $35 billion
(market value) in multi-sector CDOs protected by CDS written by AIGFP.

Additional details concerning each of these authorizations are provided below.

4Additional information concerning the terms ofthe Treasury Department's investment is

available in the Treasury Department's "TARP AIG SSFI Investment Summary of Senior
Preferred Terms," http://www.treasury.gov/press/releases/reports/lll008aigtermsheet.pdf.
5
 The foregoing restructuring removes from AIG's balance sheet certain assets
and exposures that have caused substantial liquidity drains on the company and
generated significant losses that have eroded AIG's capital base. In addition, the
modifications of the September Facility are more consistent with the stabilized
condition and prospects of AIG following completion of the restructuring package
of actions. Furthennore, the foregoing modifications and especially the extension
of the September Facility's tenn should improve the ability of AIG to repay
advances under the September Facility by providing AIG additional time to
execute its large and global divestiture program-the primary source of funding for
repayment of Federal Reserve lending.

Terms of the Restructuring

1. September Facility Restructuring

The September Facility is restructured in various ways to enhance AIG's

ability to repay the credit extended in full while having adequate time to effect its
asset disposition plan in a manner most likely to achieve favorable returns for the
sale of its various businesses. First, the maturity of the loan under the September
Facility was increased from two years to five years (i.e., until September 22,2013).
Second, the interest rates applicable to drawn and undrawn amounts of funding
under the September Facility were reduced. The interest rate payable on
outstanding advances under the September Facility was reduced from 3-month
LIBOR plus 850 basis points to 3-month LIBOR plus 300 basis points. The
interest rate payable on available but undrawn amounts of funding under the
September Facility was reduced from 850 basis points to 75 basis points. Third,
the maximum amount of credit permitted to be outstanding under the September
Facility was reduced from $85 ·billion to $60 billion. This reduction will be
effected upon the completion of the Treasury Department's investment of
$40 billion from the TARP, the proceeds of which will pay down the September
Facility.

Other important tenns of the September FaCility, however, remain

unchanged. AIG remains unconditionally obligated to repay the unpaid principal
amount of all advances, together with accrued and unpaid interest thereon and any
unpaid fees on the maturity date. Also, all outstanding balances under the
September Facility are secured by the pledge of a substantial portion of the assets
of AIG and its primary non-regulated subsidiaries, including AIG's ownership

interest in its regulated U.S. and foreign subsidiaries. 5 In addition, upon the receipt
of shareholder approval, additional collateral will be pledged by AIG to secure the
September Facility. Furthermore, AIG's obligations to the Reserve Bank continue
to be guaranteed by each of AIG's domestic, nonregulated subsidiaries that have
more than $50 million in assets.6 These guarantees themselves are separately
secured by assets pledged to the Reserve Bank by the relevant guarantor.
Additional subsidiaries of AIG may be added as guarantors over time by signing a
short supplemental agreement.

Finally, the Reserve Bank's agreement to provide advances under the

September Facility continue to be specifically conditioned on the Reserve Bank
being satisfied in its sole discretion with the nature and value of the collateral
securing AIG's obligations at the time of the advance, and on the Reserve Bank
being reasonably satisfied in all respects with the corporate governance of AIG.
Reserve Bank representatives are in regular contact with AIG's senior management
and attend all AIG board of directors meetings, ~c1uding committee meetings, as
an observer. The Reserve Bank also has staff on-site at AIG to monitor the
company's funding, cash flows, use of proceeds and progress in pursuing its global
divestiture plan. Control and management of the daily business and operations of
AIG and its subsidiaries continue to be vested in the new chairman and chief
executive officer of AIG and his management team. These and other provisions
protect the interests of the Federal Reserve, the Treasury Department, and
taxpayers in having full repaYment by AIG of all of its Federal Reserve borrowing
without incurring any losses.

2. RMBSLLC

On October 8, 2008, the Board announced that it had authorized the creation
of the Securities Borrowing Facility for AIG to address the irmnediate liquidity
needs caused by the ongoing withdrawal of AIG's securities lending
counterparties. AIG remained, however, exposed to further declines in the value of
the RMBS portfolio (par value approximately $40 billion) purchased with the
proceeds of these securities lending transactions. AIG has already experienced
approximately $16.5 billion in mark-to-market losses on these RMBS as of
September 30, 2008, and the market for these securities is illiquid.

5 In the case of foreign subsidiaries, the equity interest the Reserve Bank will accept as
collateral is limited to 66 percent ownership in order to avoid adverse tax consequences for AIG
or its subsidiaries.
6 Regulated subsidiaries, such as insurance companies, typically are not pennitted to provide
such guarantees.
7
 In order to reduce the stress and need for continued collateral calls
associated with the securities lending program, the Board authorized the
establishment of a new facility under which certain AIG insurance subsidiaries will
transfer RMBS with a par value of approximately $40 billion and a fair market
value as of September 30, 2008, of up to $23.5 billion to a newly-formed limited
liability company (the "RMBS LLC"). The RMBS LLC will be financed by AIG
with a $1 billion subordinated AIG note, and by the Reserve Bank through a senior
Reserve Bank note of approximately $22.5 billion. The aggregate proceeds of the
subordinated and senior notes will be used to purchase the RMBS portfolio from
AIG, at market value as of October 31, 2008. Proceeds to the insurance company
subsidiaries, together with other AIG funds, will be used to return all cash
collateral posted by securities borrowers, including approximately $19.9 billion to
be returned to the Reserve Bank. After all collateral is returned, AIG will repay in
full all of its obligations under the Securities Borrowing Facility. The Securities
Borrowing Facility will then be terminated, because it will no longer be necessary
once the RMBS LLC is established and functional.

The Reserve Bank senior loan will have a maturity of six years (subject to
extension by the Reserve Bank) and will accrue interest at a rate of I-month
LIBOR plus 100 basis points. The Reserve Bank's senior note will be fully
secured by the entire portfolio of RMBS acquired by the RMBS LLC, which
RMBS are in tum secured primarily by interests in subprime and Alt-A residential
mortgages. The RMBS LLC is to be managed by a financial advisor, hired by the
Reserve Bank, so that the RMBS LLC's assets can be managed with a view toward
maximizing repayment of its obligations with minimum disruption to financial
markets.

AIG's subordinated note is to accrue interest at a rate of I-month LIBOR

plus 300 basis points. AIG will receive no payments until the principal and interest
on the Reserve Bank's senior note is fully repaid. After both the senior debt and
the subordinated debt positions are fully repaid, any residual returns will be
apportioned between the Reserve Bank and AIG in the approximate ratios of 5/6
and 1/6, respectively.

3. CDOLLC

AIGFP has written CDS in favor of third-party counterparties related to

super-senior multi-sector cash CDOs (the "reference obligations"). These CDS
required AIGFP to post collateral with the counterparties to secure its obligations
based on fair value deterioration and ratings downgrades of the reference

8
obligations and downgrades of AIG's ratings. As of November 5, AIGFP had
posted or agreed to post collateral on all of its super-senior CDS in an aggregate
net amount of approximately $37.3 billion. Further declines in the mark-to-market
values would require AIG to post further collateral, creating significant potential
liquidity drains on AIG.

To address these issues, the Board authorized the Reserve Bank to lend to a
new special purpose vehicle (the "CDO LLC") that will offer to purchase the
reference obligations from the CDS counterparties, who will concurrently with
such purchase terminate the related CDS. The CDO LLC will be funded by a
subordinated AIG note in an amount of up to $5 billion, and by a senior Reserve
Bank note that will not exceed the remaining amount needed to fund the
acquisition of the CDOs, but in any event no more than $30 billion. To the extent
that the market value of the CDOs is less than $35 billion, the senior Reserve Bank
note will be in a lower amount. Separately, AIG will pay the costs associated with
the unwind of the related CDS and bear the risk of declines in market value of the
CDOs through October 31,2008. After the closing date, AIGFP will not be
subject to any further collateral calls related to the terminated CDS.

Under the CDO LLC, the Reserve Bank's senior note will be fully secured
by the CDOs, the value of which will not exceed $35 billion. The CDOs
themselves are secured by subprime and Alt-A residential RMBS and other
asset-backed securities. The Reserve Bank's senior note will have a maturity of
six years (subject to extension by the Reserve Bank) and is to accrue interest at a
rate of I-month LIBOR plus 100 basis points. AIG's subordinated note is to
accrue interest at a rate of 1 month LIBOR plus 300 basis points. AIG will receive
no payments until the principal and interest on the Reserve Bank's senior note is
fully repaid. After both the senior debt and the subordinated debt positions are
fully repaid, any residual returns will be apportioned between the Reserve Bank
and AIG in the approximate ratios of2/3 and 113, respectively. Like the
RMBS LLC, the CDO LLC is to be managed by a financial advisor, hired by the
Reserve Bank, so that the CDO LLC's assets can be managed with a view toward
maximizing repayment of its obligations with minimum disruption to fmancial
markets.

 BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON. D. C. 20551

SE.N 5. Se::RNANt<e::
December 1, 2008 C ......, RMAN

The Honorable Christopher J. Dodd

Chairman '

Committee on Banking, Housing, .

and Urban Affairs

United States Senate

Washington, D.C. 20510

Dear Mr. Chairman:

Pursuant to section 129(a) of the Emergency Economic Stabilization Act of

2008 (EESA), enclosed is a report with respect to the Board's authorization on

November 23,2008, under section 13(3) of the Federal Reserve Act (12 U.S.C. § 343),

for the Federal Reserve Bank of New York to provide residual financing to Citigroup, Inc.

for the value of assets remaining in a designated pool after certain loss sharing

arrangements with Citigroup, the Department of the Treasury, and the Federal Deposit

Insurance Corporation are exhausted.

Sincerely,

d~

Enclosure

Identical letters also sent to: Ranking Member Richard Shelby, Senate Committee on
Banking, Housing, and Urban Affairs; Chairman Barney Frank and Ranking
Member Spencer Bachus, House Committee on Financial Services
 Report Pursuant to Section 129 of the

Emergency Economic StabiliZation Act of 2008:

Authorization to Provide Residual Financing to Citigroup, Inc..

For a Designated Asset Pool

Overview

On November 23, 2008,·the Board of Governors of the Federal Reserve

System (the "Federal Reserve"), based on the unanimous vote of its five members,
authorized the Federal Reserve Bank of New York (the "Reserve Bank") under
section 13(3) of the Federal Reserve Act (12 U.S.C. § 343) to provide Citigroup,
Inc. ("Citigroup"), if necessary, residual financing for the value of assets remaining
in a designated pool after certain loss sharing arrangements with Citigroup, the
Department of the Treasury (the "Treasury") and the Federal Deposit Insurance
Corporation (the "FDIC") are exhausted. As discussed further below, this
authorization was granted as part of a package of coordinated actions by the
Treasury, FDIC, and Federal Reserve to provide financial support to Citigroup and
promote fmancial stability. .

Background

Citigroup is one of the largest financial institutions in the United States and
has extensive and diversified operations both in the United States and abroad. As
of September 30, 2008, Citigroup was the second largest banking organization in
the United States, with total consolidated assets of slightly more than $2 trillion.
As of the same date, Citigroup's lead subsidiary bank, Citibank, N.A., had total
consolidated assets of approximately $1.2 trillion, making the bank the third largest
U.S. insured depository institution in terms of assets.

Citigroup is a major supplier of credit in the United States and abroad, with
more than $750 billion in loans outstanding at the end of the third quarter of2008.
As of the same date, Citigroup held more than $277 billion in domestic deposits
and more than $500 billion in foreign deposits, making the organization one of the
largest deposit holders in the world. Citigro-u.p also has significant amounts of
commercial paper and long-term senior and subordinated debt outstanding; is a
major participant in numerous domestic and international payment, clearing and
central counterparty arrangements; and is a significant counterparty to many major
national and international financial institutions. In addition, Citigroup provides a
wide range of investment banking, capital markets, asset management, and retail
brokerage services through its subsidiary Citigroup Global Capital Markets, Inc.,

and is a major participant in a wide range of derivatives markets.

Over the past year and a quarter, Citigroup and its insured depository

institutions have been negatively affected by the ongoing disruptions in the

. fmancial markets, the broad-based decline in home prices, the accompanying

substantial drop in the values of mortgages and mortgage-backed securities and a
deterioration in the economic outlook both in the United States and abroad. In the
first three quarters of this year, Citigroup posted losses of$lO.4 billion due, in part,
to losses on m~rtgage-relatedsecurities and exposures and high provisions for
future credit losses. On October 28, 2008, the Treasury acquired $25 billion of
preferred stock of Citigroup, as well as related warrants, as part of the first tranche
of capital purchases made under the Capital Purchase Program ("CPP") established
under the Troubled Assets Relief Program ("TARP"). The CPP is available to a
broad range of financial institutions.

In recent weeks, however, investors became increasingly concerned about

Citigroup's financial prospects and viability, threatening the ability of the

organization to continue to obtain funding. Despite actions by the Federal

Reserve, Treasury and FDIC in recent months to ease the pressures on fmancial

markets, these markets continue to be strained, and firms viewed as being

potentially troubled can find it very difficult to raise funds.

Overview of the Board's Authorization and Related Programs

In light of these and other factors, includi~g conditions in the fmancial

markets and the state of the U.S. economy, the Treasury, FDIC, and Federal
Reserve agreed on November 23,2008, to provide Citigroup with a package of
programs and facilities to help restore confidence in Citigroup and promote
financial stability, which is a prerequisite to restoring vigorous economic growth.
Collectively these new measures will augment the capital of Citigroup; protect the
company from further declines in the value of a substantial pool of primarily
mortgage-related assets; and better enable the company, its subsidiary depository
institutions and the financial system to weather the current difficulties, and provide
credit and other [mancial services needed by consumers, small businesses, and
others.

The following describes the three components of the assistance provided to

Citigroup. Additional information concerning these actions is included in the
attached term sheets.
2
 1. Additional Equity Investment by the Treasury.

