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Maiden Lane III LLC
(A Special Purpose Vehicle Consolidated by the
Federal Reserve Bank of New York)
Financial Statements for the Year Ended
December 31, 2009, and for the Period
October 31, 2008 to December 31, 2008, and
Independent Auditors’ Report
Maiden Lane III LLC
Table of Contents
Page
MANAGEMENT’S ASSERTION
INDEPENDENT AUDITORS’ REPORT
1
2-3
FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 AND 2008, FOR THE
YEAR ENDED DECEMBER 31, 2009, AND FOR THE PERIOD OCTOBER 31, 2008
TO DECEMBER 31, 2008
Statements of Financial Condition
4
Condensed Schedules of Investments
5
Statements of Operations
6
Statements of Cash Flows
7
Notes to Financial Statements
8-18
INDEPENDENT AUDITORS’ REPORT
To the Managing Member of
Maiden Lane III LLC:
We have audited the accompanying statements of financial condition of Maiden Lane III LLC (a Special
Purpose Vehicle consolidated by the Federal Reserve Bank of New York) (the "LLC"), including the
condensed schedules of investments, as of December 31, 2009 and 2008, and the related statements of
operations and cash flows for the year ended December 31, 2009 and for the period October 31, 2008 to
December 31, 2008. We also have audited the LLC’s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. The LLC’s management is
responsible for these financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Management’s Report of Internal Control over Financial Reporting. Our
responsibility is to express an opinion on these financial statements and an opinion on the LLC’s internal
control over financial reporting based on our audits.
We conducted our audits in accordance with generally accepted auditing standards as established by the
Auditing Standards Board (United States) and in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
The LLC’s internal control over financial reporting is a process designed by, or under the supervision of,
the LLC’s principal executive and principal financial officers, or persons performing similar functions,
and effected by the LLC’s Managing Member to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. The LLC’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the LLC; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the LLC are being made only in accordance with authorizations of the Managing
Member; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the LLC’s assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements due to error or fraud may
not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of
the internal control over financial reporting to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, such financial statements present fairly, in all material respects, the financial position of
Maiden Lane III LLC (a Special Purpose Vehicle consolidated by the Federal Reserve Bank of New
York) as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the year
ended December 31, 2009 and for the period October 31, 2008 to December 31, 2008 in conformity with
accounting principles generally accepted in the United States of America. Also, in our opinion, the LLC
maintained, in all material respects, effective internal control over financial reporting as of December 31,
2009, based on the criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
April 21, 2010
Maiden Lane III LLC
Statements of Financial Condition
As of December 31, 2009 and 2008
(Amounts in thousands, except contributed capital data)
2009
Assets
Investments, at fair value (cost of $26,211,653 and $29,298,056,
respectively)
Cash and cash equivalents
Principal and interest receivable
Total assets
Liabilities and Member’s Equity
Senior Loan, at fair value
Equity Contribution, at fair value
Payable for investments purchased
Professional fees payable and accrued
Total liabilities
$
$
$
Member’s equity ($100 contributed capital)
2008
22,338,978
428,272
29,934
22,797,184
$
18,500,025
4,293,805
3,354
22,797,184
$
$
-
Total liabilities and member’s equity
$
22,797,184
The accompanying notes are an integral part of these financial statements.
4
26,664,828
408,362
182,983
27,256,173
24,384,487
2,824,161
38,504
9,021
27,256,173
-
$
27,256,173
Maiden Lane III LLC
Condensed Schedules of Investments
As of December 31, 2009 and 2008
(Amounts in thousands)
Face Value
2009
Fair Value
Percentage of
Total Investments
ABS CDOs:
High-Grade ABS CDOs :
TRIAX 2006-2A A1B2
TRIAX 2006-2A A1B1
TRIAX 2006-2A A1A
Other 1
Total High-Grade ABS CDOs (amortized cost $18,066,492)
$
1,499,850
485,497
557,089
$
Mezzanine ABS CDOs 1 (amortized cost $2,812,428)
Commercial Real Estate CDOs :
MAX 2007-1 A1
MAX 2008-1 A1
Other 1
Total Commercial Real Estate CDOs (amortized cost $5,034,422)
2,096,537
5,403,463
RMBS, CMBS, & Other (amortized cost $298,311)
Total Investments (amortized cost $26,211,653)
$
Face Value
2008
699,674
439,774
364,391
13,895,832
15,399,671
3.1%
2.0%
1.6%
62.2%
68.9%
1,989,447
8.9%
989,551
2,550,398
1,153,990
4.4%
11.4%
5.2%
4,693,939
21.0%
255,921
1.2%
22,338,978
Fair Value
100.0%
Percentage of
Total Investments 2
ABS CDOs:
High-Grade ABS CDOs:
TRIAX 2006-2A A1B2
TRIAX 2006-2A A1B1
TRIAX 2006-2A A1A
Other 1
Total High-Grade ABS CDOs (amortized cost $20,690,030)
$
1,499,850
981,010
742,934
$
Mezzanine ABS CDOs 1 (amortized cost $3,143,226)
Commercial Real Estate CDOs:
MAX 2007-1 A1
MAX 2008-1 A1
Other 1
Total Commercial Real Estate CDOs (amortized cost $5,464,800)
2,096,537
5,403,463
Total Investments (amortized cost $29,298,056)
1
2
$
606,689
736,739
396,334
17,030,278
18,770,040
2.3%
2.8%
1.5%
63.9%
70.4%
3,103,664
11.6%
931,701
2,401,299
1,458,124
4,791,124
3.5%
9.0%
5.5%
18.0%
26,664,828
100.0%
Includes all securities or CDO issuers that, individually, represent less than 5% of total investments.
