The New York Federal Reserve (the Fed) reported that it will bid for American International Group Inc.’s (AIG) Maiden Lane II, an investment portfolio containing residential mortgage-backed securities (RMBS), which were acquired by the Fed from the AIG during the peak of financial crisis.
Accordingly, yesterday, the Fed has scheduled the auction of 73 bonds for later this week, carrying a current face value of $3.8 billion. This is the ninth and the largest bid offered so far, wherein 17 bonds were being backed by prime and so-called Alt-A mortgages. However, most of the remaining senior bonds were backed by sub-prime and home-equity collateral.
The bonds sold are part of a portfolio of 800 residential mortgage-backed securities held in a special purpose vehicle called Maiden Lane II, one of the several government vehicles set up during the financial crisis to buy billions of dollars in mortgage securities from AIG.
In 2008, the Fed had put $20 billion into Maiden Lane to help buy residential mortgage-backed securities from AIG, which had a face value of $39.5 billion at that time.
During the same period, the sub-prime mortgage market remained essentially frozen and these assets were high-yielding and were most likely to be sold to private equity groups, hedge funds and insurance groups.
The fair value of the portfolio at the end of 2010 reached $15.9 billion, according to the Fed’s web site. However, the Fed rejected AIG’s bid of $15.7 billion to buy back the portfolio.
The Fed reasoned on March 30 that the public interest in maximizing returns and maintaining market stability would be better served by selling the assets competitively. Hence, it started vending bonds from the RMBS portfolio since April 2011.
Last month, the Fed unloaded about 63 bonds for approximately $2.25 billion, in a two-part sale. While most recently the Fed vended all 29 bonds offered for $878.6 million, it could only sell only 34 bonds for $1.37 billion in its seventh bid although it expected to unload 53 bonds for $2.08 billion. This difference between bid offered and sold was highest among all the auction sales.
In April, the Fed sold 45 bonds for about $1.16 billion, in separate blocks. Meanwhile, AIG had also bought 42 bonds from the Fed during April, carrying a face value of $1.3 billion, although 52 bonds were offered for sale. The face value was, however, less than the $1.5 billion notional value of all the bonds put up for auction. Nevertheless, the face amount before last week's sale topped $30 billion.
While the Fed expects to auction more bonds next month, it also plans to retard the rate of sale going ahead. Each month, the Fed will disclose the number and type of bonds sold, but not the price paid. Every quarter it will provide a total dollar figure of the assets sold along with the names of firms that bought the securities.
Furthermore, the Fed will not be disclosing what these firms paid until all of Maiden Lane II's assets are sold. Within three months of the final sale, the Fed will disclose who bought what securities, the price they paid as well as the price that Fed paid when it bought the securities from AIG in 2008.
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