The Treasury will acquire an additional $20 billion in newly-issued senior

preferred stock of Citigroup under the systemically significant financial institution
program established under the TARP. The preferred stock will carry an 8 percent
dividend to the Treasury, and includes terms designed to protect the interests of
taxpayers. As required by the Emergency Economic Stabilization Act, the
Treasury will receive warrants to purchase common stock of Citigroup at a strike
price of$10.61 per share and with an aggregate value of$2.7 billion. Under the
terms of the preferred stock, Citigroup also will be required to (i) abide by
enhanced executive compensation standards that are deemed to be acceptable to
the Treasury, Federal Reserve, and FDIC, and (ii) implement a program designed
to reduce preventable foreclosures on omler-occupied residential properties.

2. Treasury and FDIC Loss-Sharing Arrangements with Citigroup.

Treasury and the FDIC also have agreed to share with Citigroup losses on a
designated pool ofup to $306 billion in primarily mortgage-related assets currently
held by Citigroup. This designated pool of assets, which will remain on
Citigroup's consolidated balance sheet, will be comprised ofloans and securities
backed by residential and commercial real estate, associated hedges, and such
additional assets as may be agreed by Citigroup and the agencies. Under the tenns
of the guarantee arrangement, Citigroup first will bear responsibility for any losses
on these assets that exceed the company's current reserves and marks, up to a
maximum of $29 billion. Should there be additional losses on these assets, the
losses will be shared among Citigroup, Treasury, and the FDIC. Citigroup will
bear responsibility for 10 percent of the additional losses; the remaining portion
would be allocated first to the Treasury, up to a maximum of $5 billion, and then to
the FDIC, up to a maximum of $10 billion. These loss-sharing arrangements will
be in effect for 10 years for residential mortgage-related assets and 5 years for
other assets. As compensation for these guarantees, the Treasury and FDIC will
receive $4 billion and $3 billion, respectively, of preferred stock in Citlgroup,
which will bear dividends at 8 percent per annum.

3. Residual Federal Reserve Financing.

In connection with these actions, the Federal Reserve authorized the Reserve
Bank under section 13(3) of the Federal Reserve Act, if necessary, to provide
Citigroup with financing up to the value of the assets remaining in the designated
pool after the loss sharing arrangements with the Treasury and FDIC are
3
exhausted. Any fmancing provided by.the Reserve Bank would be collateralized
by the assets in the designated pool, and also would be protected by a continuing
10-percent loss-sharing position of Citigroup. The financing would be provided to
Citigroup on a non-recourse basis, except with respect to interest payments.
Outstanding advances made to Citigroup under the facility would bear interest at a
floating rate equal to the .3-month overnight index swap rate plus 300 basis points.
Any residual fmancing provided by the Federal Reserve would complete the
remainder of the term of the guarantee arrangements, i.e., the financing would
terminate 10 years after the start date of the guarantee for residential mortgage­
related assets and 5 years for other assets.

In light of the substantial protections against loss provided by Citigroup, the

Treasury, and the FDIC that must be exhausted before any financing would be
provided under the facility, and the fact that any financing provided under the
facility would be fully collateralized, the Federal Reserve does not expect that the
Reserve Bank's facility will result in any losses to the Federal Reserve or the
taxpayer.

Attachment

4
 November 23,2008

Summary of Terms

Eligible Asset Guarantee

Eligible Assets: Asset pool consisting of loans and securities backed by -residential real
estate and commercial real estate, and their associated hedges, as agreed,
and other such assets as the U.S. Government (USG) has agreed to
guarantee. Each specific asset must be identified on signing of guarantee
agreement. Assets will remain on the books of institution but will be
appropriately "ring-fenced."

Size: Up to $306 bn in assets to be guaranteed (based on valuation agreed upon

between institution and USG).

Term of Guarantee: FDIC standard loss-sharing protocol: Guarantee is in place for 10 years
for residential assets, 5 years for non-residential assets.

Deductible; Institution absorbs all losses in portfolio up to $29 bn (in addition to

existing reserves)

Any losses in portfolio in excess of that amount are shared USG (90%)
and institution (10%).

USG share will be allocated as follows:

UST (via TARP) second loss up to $5 bn;
FDIC takes the third loss up to $10 bn;

Financing: Federal Reserve funds remaining pool of assets with a non-recourse loan,
subject to the institution's 10% loss sharing, at a floating rate of DIS plus
300bp. Interest payments are with recourse to the institution.

Fee for Guarantee ­

Preferred Stock: Institution will issue $7 bn of preferred stock with an 8% dividend rate
(under terms described below). $4 bn ofpreferred will be issued to UST.
$3 bn will be issued to the FDIC.

Management of
Assets: USG will provide institution with a template to manage guaranteed assets
This template will include the use of mortgage modification procedures
adopted by the FDIC, unless otherwise agreed.

Risk Weighting: Institution will retain the income stream from the guaranteed assets. Risk
weighting for assets will be 20%.

 November 23,2008

Dividends: Institution is prohibited from paying common stock dividends, in excess

of $.01 per share per quarter, for 3 years without USTIFDIC/FRB consent.
A factor taken into account for consideration of the USG's consent is the
ability to complete a common stock offering of appropriate size.

Executive
Compensation: An executive compensation plan, including bonuses, that rewards long­
term performance and profitability, with appropriate limitations, must be
submitted to, and approved by, the USG

Corporate
Governance: Other matters as specified

November 23,2008

Preferred Securities

Issuer:
Citigroup ("Citi")

Initial Holder:
United States Department of the Treasury ("UST").

Size:
$20 billion

Security:
Preferred, liquidation preference $1,000 per share. (Depending upon the
available authorized preferred shares, the UST may agree to purchase
preferred with a higher liquidation preference per share, in which case the
UST may require Citi to appoint a depositary to hold the Preferred and
issue depositary receipts.)

Ranking:
Same terms as preferred issued in CPP.

Term:
Perpetual life.

Dividend:
The Preferred will pay cumulative dividends at a rate of 8% per annum.
Dividends will be payable quarterly in arrears on February 15, May 15,
August 15 and November 15 of each year.

Redemption:
In stock or cash, as mutually agreed between UST and Citi. Otherwise,
redemption terms of CPP preferred terms apply.

Restrictions
on Dividends: Institution is prohibited from paying common stock dividends, in excess
of$.OI per share per quarter, for 3 years without UST consent. A factor
taken into account for consideration of the UST's consent is the ability to
complete a common stock offering of appropriate size.

Repurchases: Same terms as preferred issued in CPP.

Voting rights: The Preferred shall be non-voting, other than class voting rights on (i) any
authorization or issuance of shares ranking senior to the Preferred, (ii) any
amendment to the rights of Preferred, or (iii) any merger, exchange or
similar transaction which would adversely affect the rights of the
Preferred.

If dividends on the Preferred are not paid in full for six dividend periods,
whether or not consecutive, the Preferred will have the right to elect 2
directors. The right to elect directors will end when full dividends have
been paid for (i) all prior dividend periods in the case of cumulative
Preferred or (ii) four consecutive dividend periods in the case of non­
cumulative Preferred.

3
 November 23, 2008

Transferability: The Preferred will not be subject to any contractual restrictions on

transfer.

Executive
Compensation: An executive compensation plan, including bonuses, that rewards long­
term performance and profitability, with appropriate limitations, must be
submitted to, and approved by, the USG.

Summary. of Warrant Terms

Warrant: Institution will issue a warrant to UST for an aggregate exercise value of
10% of the total preferred issued to USG (in both transactions) ($2.7 bn).

Exercise Price: The strike price will be equal to $10.61.per share (the 20 day trailing
average ending on November 21,2008). The warrants issued to UST are
not subject to reduction based on additional offerings.

Term: Ten years, immediately exercisable, in whole or in part.

DEPARTMENT OF THE TREASURY FEDERAL RESERVE BOARD

CITIGROUP INC. FEDERAL DEPOSIT INSURANCE CORP.

 BOARD OF GOVERNORS

OF THE

FEOE:RAL RESERVE SYSTEM

WASHINGTON, D. c. 20S51

BEN S. BERNANKE
CHAIRMAN

December 2, 2008

The Honorable Christopher J. Dodd

Chairman
Committee on Banking, Housing,
and Urban Affairs
United States Senate
Washington, D.C. 20510

Dear Mr. Chairman:

Pursuant to section 129(a) of the Emergency Economic Stabilization Act of

2008, enclosed is a report with respect to the Board's authorization on November 24,

2008, under section 13(3) of the Federal Reserve Act (12 U.S.c. § 343) of the

establishment by the Federal Reserve Bank of New York of the Term Asset-Backed

Securities Loan Facility.

Enclosure

Identical letters also sent to: Ranking Member Richard Shelby, Committee on
Banking, Housing, and Urban Affairs; and Chairman Barney Frank and Ranking
Member Spencer Bachus, House Financial Services Committee
 Report Pursuant to Section 129 of the

Emergency Economic Stabilization Act of 2008:

Term Asset-Backed Securities Loan Facility

Overview

On November 24, 2008, the Board of Governors of the Federal Reserve

System (Board), by the unanimous vote of its five members, approved under
section 13(3) of the Federal Reserve Act (12 U.S.C. § 343) the establishment of the
Term Asset-Backed Securities Loan Facility (TALF). The TALF is intended to
assist the fmancial markets in accommodating the credit needs of consumers and
small businesses by facilitating the issuance of asset-backed securities (ABS) and
improving the market conditions for ABS more generally.

Background and Details on the T ALF

Background. New issuance of ABS declined precipitously in the third

quarter of 2008 and came to a halt in October 2008. At the same time, interest rate
spreads on AAA-rated tranches of ABS soared to levels well outside the range of
historical experience, reflecting unusually high risk premiums. The ABS markets
historically have funded a substantial share of consumer credit and of small
business loans guaranteed by the Small Business Administration (SBA).
Continued disruption of these markets could significantly limit the availability of
credit to households and small businesses and thereby contribute to further
weakening of U.S. economic activity. These disruptions, when combined with the
ongoing stresses in other parts of the credit markets, present significant risks to
financial stability and economic conditions in the United States.

In light of the foregoing, the Board determined that unusual and exigent
circumstances existed that warranted approval of the TALF. The TALF is
designed to support the issuance of ABS collateralized by student loans, auto
loans, credit card loans, and SBA-guaranteed small business loans at more normal
interest rate spreads. In so doing, the TALF should increase credit availability for
consumers and small businesses and support economic activity.

Structure and Basic Terms. The following provides an overview of the

terms and conditions that are expected to govern the TALF at this time. The Board
and the Federal Reserve Bank of New York (Reserve Bank) continue to monitor
 -2­

the ABS markets and to consult with market participants and, accordingly, the
terms and conditions governing the facility may be modified in the future. The
Board expects that the TALF will be operational in February 2009.

The Reserve Bank will make up to $200 billion of loans under the TALF.
TALF loans will have a one-year term (with interest payable monthly), will be
fully secured by the market value of high-quality ABS (subject to a collateral
haircut), and will be non-recourse to the borrower. The term ofTALF loans may
be lengthened later if appropriate. Substitution of collateral during the term of the
loan will not be allowed. TALF loans will not be subject to ongoing mark-to­
market or re-margining requirements.

The U.S. Treasury Department - under the Troubled Assets Relief Program
(TARP) of the Emergency Economic Stabilization Act of 2008 - will provide
$20 billion of credit protection to the Reserve Bank in connection with the TALF,
as described below.

Eligible CollateraL Eligible collateral will include U.S. dollar-denominated

ABS that have a long-term credit rating in the highest investment-grade rating
category (for example, AAA) from two or more major nationally recognized
statistical rating organizations (NRSROs) and do not have a long-term credit rating
of below the highest investment-grade rating category from a major NRSRO.

Allor substantially all of the credit exposures underlying eligible ABS must
be newly or recently originated exposures to U.S.-domiciled obligors. The
underlying credit exposures of eligible ABS initially must be auto loans, student
loans, credit card loans, or SBA-guaranteed small business loans. The underlying
credit exposures must not include exposures that are themselves ABS.

Originators of the credit exposures underlying eligible ABS (or, in the case
ofSBA-guaranteed loans, the ABS sponsor) must agree to comply with, or already
be subject to, the executive compensation requirements in section 111 (b) of the
Emergency Economic Stabilization Act of2008.

This eligible collateral framework is designed to best stimulate new

consumer and small business lending while minimizing risk to the Federal Reserve
and the U.S. Treasury Department.
 -3­

CoUateral Haircuts. Collateral haircuts will be established by the Reserve

Bank for each class of eligible collateral. Haircuts will be determined based on the
price volatility of each class of eligible collateral.

Eligible Borrowers. All U.S. persons that own eligible collateral may
participate in the TALF. A U.S. person is a natural person that is a U.S. citizen, a
company that is organized under the laws of the United States or a political
subdivision or territory thereof (including such an entity that has a non-U.S. parent
company), or a U.S. branch or agency of a foreign banle

Maximum Size ofthe TALF. The Board has authorized the Reserve Bank
to make up to $200 billion in loans under the TALF.

Pricing and Allocation ofFederal Reserve Lending. The Reserve Bank

will offer a fixed amount of loans under the TALF on a monthly basis. TALF
loans will be awarded to borrowers each month based on a competitive, sealed bid
auction process. Each bid must include a desired amount of credit and an interest
rate spread over the one-year overnight index swap (OIS) rate. The Reserve Bank
will set minimum spreads for each auction.

The Reserve Bank will reserve the right to reject or declare ineligible any
bid, in whole or in part, at its discretion. In this regard, the Reserve Bank will
develop and implement procedures to identify for further scrutiny potentially high­
risk ABS that a borrower proposes to pledge under the TALF.

The Reserve Bank will assess a non-recourse loan fee at the inception of
each loan transaction.

Role ofthe U.S. Treasury Department The Reserve Bank will create a
special purpose vehicle (SPV) to purchase and manage any assets acquired by the
Reserve Bank in connection with default on any TALF loans. The Reserve Bank
will enter into a forward purchase agreement with the Spy under which the Spy
will commit, for a fee, to purchase - at a price equal to the TALF loan amount plus
accrued but unpaid interest - all assets securing a TALF loan that are acquired by
the Reserve Bank. The U.S. Treasury Department's TARP will purchase up to
$20 billion of subordinated debt issued by the SPV. The Reserve Bank will lend
additional funds to the SPY as necessary to finance additional asset purchases, up
to a maximum amount of$180 billion. The Reserve Bank's loan to the SPVwill
be senior to the TARP subordinated debt, with recourse to the SPV, and secured by
all the assets of the SPV. All cash flows from Spy assets will be used first to
 -4­

repay principal and interest on the Reserve Bank senior loan until the loan is repaid
in full. Next, cash flows from assets will be used to repay principal and interest on
the TARP subordinated debt until the debt is repaid in full. Residual returns from
the Spy will be shared between tbe Reserve Bank and the U.S. Treasury
Department. The interest rates on the U.S~ Treasury Department's subordinated
debt in the SPY and any Federal Reserve loan to the SPY have not yet been
detennined.

