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Maiden Lane III LLC
(A Special Purpose Vehicle Consolidated by the
Federal Reserve Bank of New York)
Financial Statements as of and for the Years Ended
December 31, 2010 and 2009, and
Independent Auditors’ Report
Maiden Lane III LLC
Table of Contents
Page
Management’s Report On Internal Control Over Financial Reporting
Independent Auditors’ Report
1
2-3
Financial Statements as of and for the years ended
December 31, 2010 and 2009:
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, 2010 and 2009, and the related statements of
operations and cash flows for the years ended December 31, 2010 and 2009. We also have audited the
LLC’s internal control over financial reporting as of December 31, 2010, 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, 2010 and 2009, and the results of its operations and its cash flows for the years
ended December 31, 2010 and 2009 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, 2010, based on the criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
March 22, 2011
Maiden Lane III LLC
Statements of Financial Condition
As of December 31, 2010 and 2009
(Amounts in thousands, except contributed capital data)
2010
Assets
Investments, at fair value (cost of $23,759,108 and $26,211,653, respectively)
Cash and cash equivalents
Principal and interest receivable
Total assets
Liabilities and Members' Equity
Senior Loan, at fair value
Equity Contribution, at fair value
Professional fees payable and accrued
Total liabilities
$
$
$
2009
22,973,856
580,181
28,862
23,582,899
16,846,264
6,732,476
4,159
23,582,899
Members' equity ($100 contributed capital)
$
$
$
-
Total liabilities and members' equity
$
23,582,899
The accompanying notes are an integral part of these financial statements.
4
22,338,978
428,272
29,934
22,797,184
18,500,025
4,293,805
3,354
22,797,184
-
$
22,797,184
Maiden Lane III LLC
Condensed Schedules of Investments
As of December 31, 2010 and 2009
(Amounts in thousands)
2010
Face Value
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 (cost $16,333,664)
$
1,499,850
128,803
423,308
$
Mezzanine ABS CDOs 1 (cost $2,571,559)
Commercial Real Estate CDOs :
MAX 2007-1 A1
MAX 2008-1 A1
Other 1
2,096,537
5,403,463
Total Commercial Real Estate CDOs (cost $4,580,348)
RMBS, CMBS, & Other (cost $273,537)
Total Investments (cost $23,759,108)
$
2009
Face Value
1,075,986
127,704
330,366
13,434,816
14,968,872
4.7%
0.6%
1.4%
58.5%
65.2%
1,941,710
8.5%
1,408,873
3,631,127
722,924
6.1%
15.8%
3.1%
5,762,924
25.0%
300,350
1.3%
22,973,856
Fair Value
100.0%
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 (cost $18,066,492)
$
1,499,850
485,497
557,089
$
Mezzanine ABS CDOs 1 (cost $2,812,428)
Commercial Real Estate CDOs:
MAX 2007-1 A1
MAX 2008-1 A1
Other 1
Total Commercial Real Estate CDOs (cost $5,034,422)
2,096,537
5,403,463
RMBS, CMBS, & Other (cost $298,311)
Total Investments (cost $26,211,653)
1
$
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
4,693,939
4.4%
11.4%
5.2%
21.0%
255,921
1.2%
22,338,978
Includes all securities or CDO issuers that, individually, represent less than 5% of total investments.
The accompanying notes are an integral part of these financial statements.
5
100.0%
Maiden Lane III LLC
Statements of Operations
For the years ended December 31, 2010 and 2009
(Amounts in thousands)
2010
Investment income
Interest income
$
Expenses
Interest expense
Professional fees
Total expenses
Net investment income
Realized and unrealized gains (losses)
Realized gains on investments, net
Unrealized gains (losses) on investments, net
Unrealized gains (losses) on Senior Loan, net
Unrealized gains (losses) on Equity Contribution, net
Net realized and unrealized losses
Net change in members' equity resulting from operations
$
2009
2,298,781
3,032,284
376,359
21,960
398,319
467,290
26,907
494,197
1,900,462
2,538,087
53,699
3,087,423
(2,775,207)
(2,266,377)
(1,239,446)
(1,298,641)
(1,900,462)
(2,538,087)
-
The accompanying notes are an integral part of these financial statements.
6
$
$
-
Maiden Lane III LLC
Statements of Cash Flows
For the years ended December 31, 2010 and 2009
(Amounts in thousands)
2010
Cash flows from operating activities
Net change in members' equity resulting from operations
$
2009
-
$
-
Adjustments to reconcile net change in members' equity resulting from
operations to net cash provided by operating activities:
Unrealized (gains) losses on investments, net
Unrealized (gains) losses on Senior Loan, 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
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
Realized gains from sale of investments, net
Net cash flow provided by operating activities
Cash flows from financing activities
Repayments of Senior Loan
Net cash flow 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
(3,087,423)
2,775,207
2,266,377
204,065
172,294
1,072
805
2,430,239
76,005
(53,699)
4,784,942
1,239,446
1,298,641
296,287
171,003
153,049
(5,667)
(40,397)
3,086,497
1,800
6,200,659
(4,633,033)
(4,633,033)
(6,180,749)
(6,180,749)
$
151,909
428,272
580,181
$
19,910
408,362
428,272
$
376,359
$
467,290
The accompanying notes are an integral part of these financial statements.