Components may not sum to totals due to rounding.
The accompanying notes are an integral part of these financial statements.
5
Maiden Lane III LLC
Statements of Operations
For the year ended December 31, 2009 and the period October 31, 2008 to December 31, 2008
(Amounts in thousands)
2009
Investment Income
Interest income
$
Expenses
Interest expense
Professional fees
Total expenses
Net investment income
Net Unrealized Gains (Losses)
Unrealized losses on investments, net
Unrealized gains (losses) on Equity Contribution, net
Net realized and unrealized losses
Net change in member’s equity resulting from operations
$
2008
3,032,284
$
467,290
26,907
494,197
73,287
9,021
82,308
2,538,087
435,103
(1,239,446)
(1,298,641)
(2,633,228)
2,198,125
(2,538,087)
(435,103)
-
$
The accompanying notes are an integral part of these financial statements.
6
517,411
-
Maiden Lane III LLC
Statements of Cash Flows
For the year ended December 31, 2009 and the period October 31, 2008 to December 31, 2008
(Amounts in thousands)
2009
Cash flows from operating activities
Net change in member's equity resulting from operations
$
2008
-
$
-
Adjustments to reconcile net change in member's equity resulting from
operations to net cash provided by (used in) operating activities:
Unrealized losses on investments, net
Unrealized (gains) losses on Equity Contribution, net
Increase in capitalized and accrued interest on Senior Loan
Increase in capitalized and accrued interest on Equity Contribution
(Increase) decrease in interest receivable
Increase (decrease) in professional fees payable and accrued
Payments for purchase of investments
Proceeds from paydowns on investments
Proceeds from sale of investments
Net cash flow provided by (used in) operating activities
Cash flows from financing activities
Proceeds from Senior Loan
Proceeds from Equity Contribution
Repayments of Senior Loan
Net cash flow provided by (used in) financing activities
Net increase in cash and cash equivalents
Beginning cash and cash equivalents
Ending cash and cash equivalents
Supplemental non-cash operating and financing activities:
Accrued and capitalized interest on Senior Loan and
Equity Contribution
1,239,446
1,298,641
296,287
171,003
153,049
(5,667)
(40,397)
3,086,497
1,800
6,200,659
2,633,228
(2,198,125)
45,171
22,286
(182,983)
9,021
(29,547,432)
287,880
(28,930,954)
(6,180,749)
(6,180,749)
24,339,316
5,000,000
29,339,316
$
19,910
408,362
428,272
$
408,362
408,362
$
467,290
$
67,457
The accompanying notes are an integral part of these financial statements.
7
Maiden Lane III LLC
Notes to Financial Statements
For the year ended December 31, 2009 and the period October 31, 2008 to December 31, 2008
1.
Organization and Nature of Business
Maiden Lane III LLC (the “LLC”), a Special Purpose Vehicle consolidated by the Federal Reserve Bank of
New York (“FRBNY” or the “Managing Member”), is a Delaware limited liability company that was
formed to acquire asset-backed security collateralized debt obligations (“ABS CDOs”) from certain thirdparty counterparties of AIG Financial Products Corp. (“AIGFP”). In connection with the acquisitions, the
third-party counterparties agreed to terminate their related credit derivative contracts with AIGFP.
During the period ended December 31, 2008, the LLC borrowed approximately $24.3 billion from FRBNY
through two separate extensions of credit (collectively the “Senior Loan”) and American International
Group, Inc., (“AIG” or the “Equity Investor”), the parent company of AIGFP, provided capital of $5 billion
to the LLC (the “Equity Contribution”). These proceeds were used to purchase ABS CDOs with a fair
value of $29.6 billion, determined as of October 31, 2008. The counterparties received $26.8 billion net of
principal and interest received and finance charges paid on the ABS CDOs. The LLC also made a payment
to AIGFP of $2.5 billion representing the over collateralization previously posted by AIGFP and retained
by counterparties in respect of terminated credit default swaps (“CDS”) as compared to the LLC’s fair
value acquisition prices calculated as of October 31, 2008. The aggregate amount of principal and interest
proceeds from CDOs received after the announcement date, but prior to the settlement dates, net of
financing costs, amounted to approximately $0.3 billion and therefore reduced the amount of funding
required at settlement by $0.3 billion, from $29.6 billion to $29.3 billion.