Executive Compensation Requirements. Originators of the credit

exposures underlying eligible ABS (or, in the case ofSBA-guaranteed loans, the
ABS sponsor) must agree to comply with, or already be subject to, executive
compensation standards consistent with the U.S. Treasury Department's TARP
guidelines applicable to its Capital Purchase· Program.

Security for Federal Reserve Loans. The Reser:ve Bank loans under the
TALF will be fully collateralized at inception by eligible ABS. As noted above,
these ABS will be high-credit-quality debt instruments that are externally rated in
the highest rating category by l'Il:ultiple NRSROs~ In addition, as noted above, the
Reserve Bank will employ substantial haircuts and screens to ensure that the
Federal Reserve and the taxpayer are protected from a decline in the value of the
ABS collateral during the term of a loan. Moreover, as noted above, the U.S.
Treasury Department's TARP has agreed to absorb at least the first ten percent of
any losses incurred by the Federal Reserve in connection with the program.

Tennination Date. The Reserve Bank will cease making new loans under
the TALF on December 31, 2009, unless the Board agrees to extend the facility.
TALF loans that are outstanding on the facility termination date will remain
outstanding until maturity.

Expected Costs. In light of the high-credit-quality ABS collateral that will

secure Reserve Bank lending under the TALF, the collateral haircuts and screens
that will be employed by the Reserve Bank in connection with TALF lending, and
the $20 billion program-wide credit protection provided by the U.S. Treasury
Department to support TALF lending, the Board does not expect at this time that
extensions of credit under the TALF will result in any losses to the Federal
Reserve or the taxpayer.
 7
BOARD OF GOVERNORS
OF THE
FEtJERAL RESERVE SYSTEM
WASHINGTON. 0. C. 20551

BE:N S. BERNANKE
CHAIRMAN

December 29, 2008

The Honorable Christopher J. Dodd

Chairman
Committee on Banking, Housing,
and Urban Affairs
United States Senate
Washington, D.C. 20510

Dear Mr. Chainnan:

Pursuant to section 129(b) of the Emergency Economic Stabilization Act of2008,

enclosed is the Board's fIrst periodic report regarding the currently outstanding loans and
loan facilities authorized by the Board under section 13(3) of the Federal Reserve Act
(12 U.S.c. § 343). The enclosed report provides infonnation regarding the following
loans and loan facilities: the Tenn Securities Lending Facility; the loan to Maiden Lane
LLC to facilitate the acquisition of The Bear Stearns Companies, Inc., by JPMorgan
Chase; the Primary Dealer Credit Facility; the Asset-Backed Commercial Paper Money
Market Mutual Fund Liquidity Facility; the Commercial Paper Funding Facility; and the
lending facilities established for American International Group, Inc.

Enclosure

Identical letters also sent to: Ranking Member Richard C. Shelby, Committee on Banking,
Housing, and Urban Mfairs; Chairman Barney Frank and Ranking Member Spencer
Bachus, Committee on Financial Services.
 BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON. D. C. 20551

BEN S. BERNANKE
CHAIRMAN
December 29, 2008

Ms. Elizabeth Warren

Chairperson
Congressional Oversight Panel
732 North Capitol Street, N.W..
Mailstop: BOC
Washington, D.C. 20401

Dear Ms. Warren:

Pursuant to sections 129(b) and (e) ofthe Emergency Economic Stabilization Act
of2008, enclosed is the Board's first periodic report regarding the currently outstanding
loans and loan facilities authorized by the Board under section 13(3) ofthe Federal
Reserve Act (12 U.S.C. § 343). The enclosed report provides infonnation regarding the
following loans and loan facilities: the Tenn Securities Lending Facility; the loan to
Maiden Lane LLC to facilitate the acquisition of The Bear Stearns Companies, Inc., by
JPMorgan Chase; the Primary Dealer Credit Facility; the Asset-Backed Commercial
Paper Money Market Mutual Fund Liquidity Facility; the Commercial Paper Funding
Facility; and the lending facilities established for American International Group, Inc.

Enclosure
cc: The Honorable John E. Sununu
The Honorable Jeb Hensarling
Mr. Richard H. Neiman
Mr. Damon A. Silvers
 Periodic Report Pursuant to Section 129(b) of the

Emergency Economic Stabilization Act of 2008:

Update on Outstanding Lending Facilities Authorized by the Board

Under Section 13(3) of the Federal Reserve Act

December 29, 2008

Overview

Pursuant to section 129(b) of the Emergency Economic Stabilization Act of

2008 ("EESA"), the Board of Governors of the Federal Reserve System
(the "Board") is providing the following updates concerning the lending facilities
established by the Board under section 13(3) of the Federal Reserve Act
(12 U.S.C. § 343). This report is the first of the periodic update reports required by
section 129(b) of the EESA.

Pursuant to section 129(b), the Board must provide the Senate Committee on
Banking, Housing, and Urban Affairs and the House Committee on Financial
Services (the "Committees") an update report on each exercise of the Board's
authority since March 1,2008 under section 13(3) of the Federal Reserve Act. The
first periodic report with respect to a particular exercise of this lending authority
must be submitted within 60 days of (i) the date on which the initial report
concerning the authorization was submitted to the Committees under section 129
of the EESA or (ii) the first date on which any loan under the authorization is first
made, whichever is later. Subsequent update reports with respect to the
authorization must be filed at least every 60 days thereafter so long as any loan
under the authorization is outstanding.

This report provides the first periodic update- for all of the loans and lending
facilities authorized by the Board under section 13(3) since March 1,2008, that are
outstanding. These facilities are: (1) the Term Securities Lending Facility, (2) the
loan to Maiden Lane LLC to facilitate the acquisition of The Bear Stearns
Companies, Inc. ("Bear Stearns") by JPMorgan Chase, (3) the Primary Dealer
.Credit Facility, (4) the Asset-Backed Commercial Paper Money Market Mutual
Fund Liquidity Facility, (5) the Commercial Paper Funding Facility, and (6) the
lending facilities established for American International Group, Inc. ("AIG").
Although the first periodic report for several of these facilities is not due yet, the
Board believes that providing a comprehensive update regarding all lending
facilities under section 13(3) currently outstanding should help Congress and the
public understand the status, scope and structure of the various facilities the Board

has established to promote financial stability, support the provision of credit to

firms and households, and contribute to a resumption of economic growth.

In addition to the credit facilities discussed in this report, the Board also has
authorized the establishment of the following credit facilities under section 13(3)
of the Federal Reserve Act: the Money Market Investor Funding Facility, certain
residual financing for Citigroup, Inc., and the Term Asset-Backed Securities Loan
Facility. No loans have been made under these credit facilities to date. When a
loan is made under any of these facilities in the future, the Board will file a report
with the Committees concerning the facility in accordance with section l29(b) of
the EESA. Additional information concerning these facilities is available in the
reports filed with the Committees on October 28,2008, December 1,2008, and
December 2, 2008.

A. Term Securities Lending Facility

On March 11,2008, the Board, in conjunction with the Federal Open Market
Committee, established the Term Securities Lending Facility ("TSLF") and
authorized the Federal Reserve Bank of New York (the "New York Reserve
Bank") to lend under this program. The TSLF generally was intended to promote
liquidity in the financing markets for Treasury and other collateral and, in doing so,
foster improved functioning, of the financial markets more broadly. Under the
TSLF, the Federal Reserve auctions term loans of U.S. Treasury securities to
primary dealers and accepts a broad range of other securities as collateral. On
July 30, 2008, the Federal Reserve established the TSLF Options Program ("TOP")
as an extension of the TSLF. Under the TOP, options to draw shorter-term TSLF
loans at future dates are auctioned to the primary dealers. All loans under the
facility are collateralized by a pledge of other securities deemed eligible collateral
by the New York Reserve Bank. Eligible collateral includes (i) all collateral
eligible for tri-party repurchase agreements arranged by the Open Market Trading
Desk, such as Treasury obligations and debt obligations (including mortgage­
backed securities) for which the payment of the principal and interest is fully
guaranteed by an agency of the United States, and (ii) investment grade corporate,
municipal, mortgage-backed and asset-backed securities. Collateral is pledged by
winning dealers from their clearing bank custodial accounts and valued daily.
Additional information concerning the TSLF and TOP is available in the report
provided to the Committees on November 3, 2008.

Update. On December 2, 2008, the Board extended the termination date of

the TSLF until April 30,2009. As of December 17,2008, the aggregate par value
2

of Treasury securities lent under the TSLF (including the TOP) was $182.4 billion.
As of the same date, the market value of the collateral pledged under the TSLF
(including the TOP) was $235.3 billion. The Board does not anticipate any losses
to the Federal Reserve or the taxpayers as a result of securities lending under the
TSLF. Any potentia1losses are mitigated by haircuts on the value of the collateral,
daily revaluation of the collateral, and limits on the participation of individual
dealers. Moreover, loans extended under this program are with recourse to the
borrower beyond the specific collateral pledged.

B. Loan to Maiden Lane LLC to facilitate the acquisition by JPMorgan

Chase & Company of Bear Stearns

On March 16,2008, the Board authorized the New York Reserve Bank to
make a senior loan to a limited liability company, Maiden Lane LLC ("Maiden
Lane"), to acquire $30 billion of identified, less liquid assets of Bear Steams to
facilitate the purchase of Bear Steams by JPMorgan Chase. As part of the
agreement among the parties, JPMorgan Chase lent $1 billion to Maiden Lane that
is subordinated for repayment purposes to the New York Reserve Bank's loan.
When the loan closed on June 26, 2008, because of adjustments in the values of
some of the assets purchased by Maiden Lane from Bear Steams, the New York
Reserve Bank actually lent $28.8 billion to Maiden Lane, and JPMorgan Chase
actually lent $1.1 billion to Maiden Lane. The New York Reserve Bank's loan is
secured by a first priority security interest in all of the assets of Maiden Lane.
Additional information concerning the loan to Maiden Lane is available in the
report provided to the Committees on November 3, 2008. 1

Update. As of December 17, 2008, the principal amount of the loan

extended by the New York Reserve Bank to Maiden Lane was $28.8 billion. The
current fair value of the portfolio holdings of Maiden Lane reported on the Board's
most recent weekly HA.1 Statistical Release, "Factors Affecting Reserve Balances
of Depository Institutions and Condition Statement of the Federal Reserve Banks,"
for December 17,2008, was $26.9 billion. Consistent with generally accepted
accounting principles ("GAAP"), the portfolio holdings are revalued as of the end
of each quarter to reflect an estimate of what would be received if the assets were
sold on the measurement date. The fair value reported for December 17,2008, is

1 The Federal Reserve also extended a bridge loan under section 13(3) to Bear
Steams on March 14, 2008. This loan was repaid in full and with interest on
March 17, 2008. Additional information concerning this bridge loan is available in
the report filed with the Committees on November 3, 2008.
3
based on the revaluations as of September 30, 2008. Accordingly, the fair value
determined through these revaluations may fluctuate over time. The fair value of
the portfolio holdings that is reported on the weekly H.4.1 release reflects the most
recent quarterly valuations of the portfolio holdings of Maiden Lane adjusted to
reflect any accrued interest earnings, expense payments and, to the extent any may
have occurred since the most recent measurement date, realized gains or losses.

Despite the decline in the current fair value of the collateral, the Board does
not anticipate the Maiden Lane loan will result in any net loss to the Federal
Reserve or taxpayers. The Maiden Lane loan was extended with the expectation
that the value of its portfolio would be realized either by holding the assets to
maturity or by selling the assets over an extended period of time during which the
full value of the assets could be realized. The ten year term of the loan provides
Maiden Lane's asset manager, BlackRock Financial Management, Inc., an
opportunity to dispose of the assets in an orderly manner over time. In addition,
JPMorgan Chase will absorb the first $1.1 billion of realized losses,. should any
occur. Moreover, under the terms of the agreement, the New York Reserve Bank
is entitled to receive interest payments on the loan to Maiden Lane as well as any
residual cash flow generated by the collateral after the loans to the New York
Reserve Bank and JPMorgan Chase are repaid.

C. Primary Dealer Credit Facility

On March 16,2008, the Board established the Primary Dealer Credit Facility
("PDCF") and authorized the New York Reserve Bank to lend under that facility.
The PDCF is intended to foster improved functioning of fmancial markets more
generally and is an overnight loan facility that provides funding to primary dealers
secured by collateral eligible for tri-party repurchase agreements in the systems of
the major clearing banks. On September 21, 2008, the Board authorized the
London-based broker-dealer subsidiaries of Merrill Lynch & Co., Inc. ("Merrill
Lynch"), The Goldman Sachs Group, Inc. ("Goldman Sachs"), and Morgan
Stanley to borrow from the New York Reserve Bank under the PDCF. In addition,
with the separate approval of the applications of Goldman Sachs and Morgan
Stanley to become bank holding companies, the Board authorized the New York
Reserve Bank to extend credit to the U.S. broker-dealer subsidiaries of these firms
under the PDCF against the types of collateral that may be pledged by depository
institutions at the Federal Reserve's primary credit facility. The Board extended
the same collateral arrangement to the U.S. broker-dealer subsidiary of Merrill
. Lynch.

4
 Collateral eligible to be pledged under the PDCF includes all collateral
eligible as of September 12,2008, for pledge in tri-party repurchase agreement
transactions through the major clearing banks, which includes (i) all collateral
eligible for pledge in open market operations, such as Treasury obligations and
debt obligations (including mortgage-backed securities) for which the payment of
the principal and interest is fully guaranteed by an agency of the United States, and
(ii) investment grade corporate securities, municipal securities, mortgage-backed
securities and asset-backed securities that were priced by the clearing banks on
such date. The U.S. broker-dealer subsidiaries of Merrill Lynch, Goldman Sachs,
and Morgan Stanley also may borrow against types of collateral that may be
pledged by depository institutions at the discount window. Additional infonnation
concerning the PDCF, including the expansions described above, is available in the
report provided to the Committees on November 3, 2008.