7
Maiden Lane III LLC
Notes to Financial Statements
For the years ended December 31, 2010 and 2009
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 third-party
counterparties of AIG Financial Products Corp. (“AIGFP”). In connection with the acquisitions, the thirdparty 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.
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.
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 and
other short-term investments are carried at fair value based on quoted prices in active markets.
8
Maiden Lane III LLC
Notes to Financial Statements
For the year ended December 31, 2010 and 2009
B. Valuation of Financial Assets and Liabilities
The LLC qualifies as a nonregistered investment company under the provisions of Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) ASC 946 Financial Services Investment Companies and therefore, all investments are recorded at fair value in accordance with FASB
ASC Topic 820 (ASC 820) Fair Value Measurements & Disclosures.
The LLC has elected the fair value option in accordance with FASB ASC Topic 825 (“ASC 825”) Financial
Instruments 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 in accordance with ASC 820. 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.
Fair Value Hierarchy
ASC 820 establishes a three-level fair value hierarchy that distinguishes between assumptions developed using
market data obtained from independent sources (observable inputs) and the LLC's assumptions developed
using the best information available in the circumstances (unobservable inputs). The three levels
established by ASC 820 are described as follows:
·
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 model-based techniques that use significant inputs and assumptions not
observable in the market. These unobservable inputs and assumptions reflect the LLC’s estimates of inputs
and assumptions that market participants would use in pricing the assets and liabilities. Valuation
techniques include the use of option pricing models, discounted cash flow models, and similar techniques.
The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated
with investing in those securities.
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, are recorded as “Senior Loan, at fair
value” in the Statements of Financial Condition and changes in fair value are recorded as “Unrealized gains
(losses) on Senior Loan, net” in the Statements of Operations. The Equity Contribution and related accrued
and capitalized interest, at fair value, are 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, net” 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 because the Equity Contribution is
mandatorily redeemable before the liquidation of the LLC.
9
Maiden Lane III LLC
Notes to Financial Statements
For the year ended December 31, 2010 and 2009
E. Professional Fees
Professional fees are primarily comprised of the fees charged by the Investment Manager and administrator.
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 January 2010, the FASB issued Accounting Standards Update 2010-06, Fair Value Measurements and
Disclosures (Topic 820). New requirements for disclosure of information about transfers among the
hierarchy’s classification and the level of disaggregation of classes of assets were effective for the LLC for
the year beginning on January 1, 2010, and the required disclosures are included in Note 5. Other
requirements, including the gross presentation of purchases, sales, issuances, and settlements in the
reconciliation for Level 3 fair value measurements are effective for the LLC in 2011 and are 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 accounts and pursuant to the order of priority described in Note 4.
10
Maiden Lane III LLC
Notes to Financial Statements
For the year ended December 31, 2010 and 2009
The following table presents a reconciliation of the Senior Loan and Equity Contribution as of December 31,
2010 and 2009 (in thousands):
Senior Loan
Fair value, January 1, 2009
$
2
24,384,487
2009 Activity:
Accrued and capitalized interest
Repayments
296,287
(6,180,749)
Unrealized (gains) / losses 1
Fair value, December 31, 2009
18,500,025
2010 Activity:
Accrued and capitalized interest
Repayments
204,065
(4,633,033)
1
Unrealized (gains) / losses
Fair value, December 31, 2010
$
2,775,207
16,846,264
Equity
Contribution 3
$
2,824,161
Total
$
171,003
-
467,290
(6,180,749)
1,298,641
4,293,805
1,298,641
22,793,830
172,294
$
2,266,377
6,732,476
27,208,648
376,359
(4,633,033)
$
1
Recorded as "Unrealized gains (losses) on Senior Loan, net and on Equity Contribution, net" in the Statements of
Operations.
2
The outstanding principal and accrued interest balance of the Senior Loan were $14,071,057 (principal of $13,525,534
and interest of $545,523) and $18,500,025 (principal of $18,158,567 and interest of $341,458) as of December 31,
2010 and 2009, respectively.
3
The outstanding principal and accrued interest balance of the Equity Contribution were $5,365,583 (principal of
$5,000,000 and interest of $365,583) and $5,193,289 (principal of $5,000,000 and interest of $193,289)
as of December 31, 2010 and 2009, respectively.
5,041,584
23,578,740
The weighted-average interest rates on the Senior Loan and Equity Contribution for the year ended December
31, 2010 were 1.27 percent and 3.27 percent, 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.