FRBNY is the managing member and controlling party of the assets of the LLC and will remain as such as long
as FRBNY retains an economic interest in the LLC. FRBNY and AIG (and any permitted assignees) are the
sole members of the LLC. FRBNY has contributed $100 and owns all managing member interests of the
LLC, AIG has contributed the Equity Contribution, and both parties own the equity interests in the LLC.
The Senior Loan is collateralized by all the assets of the LLC through a pledge to The Bank of New York
Mellon (“BNYM”) as collateral agent. The Equity Contribution is accounted for as a liability by the LLC,
as described in Note 2D.
The purchase transactions were completed with October 31, 2008 as the purchase date. Due to the extended
settlement dates, interest was charged on the cost of the securities purchased or credited for cash flows on
the purchased securities that occurred after October 31, 2008 through the date they were either paid for or
received by the LLC. In connection with the acquisition of the assets, the LLC paid a cost of carry of $5.8
million to third-party counterparties of AIGFP. The cost of carry, representing a financing cost incurred
from the October 31, 2008 through the settlement date of the assets, is recorded as a component of “Interest
expense” in the Statements of Operations.
BlackRock Financial Management, Inc. (the “Investment Manager” or “BlackRock”) manages the investment
portfolio of the LLC under a multi-year contract with FRBNY that includes provisions governing
termination. BNYM provides administrative services and has been appointed to serve as collateral agent
under multi-year contracts with FRBNY that include provisions governing termination.
The LLC does not have any employees and therefore does not bear any employee-related costs.
2.
Summary of Significant Accounting Policies
The financial statements are prepared in accordance with the accounting principles generally accepted in the
United States of America (“GAAP”), which require the Managing Member to make estimates and
assumptions that affect the reported amounts of assets, liabilities, income and expense during the reporting
period. Significant estimates include the fair value of investments, the Senior Loan, and Equity
Contribution. Actual results could differ from those estimates.
8
Maiden Lane III LLC
Notes to Financial Statements
For the year ended December 31, 2009 and the period October 31, 2008 to December 31, 2008
The following is a summary of the significant accounting policies followed by the LLC:
A. Cash and Cash Equivalents
The LLC defines investments in money market funds and other highly liquid investments with original
maturities of three months or less, when acquired, as cash and cash equivalents. Money market funds are
carried at fair value based on quoted prices in active markets. Other investments included in cash
equivalents are carried at amortized cost, which approximates fair value.
B. Valuation of Financial Assets and Liabilities
The LLC qualifies as a non-registered investment company under the provisions of the Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) ASC 946 Financial Services Investment Companies (previously the American Institute of Certified Public Accountants Audit and
Accounting Guide for Investment Companies) and therefore, all investments are recorded at fair value in
accordance with FASB ASC Topic 820 (ASC 820) Fair Value Measurements and Disclosures (previously
Statement of Financial Accounting Standard (“SFAS”) 157).
The LLC elected the fair value option under FASB ASC Topic 825 (ASC 825) Financial Instruments
(previously SFAS 159), including an amendment of FASB ASC Topic 320 (ASC 320) Investments – Debt
and Equity Securities (previously SFAS 115) for the Senior Loan and Equity Contribution. Under ASC
825, the LLC records the Senior Loan and Equity Contribution, including related accrued and capitalized
interest, at fair value in the LLC’s financial statements. The Managing Member believes that accounting for
the Senior Loan and Equity Contribution at fair value appropriately reflects the LLC’s purpose and intent
with respect to its financial assets and liabilities and most closely reflects the LLC’s obligations.
C. Investment Transactions and Investment Income
Investment transactions are accounted for at trade date. Interest income is recorded when earned and includes
paydown gains and losses on investments. Realized gains or losses on investment transactions are
determined on the identified cost basis.
D. Accounting for the Senior Loan and Equity Contribution
The Senior Loan and related accrued and capitalized interest, at fair value, is recorded as “Senior Loan, at fair
value” in the Statements of Financial Condition. The Equity Contribution and related accrued and
capitalized interest, at fair value, is recorded as “Equity Contribution, at fair value” in the Statements of
Financial Condition and changes in fair value are recorded as “Unrealized gains (losses) on Equity
Contribution” in the Statements of Operations.
The Equity Contribution is reported as a liability in the Statement of Financial Condition in accordance with
FASB ASC Topic 480 (ASC 480) Distinguishing Liabilities from Equity (previously SFAS 150) because
the Equity Contribution is mandatorily redeemable before the liquidation of the LLC.