Update. On November 23,2008, in connection with the other actions being

taken by the Treasury Department, the Federal Deposit Insurance Corporation and
the Federal Reserve with respect to Citigroup, Inc., the Board authorized the
London-based broker-dealer subsidiary ofCitigroup, Inc. to borrow from the New
York Reserve Bank under the PDCF. Separately, on December 2, 2008, the Board
extended the tennination date ofthe PDCF until April 30, 2009.

As of December 17, 2008, the amount of loans outstanding under the PDCF
was $47.3 billion. As of the same date, the market value of the collateral pledged
under the PDCF was $51.2 billion. The Board does not anticipate that lending
under the PDCF will result in any losses to the Federal Reserve or the taxpayers.
Any loans made under the PDCF are with recourse beyond the pledged collateral
to the broker-dealer entity itself, and the risk of loss is mitigated by daily
revaluation of the collateral and haircuts on the collateral value.

D. Asset-Backed Commercial Paper Money Market Mutual Fund

Liquidity Facility

On September 19,2008, the Board authorized the creation of the Asset-

Backed Commercial Paper Money Market Mutual Fund Liquidity Facility
("AMLF") and authorized the Federal Reserve Bank of Boston ("Boston Reserve
Bank") to lend under the AMLF. The AMLF provides funding to U.S. depository
institutions and bank holding companies to [mance their purchases of high-quality
asset-backed commercial paper ("ABCP") from money market mutual funds
("MMMFs") under certain conditions. The program is intended to assist money
market funds that hold such paper in meeting demands for redemptions by
5
investors and to foster liquidity in the ABCP market and money market funds more
generally. The collateral for loans is the pledged ABCP, which is equal to the
amount of the advances. Additional information concerning the AMLF is
available in the report provided to the Committees on November 3, 2008.

Update. On December 2,2008, the Board extended the termination date of

the AMLF until April 30, 2009. As of December 17, 2008, the aggregate amount
of outstanding advances under the AMLF was $27.4 billion for which an equal
amount of ABCP at amortized cost has been pledged as collateral. The Board does
not expect that advances under the AMLF will result in any realized losses to the
Federal Reserve or the taxpayers. The program is limited to ABCP that receives
the highest rating from a major credit-rating agency. Moreover, ABCP is
supported by the assets backing the paper.

E. Commercial Paper Funding Facility

On October 14, 2008, the Board authorized the creation of the Commercial
Paper Funding Facility ("CPFF") and authorized the New York Reserve Bank to
extend credit under facility. The CPFF is designed to provide a liquidity backstop
to U.S. issuers of commercial paper through a special purpose vehicle ("SPV") that
would purchase three-month unsecured and asset-backed commercial paper
directly from eligible issuers. Additional information concerning the CPFF is
available in the report provided to the Committees on October 14,2008.

Update. As of December 17,2008, the aggregate amount of outstanding

advances under the CPFF was $317.5 billion. As of the same date, the value of the
collateral pledged under the CPFF, as determined on an amortized cost basis, was
$318.8 billion. The Board does not anticipate that advances made under the CPFF
will result in any losses to the Federal Reserve or the taxpayers. All advances to
the Spy are made with full recourse to the Spy and are secured by all the assets of
the SPY. In addition, in situations where the obligations acquired by the Spy are
ABCP, the Federal Reserve's advances will be secured by the assets that support
the commercial paper. Issuers of commercial paper that is not ABCP pay an
additional fee, provide acceptable collateral~ or have the paper indorsed. In
addition, to use the CPFF, each issuer must pay a proportional fee, and all.fees are
retained by the Spy to provide an additional cushion against losses.

6
 F. Loans to American International Group, Inc.

On November 10,2008, the Board and the Department of the Treasury

announced the restructuring of the U.S. government's support for AIG. These
actions were taken to establish a more durable capital structure for the company in
order to facilitate AIG's execution of its plan to sell certain of its businesses in an
orderly manner, resolve temporary liquidity issues, and promote financial stability,
while protecting the interests of the U.S. government and taxpayers.

As part of this restructuring, the Treasury Department acquired $40 billion

in newly-issued senior preferred stock of AIG, using funding from the Troubled
Asset Relief Program (liTARP") established by the EESA. This investment
constituted an important part of the restructuring actions by providing new equity
capital to AIG, a tool that was not available to the U.S. government at the time the
Federal Reserve initially provided liquidity to AIG in September 2008. In
conjunction with the Treasury Department's investment, the Board authorized the
New York Reserve Bank to--

1. Restructure the credit facility initially provided to AIG on September 16,

2008 (the "Revolving Credit Facility"), by, among other things, reducing
to $60 billion from $85 billion the total amount of credit available under
the facility, reducing the interest rate and fees payable under the facility,
and extending to five years from two years the term of the facility;

2. Provide up to $22.5 billion in senior secured credit to a newly formed

limited liability company, Maiden Lane II, LLC ("ML-II"), to partially
fund the acquisition by ML-II from AIG of approximately $40 billion
(par value) in residential mortgage-backed securities ("RMBS")
purchased by AIG with the cash collateral received through the securities
lending operations of AIG's regulated insurance subsidiaries; and

3. Provide up to $30 billion in senior secured credit to a separate, newly

formed limited liability company, Maiden Lane III, LLC ("ML-III"), to
partially fund the acquisition by ML-III from the current counterparties
of AIG of approximately $69 billion (par value) in multi-sector
collateralized debt obligations ("CDOs") protected by credit default
swaps and similar contracts written by AIG.

Additional information concerning each of these authorizations and credit facilities

is provided in the report filed with the Committees on November 17,2008.

7
 Update.

Revolving Credit Facility. As of December 17,2008, AIG had $41.6 billion.

in advances outstanding under the Revolving Credit Facility.

As discussed in the report filed on November 17,2008, AIG is

unconditionally obligated to repay the unpaid principal amount of all advances
under the Revolving Credit Facility, together with accrued and unpaid interest
thereon and any unpaid fees, on the maturity date. Also, all outstanding balances
under the Revolving Credit Facility are secured by the pledge of assets of AIG and
its primary non-regulated subsidiaries, including AIG's ownership interest in its
regulated U.s. and foreign subsidiaries? Furthermore, AIG's obligations to the
New York Reserve Bank continue to be guaranteed by each of AIG's domestic,
nomegulated subsidiaries that have more than $50 million in assets. 3 These
guarantees themselves are separately secured by assets pledged to the New York
Reserve Bank by the relevant guarantor. Additional subsidiaries of AIG may be
added as guarantors over time by signing a short supplemental agreement.

The New York Reserve Bank's agreement to provide advances under the
Revolving Credit Facility also is specifically conditioned on the Reserve Bank
being satisfied in its sole discretion with the nature and value of the collateral
securing AIG's obligations at the time of the advance, and on the Reserve Bank
being reasonably satisfied in all respects with the corporate governance of AIG.
Representatives of the New York Reserve Bank are in regular contact with AIG's
senior management and attend all AIG board of directors meetings, including
committee meetings, as an observer. The New York Reserve Bank also has staff
on-site at AIG to monitor the company's funding, cash flows, use of proceeds and
progress in pursuing its global divestiture plan. Control and management of the
daily business and operations of AIG and its subsidiaries continue to be vested in
the new chairman and chief executive officer of AIG and his management team.
These and other provisions protect the interests of the Federal Reserve, the
TreasUry Department, and taxpayers in providing for full repayment by AIG of all
of its Federal Reserve borrowing.

2 In the case of foreign subsidiaries, the equity interest the Reserve Bank will
accept as collateral is limited to 66 percent ownership in order to avoid adverse tax
consequences for AIG or its subsidiaries.
3 Regulated subsidiaries, such as insurance companies, typically are not permitted
to provide such guarantees.
8 .
 In light of the complexities involved in valuing the extremely broad and
diverse range of collateral and guarantees securing all advances under the
Revolving Credit Facility, the Board believes any estimate at this time of the
aggregate value that ultimately will or may be received from the sale of collateral
or the enforcement of the guarantees in the future would be speculative and could
interfere with the goal of maximizing value through the company's global
divestiture program and, consequently, diminish the proceeds available to repay
the Revolving Credit Facility. Given the substantial assets and operations
supporting repayment of the loan, as well as the equity interest in AIG that the U.S.
Treasury Department has received or will receive, the Board does not expect that
the Revolving Credit Facility will result in any net loss to the Federal Reserve or
taxpayers.

Maiden Lane II and Maiden Lane III. ML-II commenced operations on

December 12,2008, through the acquisition from AIG of approximately
$39.3 billion (par value) ofRMBS. As of December 17,2008, the principal
amount of the loan extended to ML-II· by the New York Reserve Bank was
$19.5 billion.

ML-III commenced operations on November 25,2008, through the

acquisition of approximately $46.1 billion (par value) of multi-sector CDOs.
Additional CDOs may be acquired by ML-III through additional closings. As of
December 17, 2008, the principal amount of the ~oan provided to ML-III by the
New York Reserve Bank was $15.1 billion.

The current fair values of the net portfolio holdings ofML-II and ML-III
reported on the most recent weekly HA.l release for December 17, 2008, were
$20.0 billion and $19.7 billion, respectively. Consistent with GAAP, the portfolio
holdings ofML-II and ML-III will be revalued as of the end of each quarter to
reflect an estimate of what would be received if the assets were sold on the
measurement date and, accordingly, the fair value determined through these
revaluations may fluctuate over time. 4 The fair values of the portfolio holdings of
ML-II and ML-III that are reported on the Board's weekly HA.l release reflect the
most recent valuations of the portfolio holdings ofML-II and ML-III adjusted to

4 As noted above, additional multi-sector CDOs may be acquired by ML-III

through additional closings and the fair value of these additional multi-sector
CDOs would be determined in connection with the acquisition of such obligations
by ML-III.
9
reflect any accrued interest earnings, expense payments and, to the extent any may
have occurred since the most recent valuation date, realized gains and losses.

Because the collateral assets for the loans to ML-II and ML-III are expected
to generate cash proceeds and will be sold over time, the current reported fair
values of the net portfolio holdings ofML-II and ML-III do not reflect the amount
of aggregate proceeds that the Federal Reserve could receive from payments on the
assets over time or from the s.ale of the assets of these entities over time. The
collateral will be sold over time in an orderly manner that is not affected by the
unnaturally strong downward market pressures that have been associated with the
recent liquidity crisis. In addition, AIG has a $1 billion subordinated position in
ML-II and a $5 billion subordinated position in ML-Ill. These subordinated
positions are available to absorb fIrst any loss that ultimately is incurred by ML-II
or ML-III, respectively. The Federal Reserve also is entitled to receive interest on
the loans to ML-II and ML-III while they are outstanding and 5/6ths and 2/3rds of
any residual cash flow generated by the collateral held by ML-II and ML-III,
respectively, after the senior note of the New York Reserve Bank and the
subordinated note of AIG are repaid.

Given these protections, the Board does not believe that the extensions of
credit to ML-II or ML-III will result in any net cost to the taxpayers resulting from
the failure to repay the principal and interest of the senior loans provided by the
New York Reserve Bank.

Securities Borrowing Facility. As explained in the report fIled with the

Committees on November 17, 2008, the proceeds received by AIG and its
insurance subsidiaries from the establishment of Maiden Lane II were used to
terminate the securities lending program operated by certain of AIG's regulated
insurance subsidiaries. Accordingly, the $37.8 billion securities borrowing facility
authorized by the Board for AIG in October 2008 under section 13(3) of the
Federal Reserve Act was terminated on December 12,2008, and all outstanding
balances \lIlder that facility were repaid in full. During the term of the facility, the
Federal Reserve received interest on the loans provided and, as expected, the
securities borrowing facility did not result in any losses to the Federal Reserve or
the taxpayers.

10
 BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. c. 20551

BEN S. BE:RNANKE:
CHAIRMAN

January 27,2009

The Honorable Christopher J. Dodd

Chainnan
Committee on Banking, Housing,
and Urban Affairs
United States Senate
Washington, D.C. 20510

Dear Mr. Chainnan:

Pursuant to section 129(a) of the Emergency Economic Stabilization Act of2008,

enclosed is a copy of the report that was submitted on January 22, 2009, with respect to the

Board's authorization on January 15, 2009, under section 13(3) of the Federal Reserve Act

(12 U.S.C. § 343) to provide residual financing to Bank of America Corporation relating to a

designated asset pool.

Sincerely,

;2~

Enclosure

Identical letters also sent to: Ranking Member Richard C. Shelby, Committee on Banking,
Housing, and Urban Affairs; Chairman Barney Frank and Ranking Member Spencer
Bachus, Committee on Financial Services.
 Report Pursuant to Section 129 of the
Emergency Economic Stabilization Act of 2008:
Authorization to Provide Residual Financing to Bank of America Corporation
Relating to a Designated Asset Pool

Overview

On January 15,2009, the Board of Govemors of the Federal Reserve System

(Board), based on the unanimous vote of its five members, authorized the Federal
Reserve Bank of Richmond (Reserve Bank) under section 13(3) of the Federal
Reserve Act (12 U.S.c. § 343) to provide Bank of America Corporation (Bank of
America), if necessary, residual financing relating to a designated pool of financial
instruments in connection with certain loss sharing arrangements among Bank of
America, the Department of the Treasury (Treasury) and the Federal Deposit
Insurance Corporation (FDIC). As discussed further below, the Board provided
this authorization as part of a package of coordinated actions by Treasury, FDIC,
and the Federal Reserve to provide financial support to Bank of America and
promote financial stability.

Background

Bank of America consummated its acquisition of Merrill Lynch & Co., Inc.
(Merrill Lynch) on January 1,2009. Based on data for the individual firms as of
September 30, 2008, the combined Bank of America organization is the largest
banking organization in the United States, with total consolidated assets of
approximately $2.7 trillion. As of the same date, Bank of America's lead
subsidiary bank, Bank of America, N.A., had total consolidated assets of
approximately $1.4 trillion, making the bank the largest U.S. insured depository
institution in terms of assets. MerrillLynch's subsidiary insured depository
institutions had an additional $97 billion in assets as of the same date.

