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The Federal Reserve Bank of New York is to auction two packages of subprime home mortgage bonds from its Maiden Lane III portfolio in a move that will further test the market’s seemingly unquenchable appetite for lower-rated debt.
The New York Fed said in a statement on Friday that it had decided to sell the Triaxx collateralised debt obligations after “several strong reverse inquiries”.
All of the Maiden Lane III CDOs were acquired by the New York Fed as part of the US government’s 2008 bailout of insurer AIG. But the Triaxx CDOs are backed by subprime home loan bonds and have been the subject of a still pending lawsuit filed by AIG.
The New York Fed said that nine banks would be able to submit bids for the CDOs by next Thursday. The banks are Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley, Nomura and Royal Bank of Scotland.
The auction follows last week’s Fed sale of junk-rated Max CDOs, which were backed by commercial real estate mortgage bonds.
While the Max sale return was not disclosed, analysts estimated it was more than the $4.2bn the New York Fed reckoned fair market value at the end of 2011.
Before that sale, the New York Fed was owed about $8.7bn on Maiden Lane III.
Separately, the US Treasury said on Friday that it planned to sell additional AIG shares. The US government still owns 70 per cent of the insurer from its $180bn bailout of the company in 2008. It has been selling down its stake over the past year.
Treasury did not say how much AIG stock it would sell, but AIG said it would buy back up to $2bn worth of the shares, implying Treasury would sell at least that much. If Treasury were to sell $2bn, it would reduce its stake to about 67 per cent.
AIG is also among the end buyers of Maiden Lane III assets, as it was with prior Maiden Lane sales. “We saw some value in the sale of Max, and in fact we bought $600m of depositions in the insurance companies as part of our investment portfolio,” Robert Benmosche, chief executive, told analysts.
“To the extent we can get the price we think makes sense we would be a buyer,” he added.
Before the Max sale, the New York Fed was owed about $8.7bn on Maiden Lane III. The proceeds of the Max CDOs and other sales from the Maiden Lane III portfolio will first go to repay the New York Fed. AIG is entitled to the next $5.5bn and the remaining proceeds will be split, with a third going to AIG and two-thirds to the New York Fed. The New York Fed will remit any gains to the US Treasury.
AIG shares fell 3.8 per cent to $32.83 on Friday amid concern that it had pledged the proceeds of Maiden Lane III sales against some of its remaining pre-crisis liabilities.