Fed Profits From AIG Deal

The Federal Reserve has taken some knocks for giving banks 100 cents on the dollar for credit insurance bought from AIG, but that may have been a sound investment. According to the Financial Times, the Fed is sitting on billions in paper profits from that part of the bank bailout. During the bailout, a Fed-financed vehicle called Maiden Lane III bought underlying derivatives so that insurance contracts written on them could be terminated. At the time of purchase, the derivatives had a face value of $62.1 billion and a market value of $29.6 billion, but thanks to a rallying credit market, their estimated market value is now at least $45 billion. It won't be easy to realize that profit, though, since derivatvies are generally illiquid and therefore hard to sell.