Bank ofAmerica is a major supplier of credit in the United States, with more
than $940 billion in loans and leases outstanding at the end ofthe third quarter of
2008. As of the same date, Bank of America held more than $776 billion in
domestic deposits and more than $98 billion in foreign deposits, making the
organization the largest deposit holder in the United States and one of the largest
holders of foreign deposits among U.S. banking organizations. Following the
combination with Merrill Lynch, Bank ofAmerica also is the largest securities
broker in the world and provides a broad range of investment banking, capital
markets, asset management, and retail brokerage services - both domestically and
overseas through its subsidiaries. The combined organization has substantial
amounts of commercial paper and long-term senior and subordinated debt
outstanding; is a major participant in numerous domestic and international
payment, clearing, and central counterparty arrangements; and is a significant
counterparty to many major national and international financial institutions.

Financial markets in the United States have been experiencing significant

stress for more than a year. During this period, investor confidence in U.S.
financial institutions has been shaken by, among other things, sharp and broad-
based declines in both equity and home prices; continuing increases in mortgage
delinquencies and defaults; resulting substantial drops in the values of mortgages
and mortgage-backed securities; dislocations in some term funding markets; losses
caused by the failure of several significant domestic financial institutions; and
large losses at financial institutions in other parts of the world. The strains in
financial markets and pressures on financial firms have contributed to a severe
deterioration in the economic outlook for both the United States and many other
countries.

These conditions negatively affected Bank of America, Merrill Lynch and

their subsidiary insured depository institutions in the first three quarters of2008.
In the first three quarters of2008, Merrill Lynch posted net losses of$I1.8 billion
due, in part, to losses on mortgage-related securities and exposures. Bank of
America reported net income of $5.8 billion during the same period, a significant
reduction from the $14.7 billion in net income reported by the company for the
comparable period in 2007. To help strengthen the companies and promote
confidence in the financial system, on October 28,2008, Treasury acquired
$15 billion of preferred stock of Bank of America and related warrants as part of
the Capital Purchase Program (CPP) established under the Troubled Assets Relief
Program (TARP). On the same date, Treasury committed to purchase $10 billion
of preferred stock of Merrill Lynch and related warrants under the CPP, with the
settlement deferred pending completion of the firm's acquisition by Bank of
America. .

The ongoing strains in financial markets and weakening of economic

conditions, however, placed additional stress on Merrill Lynch and Bank of
America during the fourth quarter of2008. On January 16,2009, Bank of America
reported net losses of$1.8 billion for the fourth quarter of2008, and Merrill Lynch
reported net losses of$15.3 billion for the period. These losses had the potential to
weaken materially investor and counterparty confidence in the combined
organization and to hamper the ability of the organization and its insured
2
depository institutions to continue to obtain funding in the currently fragile credit
markets. Given current market conditions, such adverse developments at the
organization, if left unaddressed, could have resulted in other financial institutions
experiencing similar funding problems, posed risks to financial stability, and
increased downside risks to economic growth.

Overview of the Board's Authorization and Related Programs

In light of these and other factors, Treasury, FDIC and the Federal Reserve
agreed on January 15,2009, to provide Bank of America with a package of
programs and facilities to help restore confidence in Bank of America and promote
financial stability, which is a prerequisite to restoring vigorous economic growth.
Collectively these new measures will augment the capital of Bank of America;
protect the company from credit losses on a substantial pool of fmancial
instruments; and better enable the company, its subsidiary depository institutions
and the financial system to weather the current difficulties and provide credit and
other financial services to consumers and businesses.

The following describes the three components of the assistance provided to

Bank of America. Additional information concerning these actions is included in
the attached term sheet.

1. Additional Equity Investment by Treasury.

Treasury will acquire an additional $20 billion in newly issued senior

preferred stock of Bank of America under the Targeted Investment Program
established under the TARP. The preferred stock carries an 8 percent dividend
payable to Treasury, and includes terms designed to protect the interests of
taxpayers. For example, as required by the Emergency Economic Stabilization Act
of2008 (EESA), Treasury will receive warrants to purchase common stock of
Bank of America at a strike price of$13.30 per share and with an aggregate value
of $2.0 billion. Under the terms of the preferred stock, Bank of America also will
be required to abide by enhanced executive compensation and corporate
expenditure standards. In addition, Bank of America will be prohibited from
paying dividends on common stock in excess of$O.OI per share per quarter for
three years without the consent of Treasury.

3
 2. Treasury and FDIC Loss-Sharing Arrangements with Bank of America.

Treasury and FDIC also have agreed to share with Bank of America losses
on a designated pool of up to $118 billion ofloans, securities backed by residential
and commercial real estate loans and corporate debt, derivative transactions that
reference such securities, and other financial instruments. The designated pool of
financial instruments represents primarily assets of Merrill Lynch that now are held
by Bank of America and will remain on Bank of America's consolidated balance
sheet. Under the terms of the guarantee arrangement, Bank of America will retain
a $10 billion first loss position in the pool offimincial instruments. A second loss
position in the pool of financial instruments (covering losses after the first $1 OB of
losses in the pool) will be shared among Bank of America, Treasury and FDIC.
Bank of America will bear 10 percent of the second loss position; the remaining
90 percent portion of the second loss position would be allocated between Treasury
and FDIC on a pari passu basis -75 percent to Treasury, up to a maximum of
$7.5 billion, and 25 percent to FDIC, up to a maximum of $2.5 billion. These loss-
sharing arrangements will be in effect for 10 years for residential mortgage-related
assets and 5 years for other assets. As compensation for these guarantees, Treasury
and FDIC will receive (i) $3 billion and $1 billion, respectively, of preferred stock
in Bank of America, which will bear dividends at 8 percent per annum; and
(ii) accompanying warrants. The amount of preferred stock received as
compensation for the guarantee may be adjusted, as necessary, based on the results
of an actuarial analysis of the final composition of the designated pool of financial
instruments, as required by section 102(c) of the EESA.

Under the tenns of the guarantee arrangement, Bank of America will be

required to maintain a foreclosure mitigation policy acceptable to Treasury and to
abide by the executive compensation and corporate expenditure requirements
attached to the preferred stock for as long as the guarantee arrangement is in place.

3. Residual Federal Reserve Financing.

In connection with these actions, the Board authorized the Reserve Bank,
under section 13(3) of the Federal Reserve Act, to provide Bank of America with
financing for the pool of financial instruments if and only if Bank of America
incurs additional mark-to-market and credit losses in the pool that exceed
$18 billion. The financing would be provided to Bank of America on a non-
recourse basis, except with respect to interest payments and fees. It is expected
that the maximum amount of Federal Reserve financing would be less than
$97 billion. The Reserve Bank's credit exposure on the loan would be reduced by
4
the Bank of America first loss position, the shared TreasurylFDIC/Bank of
America second loss position, and a continuing 10-percent loss share agreement
between the Reserve Bank and Bank of America. The Reserve Bank's credit
exposure would be further limited by Bank of America's pledge ofD.S. Treasury
securities or other assets eligible for Reserve Banks to purchase under
section 14(b) of the Federal Reserve Act. Outstanding advances made to Bank of
America under the facility would bear interest at a floating rate equal to the 3-
month overnight index swap rate plus 300 basis points per annum. The Reserve
Bank also will charge Bank of America a fee of20 basis points per annum on
undrawn amounts. Any residual financing provided by the Reserve Bank would
complete the unexpired term of the guarantee arrangement by Treasury and FDIC
- that is, 10 years for residential mortgage-related assets and 5 years for other
assets from the date of inception of the guarantee arrangement.

In light of the substantial decline in the market value of the pool of financial
instruments that must occur before the Reserve Bank would be obligated to lend,
and the protections against loss provided by Bank of America, Treasury and FDIC
that must be exhausted before the Reserve Bank would suffer losses on the facility,
the Board does not expect that the Reserve Bank's facility will result in any losses
to the Federal Reserve or the taxpayer.

Attachment

5
January 15, 2009

Summary of Terms

Eligible Asset Guarantee

Eligible Assets: A pool of financial instruments consisting of securities

backed by residential and commercial reaJ estate loans and
corporate debt derivative transactions that reference such
securities, loans, and associated hedges, as agreed, and
such other financial instruments as the U.S. government
(USG) has agreed to guarantee or lend against (the Pool).
Each specific financial instrument in the Pool must be
identified on signing of the guarantee agreement. Financial
instruments in the Pool will remain on the books of
institution but will be appropriately "ring-fenced."

The following financial instruments will be excluded from

the Pool: (i) foreign assets (definition to be provided by
USG); (ii) assets originated or issued on or after March 14,
2008; (iii) equity securities; and (iv) any other assets that
USG deems necessary to exclude.

Size: The Pool contains up to $118 billion of financial

instruments. More specifically, the Pool includes cash I

assets with a current book (i.e., carrying) value of up to

$37billion and a derivatives portfolio with maximum
potential future losses of up to $81 billion (based on
valuations agreed between institution and USG).

Term and Coverage Guarantee is in place for 10 years for residential assets and
of Guarantee: 5 years for non-residential assets. Residential assets will
include loans secured solely by 1-4 family residential real
estate, securities predominately collateralized by such
loans, and derivatives that predominately reference such
securities. Institution has the right to terminate the
guarantee at any time (With the consent of USGL and the

L
parties will negotiate in good faith as to an appropriate fee
or rebate in connection with any permitted termination. If
institution terminates the guarantee, it must prepay any
January 15, 2009

outstanding Federal Reserve loan (described below) in full.

Guarantee covers Eligible Losses on the Pool. Eligible

Losses are the aggregate incurred credit losses (net of any
gains and recoveries) on the Pool during the term of the
guarantee, beyond the January 15, 2009, marks and credit
valuation adjustments for the Pool (as agreed between
institution and USG). Eligible Losses do not include
unrealized mark-to-market losses but do include realized
losses from a sale permitted under the asset management
template (described below).

Deductible: Institution absorbs all Eligible Losses in the Pool up to

$10 billion.

USG (UST/FDIC) will share Eligible Losses in the Pool in

excess of that amount, up to $10 billion. All Eligible Losses
beyond the institution's deductible will be shared USG
(90%) and institution (10%).

Financing: Federal Reserve will provide a non-recourse loan facility to

institution, subject to institution's 10% lo~s sharing.
Federal Reserve loan commitment will terminate (and any
loans thereunder will mature) on the termination dates of
USG guarantee. Institution has the right to terminate the
Federal Reserve loan commitment and prepay any Federal
Reserve loans at any time (with consent of Federal
Reserve).

Federal Reserve will charge a fee on undrawn amounts of

20 bp per annum and a floating interest rate on drawn
amounts of DIS plus 300 bp per annum. Interest and fee
payments will be with recourse to the institution.

Institution may draw on Federal Reserve loan facility if and

when additional mark-to-market and incurred credit losses
on the Pool reach $18 billion.
January 15, 2009

Fee for Guarantee- Institution will issue to USG (UST/FDIC) (i) $4 billion of
Preferred Stock and preferred stock with an 8% dividend rate (under terms
Warrants: described below); and (ii) warrants with an aggregate
exercise value of 10% of the total amount of preferred
issued. The fee may be adjusted, as necessary, based on
the results of an actuarial analysis of the final composition
of the Pool, as required under section 102(c) of the
Emergency Economic Stabilization Act of 2008.

Management of Institution generally will manage the financial instruments

Assets: in the Pool in accordance with its ordinary business
practices, but will be required to comply with an asset
management template provided by USG. This template will
require institution, among other things, to obtain USG
approval (not to be unreasonably withheld) before any
Material Disposition. A Material Disposition is a disposition
of financial instruments in the Pool that creates an Eligible
Loss that, combined with other dispositions of Pool
instruments in the same year, exceeds 1% of the Pool size
at the beginning of the year. This template also will
include, among other things, a foreclosure mitigation policy
acceptable to USG.

Revenues and Risk Institution will retain the income stream from the Pool.
Weighting: Risk weighting for the financial instruments in the Pool will
be 20%.

Dividends: Institution is prohibited from paying common stock

dividends in excess of $.01 per share per quarter for three
years without USG consent. A factor taken into account for
consideration of USG consent is the ability to complete a
common stock offering of appropriate size.

Executive An executive compensation plan, including bonuses, that

Compensation: rewards long-term performance and profitability, with
appropriate limitations, must be submitted to, and
 January IS, 2009

approved by, USG. Executive compensation requirements

will be consistent with the terms of the preferred stock
purchase agreement between USG and institution.

Corpo'rate Other matters as specified, consistent with the terms of the

Governance: preferred stock purchase agreement between USG and
institution.

The foregoing is accepted and agreed

by and among the following as of
January 15, 2009:

DEPARTMENT OF THE TREASURY FEDERAL RESERVE BOARD

By: By:
Name: Name:
Title: Title:

BANK OF AMERICA CORPORATION FEDERAL DEPOSIT INSURANCE CORP.

By: By:
Name: Name:
Title: Title:
I
 q

BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON. D. C. 20551

eE:N 5. eE:RNANKE:
February 25, 2009 CHAIRMAN

Ms. Elizabeth Warren

Chairperson
Congressional Oversight Panel
732 North Capitol Street, N.W.
Mailstop: BOC
Washington, D.C. 20401

Dear Ms. Warren:

Pursuant to sections l29(b) of the Emergency Economic Stabilization Act of2008

(EESA)" enclosed is the Board's second periodic report regarding the currently outstanding loans
and lending facilities authorized by the Board under section 13(3) of the Federal Reserve Act
(12 U.S.C. § 343). The enclosed report provides information regarding the following loans and
loan facilities: the Term Securities Lending Facility; the loan to Maiden Lane LLC to facilitate
the acquisition of The Bear Stearns Companies, Inc. by JPMorgan Chase & Co. Inc.; the Primary
Dealer Credit Facility; the Asset-Backed Connnercial Paper Money Market Mutual Fund
Liquidity Facility; the Commercial Paper Funding Facility; and the lending facilities established
for American International Group, Inc. (AlG).