E. Professional Fees
Professional fees are primarily comprised of the fees charged by the Investment Manager, BNYM, attorneys,
and independent auditors. Organization and closing costs of $5.5 million, associated with the formation of
the LLC and the cost of acquisition of the portfolio, were expensed when incurred in 2008.
9
Maiden Lane III LLC
Notes to Financial Statements
For the year ended December 31, 2009 and the period October 31, 2008 to December 31, 2008
F. Income taxes
The LLC is a partnership for U. S. Federal, state and local income tax purposes and makes no provision for such
taxes as its taxable income and losses are taken into account by its members. The LLC qualified, and
intends to continue to qualify, for tax purposes as a partnership.
G. Recently Issued Accounting Standards
In February 2008, FASB issued FASB Staff Position (“FSP”) SFAS 140-3, Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions (codified in FASB Topic 860 (ASC 860),
Transfers and Servicing). ASC 860 requires that an initial transfer of a financial asset and a repurchase
financing that was entered into contemporaneously with, or in contemplation of, the initial transfer be
evaluated together as a linked transaction unless certain criteria are met. The provisions of ASC 860, which
are effective for the LLC’s financial statements for the year ended December 31, 2009, have not had a
material effect on the LLC’s financial statements.
In March 2008, FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging Activities—an
amendment of FASB Statement No. 133, (codified in ASC 815), which requires expanded qualitative,
quantitative and credit-risk disclosures about derivatives and hedging activities and their effects on the
LLC’s financial position, financial performance and cash flows. The provisions of ASC 815, which are
effective for the LLC’s financial statements for the year ended December 31, 2009, have not had a material
effect on the LLC’s financial statements. The LLC has not entered into any derivative contracts relating to
hedging activities for the year ended December 31, 2009 and the period October 31, 2008 to December 31,
2009.
In April 2009, FASB issued FSP SFAS 157-4, Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability have Significantly Decreased and Identifying Transactions that are Not Orderly,
(codified in ASC 820), which provides additional guidance for estimating fair value when the value and
level of market activity for an asset or liability have significantly decreased. The standard also provides
guidance on identifying circumstances that indicate a transaction is not orderly. The provisions of ASC
820, which are effective for the LLC’s financial statements for the year ended December 31, 2009, were
considered in determining the valuation of assets and liabilities that are measured at fair value and have not
had a material effect on the LLC’s financial statements.
In May 2009, FASB issued SFAS 165, Subsequent Events, (codified in FASB Topic 855 (ASC 855) Subsequent
Events), which establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available to be issued. ASC 855 sets
forth (i) the period after the balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition or disclosure in the financial
statements; (ii) the circumstances under which an entity should recognize events or transactions occurring
after the balance sheet date in its financial statements; and (iii) the disclosures that an entity should make
about events or transactions that occurred after the balance sheet date, including disclosure of the date
through which an entity has evaluated subsequent events and whether that represents the date the financial
statements were issued or were available to be issued. The LLC adopted ASC 855 for the year ended
December 31, 2009 and the required disclosures are reflected in Note 9.
In June 2009, FASB issued SFAS 166, Accounting for Transfers of Financial Assets – an amendment to FASB
Statement No. 140, (codified in ASC 860). The new guidance modifies existing guidance to eliminate the
scope exception for qualifying special purpose entities and clarifies that the transferor must consider all
arrangements of the transfer of financial assets when determining if the transferor has surrendered control.
These provisions of ASC 860 are effective for the LLC’s consolidated financial statements for the year
beginning on January 1, 2010, and earlier adoption is prohibited. The provisions of ASC 860 are not
expected to have a material effect on the LLC’s financial statements.
10
Maiden Lane III LLC
Notes to Financial Statements
For the year ended December 31, 2009 and the period October 31, 2008 to December 31, 2008
In June 2009, FASB issued SFAS 168, The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles, a replacement of SFAS 162, “The Hierarchy of Generally
Accepted Accounting Principles” (codified in FASB Topic 105 (ASC 105) Generally Accepted Accounting
Principles), which establishes the FASB ASC as the source of authoritative accounting principles
recognized by the FASB to be applied by non-governmental entities in the preparation of financial
statements in conformity with GAAP. The ASC does not change current GAAP, but it introduces a new
structure that organizes the authoritative standards by topic. ASC 105 is effective for financial statements
issued for periods ending after September 15, 2009. As a result, both the ASC and the legacy standards are
referenced in the LLC’s financial statements and footnotes.
In January 2010, the FASB issued Accounting Standards Update 2010-06, Fair Value Measurements and
Disclosures (ASC 820) – Improving Disclosures about Fair Value Measurements, which requires
additional disclosures related to fair value measurements. This update is effective for the LLC’s financial
statements for the year beginning on January 1, 2010 and early adoption is prohibited. The adoption of this
update is not expected to have a material effect on the LLC’s financial statements.
3.