4.
Distribution of Proceeds
Prior to December 15, 2010, 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”) were 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 ($500,000 as of December 31, 2010);
11
Maiden Lane III LLC
Notes to Financial Statements
For the year ended December 31, 2010 and 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, 2010);
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;
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 67 percent of all remaining amounts
to FRBNY and to release to the LLC, for distribution to the Equity Investor or its permitted assignees, 33
percent of all remaining amounts.
After December 15, 2010, amounts available in the accounts of the LLC as of the 6th business day of each
month shall be distributed on the 10 th business day of each month in the order of priority as described
above. The first distribution of proceeds under the modified terms was in January 2011.
5.
Fair Value Measurements
The LLC qualifies as a non-registered investment company under the provisions of 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.
Determination of Fair Value
Due to the nature of the investments held by the LLC, valuation is based on model-based techniques that use
inputs, estimates and assumptions that market participants would use in pricing the investments. To the
extent such inputs, estimates and 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 spreads or yield estimates for comparable instruments, data for each credit
12
Maiden Lane III LLC
Notes to Financial Statements
For the year ended December 31, 2010 and 2009
rating, valuation estimates for underlying property collateral, projected cash flows, 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.
Because of the uncertainty inherent in 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.
Valuation Methodologies for Level 3 Assets and Liabilities
In certain cases where there is limited activity for particular investments or where current market quotations are
not reflective of the fair value of an instrument, the 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 that such estimates of assumptions are not observable, the investments are classified within
Level 3 of the valuation hierarchy. In valuing certain debt securities and whole mortgage loans, 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 spreads or yield estimates for comparable
instruments, data for each credit rating, valuation estimates for underlying property collateral, projected
cash flows, and other relevant contractual features. In valuing certain CDOs, assumptions used and
described above for debt securities and whole mortgage loans may have been used to value the underlying
securities within a CDO in order to ultimately determine the value of the respective CDO.
The following table presents the assets and liabilities recorded at fair value as of December 31, 2010 by the fair
value hierarchy (in thousands):
Fair value hierarchy
2010
Assets:
ABS CDOs
High-Grade ABS CDOs
Mezzanine ABS CDOs
Commercial Real Estate CDOs
Total ABS CDOs
RMBS, CMBS, & Other
Level 1
$
1
Level 2
-
$
Level 3
76
2,290
2,366
225,261
$
Total fair value
14,968,872
1,941,634
5,760,634
22,671,140
75,089
Money market funds 1
110,683
-
-
Other Short Term Investments 1
Total assets
469,498
580,181
227,627
22,746,229
Liabilities:
Senior Loan
Equity Contribution
Total liabilities
1
$
$
$
-
$
$
$
-
Recorded as a component of “Cash and cash equivalents” in the Statements of Financial Condition.
13
$
$
$
(16,846,264)
(6,732,476)
(23,578,740)
$
14,968,872
1,941,710
5,762,924
22,673,506
300,350
110,683
$
$
$
469,498
23,554,037
(16,846,264)
(6,732,476)
(23,578,740)
Maiden Lane III LLC
Notes to Financial Statements
For the year ended December 31, 2010 and 2009
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
Level 1
1
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
Liabilities:
Senior Loan
Equity Contribution
Total liabilities
Level 2
$
-
$
$
-
$
$
(18,500,025)
(4,293,805)
(22,793,830)
$
$
$
(18,500,025)
(4,293,805)
(22,793,830)
Recorded as a component of “Cash and cash equivalents” in the Statements of Financial Condition.
The following table presents a reconciliation of all assets and liabilities measured at fair value using
significant unobservable inputs (Level 3) for the year ended December 31, 2010, including realized and
unrealized gains (losses) (in thousands):
Assets:
ABS CDOs
High-Grade ABS CDOs
Mezzanine ABS CDOs
Commercial Real Estate CDOs
Total ABS CDOs
RMBS, CMBS, & Other
Total assets
Change in
unrealized gains
(losses) related
to financial
instruments
held at
December 31,
2010
Fair value at
January 1, 2010
Net purchases,
sales, paydowns,
and settlements
Net realized /
unrealized gains
(losses)
Net transfers
in or (out) 3,4
$
15,399,671
1,989,447
4,693,940
22,083,058
208,513
$
(1,732,809)
(252,978)
(495,666)
(2,481,453)
(5,451)
$
1,302,010
205,259
1,564,049
3,071,318
12,530
$
(94)
(1,689)
(1,783)
(140,503)
$
14,968,872
1,941,634
5,760,634
22,671,140
75,089
$
1,302,010
193,150
1,522,460
3,017,620
12,530
$
22,291,571
$
(2,486,904)
$
3,083,848
$
(142,286)
$
22,746,229
$
3,030,150
$
(18,500,025)
$
4,428,968
$
(2,775,207)
$
-
$
(16,846,264)
Fair value at
December 31,
2010
Liabilities:
Senior Loan
Equity Contribution
Total liabilities
1
2
(172,294) 2
(4,293,805)
$
(22,793,830)
1
$
4,256,674
(2,266,377)
$
(5,041,584)
$
-
$
(2,266,377)
(23,578,740)
$ (5,041,584)
Includes $204,065 of accrued and capitalized interest.