In addition, I am pleased to enclose a copy of the report that the Board filed on
October 14,2008, with the House Financial Services Connnittee and the Senate Banking,
Housing, and Urban Affairs Committee regarding the securities borrowing facility authorized for
AlG. The Board initially requested confidential treatment of the report pursuant to
section 129(c) of the EESA. The securities borrowing facility for AlG was terminated on
December 12, 2008, and all outstanding balances under that facility were repaid by AlG in full.
The Board has informed the Committees that it no longer requests confidential treatment of the
report.

Enclosures

cc: • The Honorable John E. Sununu

The Honorable Jeb Hensarling
Mr. Richard H. Neiman
Mr. Damon A. Silvers
 SOARD OF GOVERNORS
OF THE
FEDERAL RES.ERVE SYSTEM
WASHINGTON, D. C. 20551

February 25,2009 BEN 5. BERNANI<E

CHAI RMAN

The Honorable Christopher J. Dodd

Chainnan
Committee on Banking, Housing,
and Urban Affairs
United States Senate
Washington, D.C. 20510

Dear Mr. Chainnan:

Pursuant to section 129(b) ofthe Emergency Economic Stabilization Act of 2008

(EESA)" enclosed is the Board's second periodic report regarding the currently outstanding loans
and lending facilities authorized by the Board under. section 13(3) of the Federal Reserve Act
(12 U.S,c. § 343). The enclosed report provides information regarding the following loans and
loan facilities: the Term Securities Lending Facility; the loan to Maiden Lane LLC to facilitate
the acquisition of The Bear Steams Companies, Inc. by JPiy10rgan Chase & Co. Inc.; the Primary
Dealer Credit Facility; the Asset-Backed Commercial Paper Money Market Mutual Fund
Liquidity Facility; the Commercial Paper Funding Facility; and the lending facilities established
for American International Group, Inc. (AIG).

In addition, I am pleased to inform you that the Board no longer requests confidential
treatment of the report filed with the Committee under section 129(a) ofEESA on October 14,
2008, regarding the securities borrowing facility authorized for AIG. That facility was
terminated on December 12, 2008, and all outstanding balances under that facility were repaid by
AIG in full.

Enclosure

Identical also sent to: Ranking Member Shelby, Committee on Banking, Housing, and
Urban Affairs; Chairman Frank and Ranking Member Bachus, Committee on Financial
Services.
 Periodic Report Pursuant to Section 129(b) of the
Emergency Economic Stabilization Act of 2008:
Update on Outstanding Lending Facilities Authorized by the Board
Under Section 13(3) of the Federal Reserve Act
February 25, 2009

Overview

Pursuant to section 129(b) of the Emergency Economic Stabilization Act of

2008 ("'EESA"), the Board of Governors of the Federal Reserve System
(the "Board") is providing the following updates concerning the lending facilities
established by the Board under section 13(3) of the Federal Reserve Act
(12 U.S.C. § 343). This report is the second periodic report filed pursuant to
section 129(b) of the EESA 1 and provides an update concerning all of the loans and
lending facilities authorized by the Board under section 13 (3) since March 1, 2008,
that an~ outstanding. These facilities are: (1) the Term Securities Lending Facility,
(2) the loan to Maiden Lane LLC to facilitate the acquisition of The Bear Steams
Companies, Inc. ("Bear Steams") by JPMorgan Chase & Co., Inc. ("JPMorgan
Chase"), (3) the Primary Dealer Credit Facility, (4) the Asset-Backed Commercial
Paper :Money Market Mutual Fund Liquidity Facility, (5) the Commercial Paper
Funding Facility, and (6) the lending facilities established for American
International Group, Inc. ("AIG").

In addition to the credit facilities discussed in this report, the Board also has
authorized the establishment of the following credit facilities under section 13(3)
of the Federal Reserve Act: the Money Market Investor Funding Facility
("MNlIFF"),2 certain residual financing for Citigroup, Inc., the Term Asset-Backed
Securities Loan Facility ("TALF"), and certain residual financing for Bank of
America Corporation following its acquisition of Merrill Lynch & Co., Inc. No
loans have been made under these credit facilities to date. When a loan is made
under any of these facilities in the future, the Board will file a report with the
Committees concerning the facility in accordance with section 129(b) of the
EESA.

Additional information concerning the MMIFF, TALF, and the residual

financing for Citigroup and Bank of American is available in the reports filed with

1 The Board's first periodic report was filed on December 29, 2008.
2 On February 3, 2009, the Board extended the termination date of the MMIFF
until October 30, 2009.
1
the Committees on October 28, 2008, December 1, 2008, December 2, 2008, and
January 27,2009. As indicated in these reports, the Board expected that the terms
for the MMIFF and TALF might be modified to improve the effectiveness and
operations of the programs. Consistent with these efforts, the Board recently
announced a number of material changes to the NIMIFF and TALF.

1Nith respect to the MMIFF, the Board announced on January 7, 2009, that
the set of institutions eligible to participate in the MNIIFF was expanded to include
a broader set of money market investors. The Board also authorized the
adjustment of several of the economic parameters of the MMIFF. More
information concerning this set of changes to the NIMIFF is available on the
Board's public website?

On February 6, 2009, the Board announced additional terms and conditions,

including loan rates and collateral haircuts, for the TALF, and on February 10,
2009, announced its readiness to undertake a substantial expansion of the TALF.
The expansion could increase the size of the TALF to as much as $1 trillion and
could broaden the eligible collateral to encompass additional types of AAA-rated
asset-backed securities, such as commercial-mortgage backed securities and
private-label residential-mortgage backed securities. More information concerning
these changes and the potential for expansion of the TALF in the future is available
on the Board's public website. 4

In addition, on February 23,2009, the Board announced and launched a new

section of its public website-"Federal Reserve Credit and Liquidity Programs and
the Balance Sheet." The new website expands the information provided about the
policy tools the Federal Reserve has employed to address the financial crisis and
simplifies access to that information. The website section presents a wide range of
material, including a detailed explanation the Federal Reserve's balance sheet;
descriptions of all of the Federal Reserve's liquidity and credit facilities; discussion
of the Federal Reserve's risk management practices; information on the types and
amounts of collateral being pledged at the various lending facilities; and an
extensive set of links to Congressional reports and other resources.

3 See !lttp:i/vvww.federalreserve. gov/newsevents/press/monetary/20090 107a.htm.

4 See http://www.federalreserve.gov/newsevents/press/monetaIy/20090206a.htm
and http://www.federalreserve.gov/newsevents/press/monetary/20090210b.htm.

2
 A. :Term Securities Lending Facility

On March 11,2008, the Board, in conjunction with the Federal Open Market
Committee ("FOMC"), established the Term Securities Lending Facility ("TSLF")
and authorized the Federal Reserve Bank of New York (the "New York Reserve
Bank") to lend under this program. The TSLF generally was intended to promote
liquidity in the financing markets for Treasury and other collateral and, in doing so,
foster improved functioning of the financial markets more broadly. Under the
TSLF, the Federal Reserve auctions term loans of U.S. Treasury securities to
primary dealers and accepts a broad range of other securities as collateral. On
July 30, 2008, the Federal Reserve established the TSLF Options Program ("TOP")
as an extension of the TSLF. Under the TOP, options to draw shorter-term TSLF
loans at future dates are auctioned to the primary dealers. All loans under the
facility are collateralized by a pledge of other securities deemed eligible collateral
by the New York Reserve Bank. Eligible collateral includes (i) all collateral
eligible for tri-party repurchase agreements arranged by the Open Market Trading
Desk, such as Treasury obligations and debt obligations (including mortgage-
backed securities) for which the payment of the principal and interest is fully
guaranteed by an agency of the United States, and (ii) investment grade corporate,
municipal, mortgage-backed and asset-backed securities. Collateral is pledged by
winning dealers from their clearing bank custodial accounts and valued daily.
Additional information concerning the TSLF and TOP is available in the report
provided to the Committees on November 3, 2008.

Update. In light of the continuing and substantial strains in many financial

markets, on February 3,2009, the Board and the FOMC extended the termination
date of the TSLF until October 30,2009. As of February 18,2009, the aggregate
par value of Treasury securities lent under the TSLF (including the TOP) was
$115.3 billion. As of the same date, the market value of the collateral pledged
under the TSLF (including the TOP) was $146.1 billion. The Board does not
anticipate any losses to the Federal Reserve or the taxpayers as a result of
securities lending under the TSLF. Any potential losses are mitigated by haircuts
on the value of the collateral, daily revaluation of the collateral, and limits on the
participation of individual dealers. Moreover, loans extended under this program
are with recourse to the borrower beyond the specific collateral pledged.

3
 B. ~oan to Maiden Lane LLC to facilitate the acquisition by JPMorgan
~=hase & Company of Bear Stearns

On March 16, 2008, the Board authorized the New York Reserve Bank to
make a senior loan to a limited liability company, Maiden Lane LLC ("Maiden
Lane"), to acquire $30 billion of identified, less liquid assets of Bear Steams to
facilitate the purchase of Bear Steams by JPMorgan Chase. As part of the
agreement among the parties, JPMorgan Chase lent $1 billion to Maiden Lane that
is subordinated for repayment purposes to the New York Reserve Bank's loan.
When the loan closed on June 26, 2008, because of adjustments in the values of
some of the assets purchased by Maiden Lane from Bear Steams, the New York
Reserve Bank actually lent $28.8 billion to Maiden Lane, and JPMorgan Chase
actually lent $1.1 billion to Maiden Lane. The New York Reserve Bank's loan is
secured by a first priority security interest in all of the assets of Maiden Lane.
Additional information concerning the loan to Maiden Lane is available in the
report provided to the Committees on November 3,2008. 5

Update. As of February 18,2009, the principal amount of the loan extended

by the New York Reserve Bank to Maiden Lane was $28.8 billion. The current
fair value of the portfolio holdings of Maiden Lane reported on the Board's
weekly HA.l Statistical Release, "Factors Affecting Reserve Balances of
Depository Institutions and Condition Statement of the Federal Reserve Banks,"
for February 18, 2009, was $25.9 billion. Consistent with generally accepted
accounting principles ("GAAP"), the portfolio holdings are revalued as of the end
of each quarter to reflect an estimate of what would be received if the assets were
sold on the measurement date. The fair value reported for February 18, 2009, is
based on the revaluations as of December 31, 2008. The fair value determined
through these revaluations may fluctuate over time. The fair value of the portfolio
holdings that is reported on the weekly HA.l release also reflects any accrued
interest earnings, expense payments and, to the extent any may have occurred since
the most recent measurement date, realized gains or losses.

Despite the decline in the current fair value of the collateral, the Board does
not anticipate that the loan to Maiden Lane will result in any net loss to the Federal
Reserve or taxpayers. The Maiden Lane loan was extended with the expectation

5 The Federal Reserve also extended a bridge loan under section 13(3) to Bear
Steams on March 14, 2008. This loan was repaid in full and with interest on
March 17, 2008. Additional information concerning this bridge loan is available in
the report filed with the Committees on November 3,2008.
4
that the value of its portfolio would be realized either by holding the assets to
maturity or by selling the assets over an extended period of time during which the
full value of the assets could be realized. The ten-year term of the loan provides
Maiden Lane's asset manager, BlackRock Financial Management, Inc., an
opportunity to dispose of the assets in an orderly manner over time. In addition,
IPMorgan Chase will absorb the first $1.1 billion of realized losses, should any
occur. Moreover, under the terms of the agreement, the New York Reserve Bank
is entitled to receive interest payments on the loan to Maiden Lane as well as any
residual cash flow generated by the collateral after the loans to the New York
Reserve Bank and IPMorgan Chase are repaid.

C. 'primary Dealer Credit Facility

On March 16,2008, the Board established the Primary Dealer Credit Facility
("PDCF") and authorized the New York Reserve Bank to lend under that facility.
The PDCF is an overnight loan facility that provides funding to primary dealers
secured by collateral eligible for tri-party repurchase agreements in the systems of
the major clearing banks. The facility is intended to help address the liquidity
needs of primary dealers and foster improved functioning of financial markets
more generally. On September 21, 2008, the Board authorized the London-based
broker-·dealer subsidiaries of Merrill Lynch & Co., Inc. ("Merrill Lynch"), The
Goldman Sachs Group, Inc. ("Goldman Sachs"), and Morgan Stanley to borrow
from the New York Reserve Bank under the PDCF. In addition, with the separate
approval of the applications of Goldman Sachs and Morgan Stanley to become
bank holding companies, the Board authorized the New York Reserve Bank to
extend credit to the U.S. broker-dealer subsidiaries of these firms under the PDCF
against the types of collateral that may be pledged by depository institutions at the
Federal Reserve's primary credit facility. The Board extended the same collateral
arrangement to the U.S. broker-dealer subsidiary of Merrill Lynch. On
November 23,2008, in connection with the other actions taken by the Treasury
Department, the Federal Deposit Insurance Corporation and the Federal Reserve
with respect to Citigroup, Inc., the Board authorized the London-based broker-
dealer subsidiary of Citigroup, Inc. to borrow from the New York Reserve Bank
under the PDCF.

Collateral eligible to be pledged under the PDCF includes all collateral

eligible as of September 12,2008, for pledge in tri-party repurchase agreement
transactions through the major clearing banks. Such collateral includes (i) all
collateral eligible for pledge in open market operations, such as Treasury
obligations and debt obligations (including mortgage-backed securities) for which

5
the payment of the principal and interest is fully guaranteed by an agency of the
United States, and (ii) corporate securities, municipal securities, mortgage-backed
securities and asset-backed securities that as of September 12,2008, were eligible
for pledge in tri-party repurchase agreement transactions through the major
clearing banks. The U.S. broker-dealer subsidiaries of Merrill Lynch, Goldman
Sachs, and Morgan Stanley also may borrow against types of collateral that may be
pledged by depository institutions at the discount window. Additional information
concerning the PDCF, including the expansions described above, is available in the
report provided to the Committees on November 3, 2008.

