Thread: Fed Sells Out Latest AIG Bond Offering

MAY 20, 2011.

Fed Sells Out Latest AIG Bond Offering

By MARK STEIN

NEW YORK—The Federal Reserve Bank of New York on Thursday sold all 29 subprime mortgage bonds on offer in its latest sale from a portfolio of securities acquired from American International Group.

The securities, held in a legal entity called Maiden Lane II, sold for what the Fed had estimated their fair current value to be, $878.6 million. The debt was part of a clutch of so-called toxic bonds the central bank acquired when it rescued the failing insurer in 2008.

Market participants said the small number and size of assets on offer helped the Fed to sell out its entire list.

"To be sure, a lower-dollar list presents a less-challenging hurdle for both buyers and sellers," Walter Schmidt, a senior vice president for FTN Financial Capital Markets in Chicago, wrote in a note to clients. "Still, it was good for the market to see that the entire…list traded after such a low hit rate on the previous list."

The Fed had been selling bonds with a face value of about $1.5 billion almost each week since April 6, and some market participants have said the process is too drawn out and is depressing prices on all subprime residential mortgage bonds.

Investors initially were excited about the sales but the steady pressure of a weekly auction brought down prices of some securities, such as the lowest-quality subprime bonds. Only 34 of 53 bonds—64% of those on offer—sold at the Fed auction last week. That compares with 88% overall since the process began last month.

The Fed said it is "pleased" with its weekly auction of subprime bonds, according to a representative.

Maiden Lane II had a total face value of about $30 billion and an estimated market value today of about $16 billion. The Fed has sold about $6 billion of the portfolio's assets so far. There is no fixed timetable for sales, and the Fed can vary the size and composition of each auction.

Thursday's sale was closely watched by investors and traders in the market for mortgage-backed securities because of what one characterized as "market fatigue" with the pace of sales and what others said was waning interest in the Fed's list of assets.

AIG, which had around $21 billion cash at the end of 2010, much of it in anticipation of buying the securities in Maiden Lane II, had invested a third of that sum in various assets by the end of March.

In its recent first-quarter report, released in early May, AIG said it has been "actively redeploying" its investable cash into higher-yielding assets but didn't specify what it is buying. It isn't known how much AIG has spent on bonds the Fed put up for sale.

http://online.wsj.com/article/SB1000142 ... 32248.html

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