Senior Loan and Equity Contribution
The Senior Loan has an original six year term maturing on November 25, 2014 provided that FRBNY may
extend the date of final maturity to any later date. The interest rate on the Senior Loan is equal to the
London Interbank Offered Rate (“LIBOR”) rate for one-month deposits in U.S. dollars plus 100 basis
points, while the interest rate on the Equity Contribution is equal to the LIBOR rate for one-month deposits
in U.S. dollars plus 300 basis points. Interest on the Senior Loan and Equity Contribution is capitalized
monthly and accrued daily based on the amount of principal and capitalized interest outstanding on the first
business day of each month.
Repayment of the Senior Loan and Equity Contribution will be made monthly, subject to availability of funds in
the LLC’s collateral accounts and pursuant to the order of priority described in Note 4.
The table below presents a reconciliation of the Senior Loan and Equity Contribution as of December 31, 2009
and 2008 (in thousands):
11
Maiden Lane III LLC
Notes to Financial Statements
For the year ended December 31, 2009 and the period October 31, 2008 to December 31, 2008
Equity
Contribution 3
Senior Loan 2
Beginning principal balance, October 31, 2008
$
-
$
-
Total
$
-
2008 Activity:
Funding, November 25, 2008
Funding, December 18, 2008
Accrued and capitalized interest
15,133,567
9,205,749
45,171
5,000,000
22,286
20,133,567
9,205,749
67,457
Unrealized (gains) / losses 1
Fair value, December 31, 2008
24,384,487
(2,198,125)
2,824,161
(2,198,125)
27,208,648
2009 Activity:
Accrued and capitalized interest
Repayments
296,287
(6,180,749)
Unrealized (gains) / losses 1
Fair value, December 31, 2009
$
18,500,025
171,003
$
1,298,641
4,293,805
467,290
(6,180,749)
$
1,298,641
22,793,830
1
Recorded as "Unrealized gains (losses) on Equity Contribution, net" in the Statements of Operations.
2
The outstanding principal and accrued interest balance of the Senior Loan was $18,500,025 and $24,384,487 as of
December 31, 2009 and 2008, respectively.
3
The outstanding principal and accrued interest balance of the Equity Contribution was $5,193,289 and $5,022,286 as of
December 31, 2009 and 2008, respectively.
The weighted-average interest rates on the Senior Loan and Equity Contribution for the year ended December
31, 2009 were 1.36 percent and 3.36 percent, respectively. The weighted-average interest rates on the
Senior Loan and Equity Contribution for the period November 25, 2008 to December 31, 2008 were 2.41
percent and 4.41 percent, respectively.
4.
Distribution of Proceeds
In accordance with the Master Investment and Credit Agreement, amounts available in the accounts of the LLC
as of the 27th calendar day of each month (each a “Payment Cut-Off Date”) shall be distributed on the 4th
business day following each month-end or such other date as may be specified by FRBNY in the following
order of priority:
first, to pay any costs and expenses then due and payable;
second, to pay any amounts due and payable to any counterparty to any permitted hedging transactions as of the
Payment Cut-off Date;
third, to fund the expense reimbursement sub-account until the balance thereof is equal to an amount specified
by FRBNY ($500 thousand as of December 31, 2009);
fourth, to fund the investment reserve sub-account until the balance thereof is equal to an amount specified by
FRBNY ($0 as of December 31, 2009);
fifth, to pay all or a portion of the outstanding principal amount of the Senior Loan;
sixth, so long as the entire outstanding principal amount of the Senior Loan shall have been paid in full in cash,
to pay all or any portion of the accrued and unpaid interest outstanding on the Senior Loan;
12
Maiden Lane III LLC
Notes to Financial Statements
For the year ended December 31, 2009 and the period October 31, 2008 to December 31, 2008
seventh, so long as the entire outstanding principal amount of, and all accrued and unpaid interest outstanding
on, the Senior Loan shall have been paid in full in cash, to release to the LLC, for distribution to the Equity
Investor or its permitted assignees, the lesser of (a) all remaining amounts and (b) the undistributed balance
of the Equity Contribution Amount;
eighth, so long as (i) the entire outstanding principal amount of, and all accrued and unpaid interest outstanding
on, the Senior Loan shall have been paid in full in cash, (ii) all other remaining secured obligations
outstanding shall have been paid in full in cash and (iii) the Equity Contribution amount shall have been
decreased to zero because cash has been released to the LLC for distribution to the Equity Investor or its
permitted assignees, the lesser of (a) all remaining amounts and (b) the accrued but unpaid accrued interest
in respect of the Equity Interest;
ninth, so long as (i) the entire outstanding principal amount of, and all accrued and unpaid interest outstanding
on, the Senior Loan has been paid in full in cash, (ii) all other remaining secured obligations outstanding
shall have been paid in full in cash and (iii) the Equity Contribution amount shall have been decreased to
zero and there are no outstanding accrued and unpaid interest, to pay any amounts due and payable to any
counterparty to any permitted hedging transactions as of the Payment Cut-off Date to the extent not paid
under clause second above;
tenth, so long as, (i) the entire outstanding principal amount of, and all accrued and unpaid interest outstanding
on, the Senior Loan have been paid in full in cash, (ii) all other remaining secured obligations outstanding
shall have been paid in full in cash and (iii) the Equity Contribution amount shall have been decreased to
zero and there are no outstanding accrued and unpaid interest, to pay two-thirds of all remaining amounts to
FRBNY and to release to the LLC, for distribution to the Equity Investor or its permitted assignees, onethird of all remaining amounts.