![]pdate. In light of the continuing and substantial strains in many financial

markets, on February 3, 2009, the Board extended the termination date of the
PDCF until October 30, 2009. As of February 18,2009, the amount of loans
outstanding under the PDCF was $25.3 billion. As of the same date, the market
value of the collateral pledged under the PDCF was $27.2 billion. The Board does
not anticipate that lending under the PDCF will result in any losses to the Federal
Reserve or the taxpayers. Any loans made under the PDCF are with recourse to
the broker-dealer entity beyond the pledged collateral, and the risk of loss is
mitigated by daily revaluation of the collateral and haircuts on the collateral value.

D. ~Asset-Backed Commercial Paper Money Market Mutual Fund

;Liguiditv Facility

On September 19,2008, the Board authorized the creation of the Asset-

Backed Commercial Paper Money Market Mutual Fund Liquidity Facility
("AMLF") and authorized the Federal Reserve Bank of Boston ("Boston Reserve
Bank") to lend under the AMLF. The AMLF provides funding to U.S. depository
institutions and bank holding companies to finance their purchases of high-quality
asset-backed commercial paper ("ABCP") from money market mutual funds
("MMMFs") under certain conditions. The program is intended to assist money
market funds that hold such paper in meeting demands for redemptions by
investors and to foster liquidity in the market for ABCP as well as the market for
money market funds more generally. The collateral for loans is the pledged
ABCP, which is equal to the amount of the advances. Additional information
concerning the AMLF is available in the report provided to the Committees on
November 3, 2008.

Update. In light of the continuing and substantial strains in many financial

markets, on February 3, 2009, the Board extended the termination date of the
AMLF until October 30,2009. As of February 18,2009, the aggregate amount of

6
outstanding advances under the AMLF was $12.7 billion for which an equal
amount of ABCP at amortized cost has been pledged as collateral. The Board does
not expect that advances under the AMLF will result in any realized losses to the
Federal Reserve or the taxpayers. The program is limited to ABCP that receives
the highest rating from a major credit-rating agency. Moreover, ABCP is
supported by the assets backing the paper.

E. !Commercial Paper Funding Facility

On October 14, 2008, the Board authorized the creation of the Commercial
Paper Funding Facility ("CPFF") and authorized the New York Reserve Bank to
extend credit under the facility. The CPFF is designed to provide a liquidity
backstop to U.S. issuers of commercial paper through a special purpose vehicle
("SPV~") that purchases three-month unsecured and asset-backed commercial paper
directly from eligible issuers. Loans provided to the Spy have a three-month term
to match the term of the commercial paper acquired. Additional information
concerning the CPFF is available in the report provided to the Committees on
October 14, 2008.

!lJpdate. In light of the continuing and substantial strains in many financial

markets, on February 3, 2009, the Board extended the termination date of the
CPFF until October 30,2009. As of February 18,2009, the aggregate amount of
outstanding advances under the CPFF was $246.5 billion. As of the same date, the
value of the collateral pledged under the CPFF, as determined on an amortized cost
basis, was $248.7 billion. The Board does not anticipate that advances made under
the CPFF will result in any losses to the Federal Reserve or the taxpayers. All
advances to the SPY are made with full recourse to the SPY and are secured by all
the assets of the SPY. In addition, in situations where the obligations acquired by
the SPY are ABCP, the Federal Reserve's advances will be secured by the assets
that support the commercial paper. To use the CPFF, each issuer must pay a
proportional fee, and all fees are retained by the Spy to provide an additional
cushion against losses. In addition, issuers of commercial paper that is not ABCP
pay an additional fee, provide acceptable collateral, or have the paper indorsed.

F. Loans to American International Group, Inc.

On November 10,2008, the Board and the U.S. Department of the Treasury
("Treasury Department") announced the restructuring of the U.S. government's
support for AIG. AIG is a large, diversified financial services company that, as of
September 30, 2008, reported consolidated total assets of slightly more than
7
$1 trillion. In 2007, AIG's U.S. life and health insurance businesses ranked first in
the United States in tenns of net premiums written ($51.3 billion), and its U.S.
property and casualty insurance businesses ranked second in the United States in
tenns of net premiums written ($35.2 billion). In addition to its on-balance-sheet
positions, AIG is a major participant in a wide range of derivatives markets
through its Financial Services division, and is a significant counterparty to a
number of major national and international financial institutions. The actions
taken by the Board and the Treasury Department were intended to facilitate AIG's
execution of its plan to sell certain of its businesses in an orderly manner, resolve
temporary liquidity issues, and promote financial stability, while protecting the
interests of the U.S. government and taxpayers.

As part of this restructuring, the Treasury Department acquired $40 billion

in newly-issued senior preferred stock of AIG, using funding from the Troubled
Asset Relief Program ("TARP") established by the EESA. This investment
constituted an important part of the restructuring actions by providing new equity
capital to AIG, a tool that was not available to the U.S. government at the time the
Federal Reserve initially provided liquidity to AIG in September 2008. In
conjunction with the Treasury Department's investment, the Board authorized the
New York Reserve Bank to-

1. Restructure the credit facility initially provided to AIG on September 16,

2008 (the "Revolving Credit Facility"), by, among other things, reducing
to $60 billion from $85 billion the total amount of credit available under
the facility, reducing the interest rate and fees payable under the facility,
and extending to five years from two years the tenn of the facility;

2. Provide up to $22.5 billion in senior secured credit to a newly fonned

limited liability company, Maiden Lane II, LLC ("ML-II"), to partially
fund the acquisition by ML-II from AIG of approximately $40 billion
(par value) in residential mortgage-backed securities ("RMBS")
purchased by AIG with the cash collateral received through the securities
lending operations of AIG's regulated insurance subsidiaries; and

3. Provide up to $30 billion in senior secured credit to a separate, newly

fonned limited liability company, Maiden Lane III, LLC ("ML-III"), to
partially fund the acquisition by ML-III from the current counterparties
of AIG of approximately $69 billion (par value) in multi-sector
collateralized debt obligations ("CDOs") protected by credit default
swaps and similar contracts written by AIG.

8
Additional infonnation concerning each of these authorizations and credit facilities
is provided in the report filed with the Committees on November 17,2008.

:Update.

Revolving Credit Facility. As of February 18,2009, AIG had $37.4 billion

in advances outstanding under the Revolving Credit Facility.

As discussed in the report filed on November 17,2008, AIG is

unconditionally obligated to repay the unpaid principal amount of all advances
under the Revolving Credit Facility, together with accrued and unpaid interest
thereon and any unpaid fees, on the maturity date. Also, all outstanding balances
under the Revolving Credit Facility are secured by the pledge of assets of AIG and
its primary non-regulated subsidiaries, including AIG's ownership interest in its
6
regula1ted U.S. and foreign subsidiaries. Furthennore, AIG's obligations to the
New York Reserve Bank continue to be guaranteed by many of AIG's domestic,
nonregulated subsidiaries that have more than $50 million in assets. 7 These
guarantees themselves are separately secured by assets pledged to the New York
Reserve Bank by the relevant guarantor. Additional subsidiaries of AIG may be
added as guarantors over time by signing a short supplemental agreement.

The New York Reserve Bank's agreement to provide advances under the
Revolving Credit Facility also is specifically conditioned on the Reserve Bank
being satisfied in its sole discretion with the nature and value of the collateral
securing AIG's obligations at the time of the advance, and on the Reserve Bank
being reasonably satisfied in all respects with the corporate governance of AIG.
Representatives of the New York Reserve Bank are in regular contact with AIG's
senior management and attend all AIG board of directors meetings, including
committee meetings, as an observer. The New York Reserve Bank also has staff
on-site at AIG to monitor the company's funding, cash flows, use of proceeds and
progress in pursuing its global divestiture plan. Control and management of the
daily business and operations of AIG and its subsidiaries continue to be vested in
the new chainnan and chief executive officer of AIG and his management team.
These and other provisions protect the interests of the Federal Reserve, the

6 In the case of foreign subsidiaries, the equity interest the Reserve Bank will
accept as collateral is limited to 66 percent ownership in order to avoid adverse tax
consequences for AIG or its subsidiaries.
7 Regulated subsidiaries, such as insurance companies, typically are not pennitted
to provide such guarantees.
9
Treasury Department, and taxpayers in providing for full repayment by AIG of all
of its Federal Reserve borrowing.

.I[n light of the complexities involved in valuing the extremely broad and
diverst:: range of collateral and guarantees securing all advances under the
Revolving Credit Facility, the Board believes any estimate at this time of the
aggregate value that ultimately will or may be received from the sale of collateral
or the enforcement of the guarantees in the future would be speculative and could
interfere with the goal of maximizing value through the company's global
divestiture program and, consequently, diminish the proceeds available to repay
the Revolving Credit Facility. Given the substantial assets and operations
supporting repayment of the loan, as well as the equity interest in AIG that the U.S.
Treasury Department has received or will receive, the Board does not expect that
the Revolving Credit Facility will result in any net loss to the Federal Reserve or
taxpayers.

"Maiden Lane II and Maiden Lane III. ML-II commenced operations on

December 12,2008, through the acquisition from AIG of approximately
$39.3 billion (par value) ofRMBS. As of February 18,2009, the principal amount
of the ]loan extended to ML-II by the New York Reserve Bank was $18.8 billion.

:ML-III commenced operations on November 25,2008, through the

acquisition of approximately $46.1 billion (par value) of multi-sector CDOs. An
additional $16 billion (par value) of multi-sector CDOs were acquired by ML-III
through additional closings that occurred on December 18, 2008, and
December 22,2008. As of February 18,2009, the principal amount of the loan
provided to ML-III by the New York Reserve Bank was $24.3 billion.

The current fair values of the net portfolio holdings ofML-II and ML-III
reportt::d on the weekly HA.1 release for February 18, 2009, were $18.6 billion and
$27.7 billion, respectively. Consistent with GAAP, the portfolio holdings ofML-II
and ML-III will be revalued as of the end of each quarter to reflect an estimate of
what would be received if the assets were sold on the measurement date. The fair
value reported for February 18,2009, is based on the revaluations as of
December 31, 2008. The fair value determined through these revaluations may
t1uctuate over time. 8 The fair values of the portfolio holdings ofML-II and ML-III

8 The fair value of the additional multi-sector CDOs acquired after the
commencement date of NIL-III was determined in connection with the acquisition
of such obligations by ML-III.
10
that an~ reported on the Board's weekly HA.l release reflect the most recent
valuations of the portfolio holdings ofML-II and ML-III adjusted to reflect any
accrued interest earnings, expense payments and, to the extent any may have
occurred since the most recent valuation date, realized gains and losses.

Because the collateral assets for the loans to ML-II and ML-III are expected
to generate cash proceeds and will be sold over time, the current reported fair
values of the net portfolio holdings of ML-II and ML-III do not reflect the amount
of aggregate proceeds that the Federal Reserve could receive from payments on the
assets over time or from the sale of the assets of these entities over time. The
collateral will be sold over time in a manner that is orderly and designed to reduce
the effects of the unnaturally strong downward market pressures that have been
associated with the recent liquidity crisis. In addition, AIG has a $1 billion
subordinated position in ML-II and a $5 billion subordinated position in ML-III.
These subordinated positions are available to absorb first any loss that ultimately is
incurred by ML-II or ML-III, respectively. The Federal Reserve also is entitled to
receive: interest on the loans to ML-II and ML-III while they are outstanding and
5/6ths and 2/3rds of any residual cash flow generated by the collateral held by ML-
II and J\1L-III, respectively, after the senior note of the New York Reserve Bank
and the: subordinated note of AIG are repaid.

Given these protections, the Board does not believe that the extensions of
credit to ML-II or ML-III will result in any net cost to the taxpayers resulting from
the failure to repay the principal and interest of the senior loans provided by the
New York Reserve Bank.

Securities Borrowing Facility. As explained in the report filed with the

Committees on November 17,2008, the proceeds received by AIG and its
insurance subsidiaries from the establishment of Maiden Lane II were used to
terminate the securities lending program operated by certain of AIG's regulated
insurance subsidiaries. Accordingly, the $37.8 billion securities borrowing facility
authorized by the Board for AIG in October 2008 under section 13(3) of the
Federal Reserve Act was terminated on December 12, 2008, and all outstanding
balances under that facility were repaid in full. During the term of the facility, the
Federal Reserve received interest on the loans provided and, as expected, the
securities borrowing facility did not result in any losses to the Federal Reserve or
the taxpayers.

11
 BOARD OF GOVERNORS
OF THE
F"EOERAL RESERVE SYSTEM
WASHINGTON, D. C. 2QSSI

BEN S. BEl'l NAN KE

CHAIl'lMAN

March 9, ~009

The Honorable Christopher J. Dodd

Chainnan
Committee on Banking, Housing,
and Urban Affairs
United States Senate
Washington, D.C. 20510

Dear Mr. Chainnan:

Pursuant to section 129(a) of the Emergency Economic Stabilization Act of2008,

enclosed is the Board's report concerning the Board's authorization on March 2,2009,
to provide credit, Wlder section 13(3) ofthe Federal Reserve Act (12 U.S.c. § 343), to
American International Group, Inc. ("AIG'') to facilitate the securitization of the net cash
flows of designated blocks of life insurance policies written by domestic life insurance
subsidiaries of AIG. As discussed in the enclosed report, the Board's authorization was
taken as part of a broader restructuring of the assistance provided by the Department of the
Treasury and the Federal Reserve to AIG in order to promote financial stability.

/JelY,

Enclosure

Identical also sent to: Ranking Member Shelby, Committee on Banking, Housing, and
Urban Affairs; Chairman Frank and Ranking Member Bachus, Committee on Financial
Services.
 SOARD OF GOVERNORS
OF TH E:
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. i20SSI

BEN 5. BERNANKE
CHAIRMAN

March 9, 2009

Ms. Elizabeth Warren

Chairperson
Congressional Oversight Panel
732 North Capitol Street, N.W.
Mailstop: BOC
Wasbington, D.C. 2040 I

Dear Ms. Warren:

Pursuant to section 129(a) of the Emergency Economic Stabilization Act of2008,

enclosed is a copy ofthe Board's report filed on March 9, 2009, with the House Financial
Services Committee and the Senate Banking, Housing, and Urban Mfairs Committee,
concerning the Board's authorization on March 2, 2009, to provide credit, under section 13(3)
of the Federal Reserve Act (12 U.S.c. § 343), to American International Group, Inc. ("AIG") to
facilitate the securitization of the net cash flows of designated blocks oflife insurance policies
written by domestic life insurance subsidiaries of AIG. As discussed in the enclosed report, the
Board's authorization was taken as part of a broader restructuring of the assistance provided by
the Department of the Treasury and the Federal Reserve to AIG in order to promote financial
stability.

