Sender, Herrera, Tett: no Haircut on AIG...

What didn't happen with AIG CDOs:

"t was mid-2008 and a littlenoticed wrangle was taking place that will be of particular interest to the US congressional committee that is today due to grill Tim Geithner, US Treasury secretary, over the rescue two months later of AIG, America's biggest insurer.

On one side of the earlier negotiations stood a group of banks that included Merrill Lynch of the US and France's Société Générale. On the other: Security Capital Assurance (SCA), a Bermuda-based bond insurer that had run into difficulties as the US subprime mortgage market imploded. At stake was how much money the banks should receive on insurance contracts that SCA provided for complex pools of mortgage securities known as collateralised debt obligations, or CDOs.

Among other reasons, the banks had bought the insurance - called credit default swaps, or CDS - to protect themselves against a panic just like the one sweeping the markets at that time. But SCA lacked sufficient capital to pay the claims in full and the banks feared that if the insurer went under, they would receive nothing.

Something had to give. After heated talks, Merrill agreed that July to cancel its CDS contracts for a pay-out of 14 cents on the dollar - a severe "haircut", in market parlance. The other banks also reduced their original claims. At the conclusion of talks that dragged on until May 2009, not a single lender was paid in full..."

"... Mr Geithner's operation opened secret negotiations with the banks and agreed to buy underlying CDOs with a face value of $62bn from them.

No haircut was required. Instead, the Fed provided most of the $27bn in financing needed to make up the difference between the face value of the CDOs and the collateral AIG had posted, which the banks were allowed to keep.

The central bank wound up with a portfolio of CDOs of uncertain value - now residing in Maiden Lane III, a special purpose vehicle named after the New York Fed's location - and a political headache with few parallels in the history of US finance. The $62bn transfer.."