Deutsche's AIG Bailout

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We’ve heard a lot about how Goldman Sachs (GS)benefited from the federal government’s bailout of American International Group. But thanks to some new candor by the Federal Reserve, we’re learning a bit more about how Germany’s Deutsche Bank (DB)may have benefited from the AIG rescue package.

Deutsche appears to have sold two commercial real estate-related collateralized debt obligations to a Fed-sponsored entity that bought ailing CDOs from some of AIG’s trading partners. The two CDOs in question were big ones, having a combined face value of $7.4 billion, according to information released by the Federal Reserve on April 23.

Now Deutsche’s name doesn’t actually appear in the Fed’s audit for Maiden Lane III. But it’s not hard to figure out. Ratings reports on the CDOs called MAX CMBS I, reveal that Deustche was the sole arranger of those transactions.

The investment bank presumably kept the tranches in its portfolio after purchasing the credit default swaps from AIG to gurantee the securities against a default. It wasn’t uncommon from investment banks to retain the so-called top tranche of CDO and sell-off the lower rated pieces of the deal.

The Fed-engineered transaction took two CDOs chock full of commercial real estate securities off Deutsche’s hand. Deutsche had purchased CDS on the CDOs in 2007 and 2008.

Deutsche got $2.8 for selling the CDOs to the Fed-sponsored entity called Maiden Lane III. That’s roughly equal to the $2.5 billion fair value estimate the auditors have given the CDOs. But Deutsche, like all the other banks that sold CDOs to Maiden Lane III, didn’t take any loss. That’s because the Fed also gave AIG money to make payments to the banks to make up for any lost value in the CDOs.

In effect, the banks were largely made whole in the transactions.

What may be most interesting about these transactions is that AIG was willing to write insurance on CDOs as late as May 2008. The insurer had left the impression it got out of the business of writing CDS or default insurance on CDOs at the end of 2006. Now granted, these weren’t CDOs backed by subprime residential mortgages. But commercial real estate isn’t in much better shape these days than the residential market.

Deutsche wasn’t available for comment. But it certainly appears Deutsche has come out ahead in its deal with AIG and the Fed when you consider that the rating agencies have begun downgrading some of the other tranches of the CDOs. Presumably, the other banks that sold CDOs to Maiden Lane III are now similarly pleased—-and that includes Goldman.

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