The Federal Reserve on Friday lifted an estimate of the value of Bear Stearns and American International Group assets used to secure their rescue last year, potentially reducing losses to U.S. taxpayers.

The Fed said that a quarterly revaluation of the roughly $62 billion portfolio resulted in a net increase in fair value of $1.5 billion at the end of June. Fair value means an estimate of what the assets would fetch if sold in an orderly market on June 30.

In addition, the Fed said that cash flow generated by the assets from AIG during the second quarter had been used to pay down the loan that they are securing from the Federal Reserve Bank of New York by around $2.6 billion.

The Fed put up $29 billion in March 2008 to underwrite JP Morgan Chase's rescue of Bear Stearns, and was forced to step up again last September to prevent AIG from collapsing, days after the failure of investment bank Lehman Brothers.

The assets pledged to the Fed as collateral against the loans are housed in three private companies, called Maiden Lane I, for Bear Stearns' assets, and Maiden Lane II and III for the AIG assets, and they now sit on the Fed's balance sheet.

Any loss potentially reduces the amount of revenue that the Fed can pass along to the U.S. Treasury, and would therefore represent a loss to U.S. taxpayers.

The latest fair value estimate of the asset coverage of the Fed loans stood at a loss of $3.40 billion for the Bear Stearns' portfolio, a $2.37 billion loss for Maiden Lane II and a $129 million loss for Maiden Lane III, Fed data showed.

(Reporting by Alister Bull; Editing by James Dalgleish)

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