5.
Fair Value Measurements
The LLC qualifies as a non-registered investment company under the provisions of the ASC 946 and, therefore,
all investments are recorded at fair value in accordance with ASC 820. The LLC elected to measure the
Senior Loan and the Equity Contribution at fair value under ASC 825.
Fair Value Hierarchy
ASC 820 establishes a three-level fair value hierarchy that distinguishes between market participant
assumptions developed using market data obtained from independent sources (observable inputs) and the
LLC's own assumptions about market participant assumptions developed based on the best information
available in the circumstances (unobservable inputs).
The three levels established by ASC 820 are described below:
·
Level 1 – Valuation is based on quoted prices for identical instruments traded in active markets.
·
Level 2 – Valuation is based on quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, and model-based valuation techniques for
which all significant assumptions are observable in the market.
·
Level 3 – Valuation is based on inputs from model-based techniques that use significant assumptions not
observable in the market. These unobservable assumptions reflect the LLC’s own estimates of assumptions
that market participants would use in pricing the asset and liability. Valuation techniques include the use of
option pricing models, discounted cash flow models, and similar techniques.
13
Maiden Lane III LLC
Notes to Financial Statements
For the year ended December 31, 2009 and the period October 31, 2008 to December 31, 2008
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated
with investing in those securities.
Determination of Fair Value
Due to the nature of the investments held by the LLC, valuation is based on inputs from model-based
techniques that use estimates of assumptions that market participants would use in pricing the investments.
To the extent such estimates of assumptions are not observable, the investments are classified within Level
3 of the valuation hierarchy. For instance, in valuing certain investments, the determination of fair value is
based on proprietary valuation models when external price information is not available. Key inputs to the
model may include market spread data for each credit rating, collateral type, and other relevant contractual
features.
The fair value of the Senior Loan and the Equity Contribution is determined based on the fair value of the
underlying assets held by the LLC and the allocation of the LLC’s net investment income and realized
losses on investments, as reflected in the Senior Loan and Equity Contribution reconciliation presented in
Note 3.
Due to the inherent uncertainty of determining the fair value of investments and debt instruments that do not
have a readily available fair value, the fair value of the LLC’s investments, Senior Loan and Equity
Contribution may differ from the values that may ultimately be realized and paid.
The following table presents the assets and liabilities recorded at fair value as of December 31, 2009 by the fair
value hierarchy (in thousands):
Fair Value Hierarchy
2009
Assets:
Investments
Money market funds
Total assets
Liabilities:
Senior Loan
Equity Contribution
Total liabilities
1
Level 1
Level 2
Level 3
Total Fair Value
$
-
$
47,407
$
22,291,571
$
22,338,978
$
428,272
428,272
$
47,407
$
22,291,571
$
428,272
22,767,250
1
$
$
-
$
$
-
$
$
(18,500,025)
(4,293,805)
(22,793,830)
Recorded as a component of “Cash and cash equivalents” in the Statements of Financial Condition.
14
$
$
(18,500,025)
(4,293,805)
(22,793,830)
Maiden Lane III LLC
Notes to Financial Statements
For the year ended December 31, 2009 and the period October 31, 2008 to December 31, 2008
The following table presents the assets and liabilities recorded at fair value as of December 31, 2008 by the fair
value hierarchy (in thousands):
2008
Assets:
Investments
Money market funds
Total assets
$
-
$
408,362
408,362
1
Liabilities:
Senior Loan
Equity Contribution
Total liabilities
1
Fair Value Hierarchy
Level 2
Level 1
$
-
$
$
-
$
-
$
Level 3
-
$
Total Fair Value
$
26,664,828
$
26,664,828
$
26,664,828
$
408,362
27,073,190
$
(24,384,487)
(2,824,161)
(27,208,648)
$
$
$
(24,384,487)
(2,824,161)
(27,208,648)
Recorded as a component of “Cash and cash equivalents” in the Statements of Financial Condition.
