Zacks_Analysts' Blog : Fed Raises $7B from AIG RMBS - Analyst Blog

Yesterday, the New York Federal Reserve (Fed) reported that it sold American International Group Inc.’s (AIG) Maiden Lane II with fair value worth $7.014 billion to Credit Suisse Group AG (CS).  Maiden Lane II is an investment portfolio containing residential mortgage-backed securities (RMBS), which was acquired by Fed from AIG during the peak of financial crisis.

Accordingly, the bonds were sold off to Credit Suisse through a competitive bid, which was also participated by Goldman Sachs Group Inc. (GS), Barclays Capital plc (BCS) and Merrill Lynch of Bank of America Corp. (BAC). The Fed appointed BlackRock Inc. (BLK) to manage this RMBS portfolio.

Before this, in the second quarter of 2011, the Fed had raised earned about $4.68 billion from these securities, whose notional value was about $10 billion. Moreover, majority of the RMBS were sold to broker-dealers in nine sales that took place between April and June 2011. These primarily included Merrill Lynch, Pierce, Fenner, & Smith units of Bank of America, which purchased a chunk of $1.14 billion of debt followed by Citigroup Inc. (C) that acquired $699.4 million. Meanwhile, Royal Bank of Scotland Plc’s (RBS) RBS Securities purchased $541.1 million and Credit Suisse acquired $419.1 million.

However, the Fed had planned to retard the rate of sale in June 2011, given the severe market volatility, which shrunk the value of such subprime mortgage securities to almost $21 billion. This was due to the then over-supply of the subprime securities owing to the de-risking activities implemented by many organizations that finally led to decline in demand and prices in the market. Hence, the Fed decided to wait and make as best-value investments as possible.

Another reason for the failure to dispose all bonds in 2011 lies in the fact that most of these bonds were backed by prime and so-called Alt-A mortgages while the remaining senior bonds were backed by sub-prime and home-equity collateral, wherein the over-supply dampened the demand and therefore the prices of these bonds.

In 2008, the Fed had put $19.5 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. The total notional value of the Maiden Lane II portfolio was more than $30 billion.

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, Fed rejected AIG’s bid of $15.7 billion to buyback the portfolio. The Fed reasoned, in March 2011, 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.

Besides, the Fed has decided to disclose the number and type of bonds sold each month, but not the price paid. Every quarter it will provide a total dollar figure of the assets sold along with the names of the 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.