Sincerely,

Enclosure
cc: The Honorable John E. Sununu
The Honorable Jeb Hensarling
Mr. Richard H. Neiman
Mr. Damon A. Silvers
 Report Pursuant to Section 129 of the
Emergency Economic Stabilization Act of 2008:
Restructuring of the Government's Financial Support to
the American International Group, Inc.
on March 2, 2009

Overview

On March 2, 2009, the Board of Governors of the Federal Reserve System (the
"Board"), based on the unanimous vote of its five members, announced its approval
under section 13(3) of the Federal Reserve Act (12 U.S.C. § 343) for the Federal Reserve
Bank of New York (the "Reserve Bank") to extend credit to American International
Group, Inc. ("AIG") in connection with the securitization of the net cash flows of
designated blocks of life insurance policies written by domestic life insurance
subsidiaries of AIG. The proceeds of this new Reserve Bank credit will be used to repay
an equivalent amount of borrowing by AIG under the revolving credit facility (the
"Revolving Credit Facility") established by the Reserve Bank in September 2008.

In connection with this authorization under section 13(3) of the Federal Reserve
Act, the Board separately authorized the Reserve Bank to take certain actions to reduce
and restl1lcture the Revolving Credit Facility. Part of this restructuring will involve the
exchange of a portion of the amount owed by AIG under the Revolving Credit Facility
for preff:rred equity interests in two special purpose vehicles that will be established to
hold the stock of two life insurance subsidiaries of AIG.

These new measures taken by the Department of the Treasury (the "Treasury
Department") and the Board help address the capital and liquidity needs of AIG, which
continues to be systemically important, facilitate the execution of AIG's global
divestiture program in an orderly manner, promote market stability, and protect the
interests of the U.S. government and taxpayers.

As Vice Chairman Kohn noted in his testimony before the Senate Committee on
Banking, Housing, and Urban Affairs on March 5, 2009, the decision to provide
additional assistance to AlG was both difficult and uncomfortable for the Federal
Reserve. However, the Federal Reserve and the Treasury detennined that the risks and
potential costs to consumers, municipalities, small businesses and others who depend on
AlG for insurance protection in their lives, operations, pensions, and investments, as well
as the risks to the wider economy, of not providing this assistance during the current
economic environment were unacceptably large. The disorderly failure of systemically
important financial institutions during this period of severe economic stress would only
deepen the current economic recession.
Background

AIG is a large, diversified financial services company that, as of September 30,

2008, reported consolidated total assets of slightly more than $1 trillion. 1 AIG operates
in four general business lines through a number of subsidiaries: (i) general insurance;
(ii) life insurance and retirement services; (iii) financial services; and (iv) asset
management. In 2007, the last year for which annual industry data is available, AIG's
U.S. life: and health insurance businesses ranked first in the United States in terms of net
premiums written ($51.3 billion) and third in terms of total assets at year-end ($364
billion). For the same period, AIG's U.S. property and casualty insurance businesses
ranked second in the United States in terms of net premiums written ($35.2 billion) and
third in tenns of total assets at year-end ($124.5 billion). AIG conducts insurance and
finance operations in more than 130 countries and jurisdictions and has more than 74
million individual and corporate customers and 116,000 employees globally. In the
United States, it has approximately 30 million customers and 50,000 employees, and
provides insurance to approximately 180,000 small businesses and other corporate
entities, which employ approximately 106 million people in the United States.

In addition to its on-balance-sheet positions, AIG is a major participant in a wide

range of derivatives markets through its Financial Services division, and particularly
through its AIG Financial Products business unit ("AIGFP"), and is a significant
counterparty to a number of major national and intemationalfinancial institutions. AIG
also is a major provider of protection to municipalities, pension funds, and other public
and private entities through guaranteed investment contracts and products that protect
participants in 401(k) retirement plans. A significant portion of the guaranteed
investment agreements and financial derivative transactions entered into by AIGFP
include provisions that require AIGFP, upon a downgrade of AIG's long-term debt
ratings, to post additional collateral or, with the consent of the counterparties, assign or
repay its positions or arrange a substitute guarantee of its obligations by an obligor with
higher debt ratings.

Financial markets in the United States have been experiencing significant stress
for more than a year. During this period, investor confidence in U.S. financial
institutions has been shaken by sharp and broad-based declines in both equity and home
prices; continuing increases in mortgage delinquencies and defaults; resulting substan1ial
drops in the values of mortgages and mortgage-backed securities; dislocations in some
term funding markets; losses caused by the failure of several significant domestic
financial institutions; and large losses at financial institutions in other parts of the worM,
among other things. The strains in financial markets and pressures on financial firms

1 September 30, 2008, is the reporting date closest to the date on which the Federal
Reserve's involvement with AIG commenced. As of December 31, 2008, the company's
reported total consolidated assets were $860 billion.
2
have contributed to a significant deterioration in the economic outlook for both the
United States and many other countries.

In light of these and other facts, the Federal Reserve and the Treasury Department
have taken a series of steps since September 2008, to address the liquidity and capital
needs of AIG and thereby help stabilize the company, prevent a disorderly failure, and.
protect financial stability, which "is a prerequisite to the resumption of economic growth.
The Board previously has provided the Committees a description of, and the reasons for,
the actions taken with respect to AIG in 2008 by the Federal Reserve under section 13(3)
of the Federal Reserve Act and the Treasury Department under the Emergency Economic
Stabilization Act ("EESA") in the reports filed with the Committees on October 14,
November 3, and November 17,2008. 2

Despite these actions, AIG continued to face strong liquidity and capital pressures
in the fourth quarter of 2008. On Monday, March 2, 2009, AIG announced a loss of
approximately $62 billion for the fourth quarter of 2008, ending a year in which AIG
suffered approximately $99 billion in total net losses. As a consequence of increased
economic weakness and market disruption, the insurance subsidiaries of AIG, like many
other insurance companies, recorded significant losses on investments in the fourth
quarter of 2008. Commercial mortgage-backed securities and commercial mortgages
experienced especially severe impairment in market value, requiring a steep markdo\\iTI
on the companies' books, despite a lack of significant credit losses on these assets to date.

1be loss of value in the AIG's investment portfolios, which totaled approximately
$18.6 billion pre-tax, was primarily attributable to the holdings of the company's
insurance subsidiaries. This loss was a substantial contributor to AIG's loss in the fOllrth
quarter of2008. The remainder of the fourth quarter loss was significantly associated
with the mark to market of certain assets transferred during the quarter to two special
purpose vehicles established by the Federal Reserve to help relieve the capital and
liquidity pressure on AIG from exposure to those assets, losses due to accounting on
securities lending transactions that occurred during the fourth quarter, impairment of
deferred tax assets and goodwill, and other market valuation losses. At the same time,
general economic weakness along with a tendency of the public to pull away from a
company that it viewed as having an uncertain future, hurt AIG's ability to generate new
business during the second half of 2008 and caused a noticeable increase in policy
surrenders.

2 These reports are available on the Board's public website at

http://www.federalreserve.gov/monetarypolicylbstreportsresources.htm. On
February 25, 2009, the Board filed a report with the Committees that provided an update
on the facilities provided AIG by the Federal Reserve. This report also is available on the
Board's public website at the address indicated.
3
 In addition, the extreme financial and economic conditions that existed during the
fourth quarter have greatly complicated and delayed AIG's plans to divest significant
parts of the company in order to repay the U.S. government for its previous support.
Would-be buyer themselves are experiencing financial strains and lack access to
financing that would make such purchases possible. While progress has been made in
reducing the risks that would be posed to the financial system by a disorderly failure of
AIG, the company continues to pose systemic risks. A disorderly failure of AlG would
still impose unnecessary and burdensome losses on many households and businesses,
would deepen and extend market disruptions and asset price declines, further constrict the
flow of credit to households and businesses in the United States, and materially worsen
the recession the economy is enduring.

March 2009 Restructuring Authorizations

In the context of this backdrop, on March 2, 2009, the Treasury Department and
the Board announced a restructuring of the government's assistance to AIG in order to
stabilize this systemically important company in a manner that best protects the U.S.
taxpayer. These actions are designed to help stabilize the company and the financial
system, enhance the company's capital and liquidity, and facilitate the orderly compleition
of the company's global divestiture program. Importantly, these restructuring actions also
will begin to separate the major non-core businesses of AIG. The long-term solution fi)r
the company, its customers, the U.S. taxpayer, and the financial system is the orderly
restructuring and refocusing of the firm.

Capital Investment by the Treasury Department

A key component of the restructuring involves the provision of new preferred

equity capital to AIG by the Treasury Department, and a change in the terms of the
perpetual preferred shares acquired by the Treasury Department in November 2008. In
particular, the Treasury Department will create a new equity capital facility for AIG
pursuant to which it may obtain up to $30 billion of capital as needed over the 5-year life
of the facility in exchange for newly-issued non-cumulative preferred stock. The
preferred stock issued to the Treasury Department under this facility will pay a non-
cumulative dividend of 10 percent per year, and will have certain limited voting rights if
AIG does not pay dividends on the preferred for four periods, whether consecutive or not.
The Treasury Department also will receive warrants that will entitle the Treasury
Department to purchase 1 percent of the common stock of AIG issued and outstanding on
the commencement date of the capital facility, subject to customary anti-dilution
adjustments.

The Treasury Department also will exchange the $40 billion of cumulative
perpetual preferred shares that it acquired in November 2008 for preferred shares with
revised tenns that more closely resemble common equity. The new terms will provide

4
for non-cumulative dividends and limit AIG's ability to redeem the preferred stock
except with the proceeds from the issuance of equity capital. Additional infonnation
concerning the terms of the additional or modified preferred shares of AIG to be acquired
by the Treasury Department are available on the Treasury Department's public website. 3

It should be noted that, as required by the Revolving Credit Facility, AIG has
issued shares of perpetual, non-redeemable convertible participating preferred stock to a
trust that will hold the stock for the benefit for the Treasury Department. Under the tenus
of the preferred stockissuance, the preferred stock is convertible into AIG's common
stock. The conversion formula provides that the Trust will receive 79.9 percent of AIO's
common stock on a fully diluted basis, less the percentage of common stock that may be
acquired by or for the benefit of the Treasury Department as a result of warrants or other
convertible preferred stock held by the Treasury.

Board's Section 13(3) Authorization to Facilitate the Securitization ofthe Net

Cash Flows ofDomestic Life Insurance Policies

In conjunction with the Treasury Department's investment authorization, the

Board authorized the Reserve Bank to extend, pursuant to section 13(3) of the Federal
Reserve Act, up to approximately $8.5 billion in credit to special purpose vehicles
("SPVs") to be established by domestic life insurance subsidiaries of AIG. The SPVs
would repay the loans from the net cash flows they receive from designated blocks of
existing life insurance policies held by the parent insurance companies. The total amount
of principal and interest due to the Federal Reserve on this credit would represent a fixed
percentage of the estimated net cash flow from the underlying policies that would flow to
the borrowing Spys. This "buffer" between the amount of the Federal Reserve's credit
extension and the net cash flows from the insurance policies will provide the Federal
Reserve with security and provide reasonable assurance of repayment.

The proceeds of the new credit extensions will be used by AIG to pay down an
equivalent amount of the company's outstanding borrowings under the Revolving Credit
Facility. The amounts lent, the percentage subtracted from the par value of the collateral
taken by the Reserve Bank, and the other tenus of the credit to be extended will be
determined based on valuations acceptable to the Reserve Bank following due diligence
to be conducted by the Reserve Bank and its advisors. In light of this required valuation
process, the buffer that will exist between the estimated net cash flows from the
designated blocks of life insurance policies and other expected features of the
securitization structure, the Board does not expect at this time that the credit extended
under this authorization will result in any losses to the Federal Reserve or the taxpayer.

3 See http://www.treasurv.gov/press/releases/reports/030209 aig term sheet.pdf.

5
 Other Actions Taken by the Board

In addition to this new authorization under section 13(3) of the Federal Reserve
Act, the Board authorized a number of additional actions to reduce and restructure AIG's
outstanding debt under the Revolving Credit Facility, which stood at $38.2 billion as of
February 25, 2009. First, the Revolving Credit Facility will be reduced by up to
approximately $26 billion in exchange for preferred interests in two Spys created to hold
all of the outstanding common stock of American Life Insurance Company ("ALICO")
and American International Assurance Company Ltd. ("ALA"), two life insurance holding
company subsidiaries of AIG. AIG will retain control of ALICO and ALA, though the
Reserve Bank will have certain governance rights to protect its interests.

The actual value of the Spy preferred interests received by the Reserve Bank and
the amount by which the outstanding obligation of AlG under the Revolving Credit
Facility will be reduced as a result of the exchange will be a percentage of the fair'market
value of AlA and ALICO based on valuations acceptable to the Reserve Bank. The
coupon rate, voting rights, and other tenns of the preferred equity interests also will be
detennined after further consultations with AIG and the Reserve Bank. This action
would be a positive step toward preparing these two subsidiaries of AIG for sale to third
parties or disposition through an initial public offering, the proceeds of which would
return to the Federal Reserve through its preferred equity interests in the SPVs that
control these two companies.

In addition, the total amount available under the Revolving Credit Facility will be
reduced from $60 billion to $25 billion. The interest rate payable on outstanding
advances under the Revolving Credit Facility, which currently is 3-month LIBOR plus
300 basis points, will be modified by removing the existing floor (3.5 percent) on the
3-month LIBOR rate. .

All other material tenns of the Revolving Credit Facility will remain unchanged.
For example, AIG will remain unconditionally obligated to repay the unpaid principal
amount of all advances, together with accrued and unpaid interest thereon and any unpaid
fees, on the maturity date. Also, all outstanding balances under the Revolving Credit
Facility will continue to be secured by the pledge of a substantial portion of the assets of
AIG and its primary non-regulated subsidiaries, including AIG's ownership interest in its
regulated U.S. and foreign subsidiaries, as described in the reports previously submitted
to the Committees.