The table below presents a reconciliation of all assets and liabilities measured at fair value using significant
unobservable inputs (Level 3) for the year ended December 31, 2009, including realized and unrealized
gains (losses) (in thousands):
Fair Value at
January 1, 2009
Net Purchases,
Sales, Paydowns,
and Settlements
Net Realized /
Unrealized Gains
(Losses)
Net
Transfers
In or (Out)
Fair Value at
December 31,
2009
Net Unrealized
Gains (Losses)
$
$
(3,133,811)
$
(1,239,446)
$
-
$ 22,291,571
$
$
5,884,462
1
$
-
$
-
$ (18,500,025)
$
-
2
$
(171,003)
5,713,459
$
(1,298,641)
(1,298,641)
$
-
(4,293,805)
$ (22,793,830)
$
(1,298,641)
(1,298,641)
Assets:
Investments
26,664,828
(1,239,446)
Liabilities:
Senior Loan
$ (24,384,487)
Equity Contribution
Total liabilities
(2,824,161)
$ (27,208,648)
1
2
Includes $296,287 of accrued and capitalized interest.
Includes $171,003 of accrued and capitalized interest.
The table below presents a reconciliation of all assets and liabilities measured at fair value using significant
unobservable inputs (Level 3) during the period October 31, 2008 to December 31, 2008, including realized
and unrealized gains (losses) (in thousands):
Net Purchases,
Sales, Paydowns,
and Settlements
Net Realized /
Unrealized Gains
(Losses)
$
29,298,056
$
$
(24,384,487)
1
(5,022,286)
2
Net Transfers
In or (Out)
Fair Value at
December 31, 2008
Net Unrealized
Gains (Losses)
Assets:
Investments
(2,633,228) $
-
$
26,664,828
$
-
$
(24,384,487) $
(2,633,228)
Liabilities:
Senior Loan
Equity Contribution
Total liabilities
$
(29,406,773)
$
-
$
2,198,125
$
2,198,125
1
Includes $45,171 of accrued and capitalized interest.
Includes $22,286 of accrued and capitalized interest.
2
15
$
-
(2,824,161)
$
(27,208,648) $
2,198,125
2,198,125
Maiden Lane III LLC
Notes to Financial Statements
For the year ended December 31, 2009 and the period October 31, 2008 to December 31, 2008
6.
Investment Risk Profile
The primary holdings within the LLC are ABS CDOs. An ABS CDO is a security issued by a bankruptcy
remote entity that is backed by a diversified pool of debt securities, which in the case of the LLC are
primarily residential mortgage-backed securities (“RMBS”) and commercial mortgage backed-securities
(“CMBS”). The cash flows of ABS CDOs can be split into multiple segments, called “tranches,” which will
vary in risk profile and yield. The junior tranches will bear the initial risk of loss followed by the more
senior tranches. The ABS CDOs in the LLC portfolio largely represent senior tranches. Because they are
shielded from defaults by the subordinated tranches, senior tranches will typically have higher credit ratings
and lower yields than their underlying securities, and often receive investment grade ratings from one or
more of the nationally recognized rating agencies upon issuance. Despite the protection afforded by the
subordinated tranches, senior tranches can experience substantial losses from actual defaults on the
underlying RMBS or CMBS.
ABS CDO securities are limited recourse obligations of the issuer thereof payable solely from the underlying
securities owned by the issuer or proceeds thereof. Consequently, holders of ABS CDO securities must rely
solely on distributions on the collateral underlying such ABS CDO securities or the proceeds thereof for
payment. Such collateral may consist of investment grade debt securities, high yield debt securities, loans,
structured finance securities, synthetic securities and other debt instruments. Investments in assets through
the purchase of synthetic securities present risks in addition to those resulting from direct purchases of
those assets because the buyer of such synthetic security usually will have a contractual relationship only
with the synthetic security counterparty and not the obligor on the reference obligation of such synthetic
security. The buyer of a synthetic security will not benefit from any collateral supporting the reference
obligation of such synthetic security, will not have any remedies that would normally be available to the
holder of such reference obligation and will be subject to the credit risk of the synthetic security
counterparty as well as the obligor on such reference obligation. Over the last several years, there has been
a significant increase in the default rates of, delinquencies on, and rating downgrades reported on RMBS
and CMBS. As a result of increases in the default rates and delinquencies, there has been a decrease in the
amount of credit support available for the ABS CDO securities backed by such RMBS and CMBS since the
issue date thereof. Diminished credit support as a result of increases in the default rates of, delinquencies
on, and rating downgrades reported on RMBS and CMBS could increase the likelihood that payments may
not be made to holders of ABS CDO securities.
Certain ABS CDO issuers can issue short-term eligible investments under Rule 2a-7 of the Investment
Company Act of 1940 if the ABS CDO contains arrangements to remarket the securities at defined periods.