Includes $172,294 of accrued and capitalized interest.
3
RMBS, CMBS and other securities, with a December 31, 2009 fair value of $140,503, were transferred from Level 3 to Level 2 because they are valued at
December 31, 2010 based on quoted prices for identical or similar assets in non-active markets (Level 2). These investments were valued in the prior year
based on non-observable inputs (Level 3). There were no other significant transfers between Levels during the year ended December 31, 2010.
4
The amount of transfers is based on fair values of the transferred assets at the beginning of the reporting period.
14
$ (2,775,207)
(6,732,476)
Maiden Lane III LLC
Notes to Financial Statements
For the year ended December 31, 2010 and 2009
The following table 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
December 31,
2009
Change in
unrealized gains
(losses) related
to financial
instruments
held at
December 31,
2009
Fair value at
January 1, 2009
Net purchases,
sales, paydowns,
and settlements
Net realized /
unrealized gains
(losses)
Net
transfers
in or (out)
$
26,664,828
$
(3,133,811)
$
(1,239,446)
$
-
$
22,291,571
$
(24,384,487)
$
5,884,462
1
$
-
$
-
$
(18,500,025)
$
$
(171,003)
5,713,459
2
$
(2,824,161)
(27,208,648)
$
(1,298,641)
(1,298,641)
$
-
$
(4,293,805)
(22,793,830)
(1,298,641)
$ (1,298,641)
Assets:
Investments
$ (1,239,446)
Liabilities:
Senior Loan
Equity Contribution
Total liabilities
1
2
6.
-
Includes $296,287 of accrued and capitalized interest.
Includes $171,003 of accrued and capitalized interest.
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 non-agency 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
15
Maiden Lane III LLC
Notes to Financial Statements
For the year ended December 31, 2010 and 2009
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. 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 at December 31, 2009.
There were no remaining ABS CDO investments held by the LLC with embedded 2a-7 Puts at December
31, 2010.
The LLC may acquire underlying collateral of ABS CDOs held in the portfolio. Collateral acquired by the LLC
is reported as “RMBS, CMBS, and Other” in the Condensed Schedules of Investments as of December 31,
2010 and 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. Adverse developments in the RMBS
and CMBS markets could have a considerable effect on the LLC because of its investment concentration in
CDOs backed by CMBS and RMBS as well as through “RMBS, CMBS and Other” securities held directly
by the LLC.
16
Maiden Lane III LLC
Notes to Financial Statements
For the year ended December 31, 2010 and 2009
At December 31, 2010, the investment type/vintage and rating composition of the LLC’s $23 billion portfolio,
recorded at fair value, as a percentage of aggregate fair value of all securities in the portfolio, was as
follows:
Rating 1, 2, 3
AAA
AA+ to AA- A+ to A-
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%
64.1%
22.1%
29.1%
6.3%
6.7%
1.0%
0.0%
1.0%
0.0%
0.0%
65.2%
22.1%
30.1%
6.3%
6.7%
Mezzanine 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%
0.1%
0.1%
0.0%
0.0%
0.0%
8.2%
4.7%
2.9%
0.0%
0.6%
0.1%
0.1%
0.0%
0.0%
0.0%
8.5%
4.9%
2.9%
0.0%
0.6%
Commercial Real-Estate 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%
25.0%
3.1%
0.0%
0.0%
21.9%
0.0%
0.0%
0.0%
0.0%
0.0%
25.0%
3.1%
0.0%
0.0%
21.9%
RMBS, CMBS, & Other:
Pre-2005
2005
2006
2007
0.1%
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%
0.0%
0.0%
0.0%
0.0%
0.0%
0.9%
0.1%
0.7%
0.1%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
1.3%
0.2%
1.0%
0.1%
0.0%
Total Investments
0.1%
0.2%
0.1%
0.1%
98.3%
1.2%
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.
17
Maiden Lane III LLC
Notes to Financial Statements
For the year ended December 31, 2010 and 2009
8.
Financial Highlights
The disclosures of internal rate of return and ratios of net investment income and expenses to average members’
equity have been omitted because the LLC has no substantial equity and such disclosures would not be
meaningful.
9.
Subsequent Events
There were no subsequent events that require adjustments to or disclosures in the financial statements as of
December 31, 2010. Subsequent events were evaluated through March 22, 2011, which is the date the LLC
issued the financial statements.
18