U.S. Banks Benefit From AIG's Latest Bailout-WSJ

The WSJ published a column this morning, saying that the biggest beneficiaries of the new $150 billion bailout package for American International Group (NYSE: AIG) is likely banks in the U.S. and abroad.

Many banks that previously bought their insurance from AIG, now stand to recoup the bulk of their investments under a plan by AIG and the Federal Reserve Bank of New York to buy around $70 billion of those securities via a new company. These securities are collateralized debt obligations backed by subprime-mortgage bonds, commercial-mortgage loans and other assets.

Banks that have sought and received collateral from AIG include Goldman Sachs (NYSE: GS), Merrill Lynch (NYSE: MER), UBS AG (NYSE: UBS), Deutsche Bank (NYSE: DB) and others. Because the market values of the CDOs fell sharply over the past year, these banks were able to pry roughly $35 billion in collateral from AIG.

Under this new plan, banks will get to keep the collateral they received from AIG, but also the banks will sell the CDOs to the new facility at market prices averaging 50 cents on the dollar. The banks that participate will be compensated for the securities' full, or par, value in exchange for allowing AIG to unwind the credit-default swaps it wrote.

Carlos Mendez, a senior managing director at ICP Capital told the WSJ, "It's like a home run for some of the banks. They bought insurance from a company that ran into trouble and still managed to get all, or most, of their money back."

The contract cancellations will free AIG from additional collateral calls on those swaps, which have been responsible for billions of dollars in write-downs that AIG has logged in recent quarters.

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