The investments must contain put options ("2a-7 Puts"), which allow the purchasers to sell the ABS CDO
at par to a third-party ("Put Provider") if a scheduled remarketing is unsuccessful due to reasons other than
a credit or bankruptcy event. As of December 31, 2009, the total notional value of ABS CDOs held by the
LLC with embedded 2a-7 Puts, for which AIGFP was, directly or indirectly, the Put Provider, was $1.6
billion. The LLC has entered into an agreement not to exercise the 2a-7 Puts, or to only exercise the 2a-7
Puts if it simultaneously repurchases the ABS CDOs at par. In return, the LLC will receive the put
premiums and AIGFP will take the necessary steps to attempt conversion of the ABS CDOs to long-term
notes. The termination date of this agreement ranges from December 31, 2010 to April 30, 2011 depending
on the respective ABS CDOs.
The LLC may acquire underlying collateral of ABS CDOs held in the portfolio. Collateral acquired during 2009
is reported as “RMBS, CMBS, and Other” in the Condensed Schedule of Investments as of December 31,
2009. CMBS and RMBS expose the LLC to varying levels of credit, interest rate, liquidity, and
concentration risk. Credit-related risk arises from losses due to delinquencies and defaults by borrowers on
the underlying mortgage loans and breaches by originators and servicers of their obligations under the
underlying documentation pursuant to which the securities are issued. The rate of delinquencies and
defaults on residential and commercial mortgage loans and the aggregate amount of the resulting losses will
be affected by a number of factors, including general economic conditions, particularly those in the area
where the related mortgaged property is located; the level of the borrower's equity in the mortgaged
property; and the individual financial circumstances of the borrower.
16
Maiden Lane III LLC
Notes to Financial Statements
For the year ended December 31, 2009 and the period October 31, 2008 to December 31, 2008
At December 31, 2009, the investment type/vintage and rating composition of the LLC’s $22.3 billion portfolio,
recorded at fair value, as a percentage of aggregate fair value of all securities in the portfolio, was as
follows:
Rating
AAA
AA+ to AA-
A+ to A-
1, 2, 3
BBB+ to
BBB-
BB+ and
lower
Not
Rated
Total
ABS CDOs:
7.
High-Grade ABS CDOs
Pre-2005
2005
2006
2007
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
68.9%
24.3%
30.6%
7.3%
6.7%
0.0%
0.0%
0.0%
0.0%
0.0%
68.9%
24.3%
30.6%
7.3%
6.7%
Mezzanine ABS CDOs
Pre-2005
2005
2006
2007
0.0%
0.0%
0.0%
0.0%
0.0%
0.2%
0.2%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.5%
0.5%
0.0%
0.0%
0.0%
8.0%
4.4%
2.8%
0.0%
0.7%
0.3%
0.3%
0.0%
0.0%
0.0%
8.9%
5.4%
2.8%
0.0%
0.7%
Commercial Real-Estate CDOs
Pre-2005
2005
2006
2007
1.5%
1.5%
0.0%
0.0%
0.0%
0.5%
0.5%
0.0%
0.0%
0.0%
18.9%
3.1%
0.0%
0.0%
15.8%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
21.0%
5.2%
0.0%
0.0%
15.8%
RMBS, CMBS, & Other:
Pre-2005
2005
2006
2007
0.2%
0.0%
0.1%
0.0%
0.0%
0.2%
0.0%
0.1%
0.0%
0.0%
0.1%
0.0%
0.1%
0.0%
0.0%
0.1%
0.0%
0.1%
0.0%
0.0%
0.6%
0.1%
0.4%
0.1%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
1.2%
0.2%
0.9%
0.1%
0.0%
Total Investments
1.7%
0.8%
19.1%
0.6%
77.5%
0.3%
100.0%
1
Lowest of all ratings is used for the purpose of this table if rated by two or more nationally recognized statistical rating
organizations.
2
The year of issuance with the highest concentration of underlying assets as measured by outstanding principal balance determines
the vintage of the CDO.
3
Rows and columns may not total due to rounding.
Contingencies
The LLC agrees to pay the reasonable out-of-pocket costs and expenses of its service providers incurred in
connection with its duties under the respective agreements and to indemnify its service providers for any
losses, claims, damages, liabilities and related expenses etc., which may arise out of the respective
agreements unless they result from the service provider’s bad faith, gross negligence, fraudulent actions or
willful misconduct. The indemnity, which is provided solely by the LLC, survives termination of the
respective agreements. The LLC has not had any prior claims or losses pursuant to these contracts and
expects the risk of loss to be remote.
8.
Financial Highlights
The disclosures of internal rate of return and ratios of net investment income and expenses to average member’s
equity have been omitted because the LLC has no substantial equity and such disclosures would not be
meaningful.
17
Maiden Lane III LLC
Notes to Financial Statements
For the year ended December 31, 2009 and the period October 31, 2008 to December 31, 2008
9.
Subsequent Events
There were no subsequent events that require adjustments to or disclosures in the financial statements as of
December 31, 2009. Subsequent events were evaluated through April 21, 2010, which is the date the LLC
issued the financial statements.
18