REFILE-UPDATE 1-Fed solicits banks to buy risky securities
By Karen Brettell and Richard Leong
NEW YORK, April 18 (Reuters) - The New York Federal Reserve said on Wednesday it has asked eight investment banks to bid on risky assets from its Maiden Lane III portfolio, which was created during its 2008 bailout of insurer American International Group (AIG).
This move would trim the U.S. central bank's balance sheet which about tripled from the emergency measures it has enacted to help the banking system and the economy since the global credit crunch.
It also signals some confidence that collateralized debt obligations, a once-fledgling asset class because of its tie to the U.S. mortgage market, might have finally stabilized after they were battered since the housing meltdown.
Barclays Capital, Citigroup, Credit Suisse , Deutsche Bank, Goldman Sachs, Bank of America's Merrill Lynch broker, Morgan Stanley and Nomura have been invited to submit bids for the assets, "based on the strength of their expressions of interest" in the bonds, the Fed said in a statement on its Web site.
The New York Fed said it opened up the bidding for these CDOs "in response to several reverse inquiries."
BlackRock Solutions, the investment manager for the Maiden Lane portfolio, will conduct a bid process for these CDOs, with all bids due on April 26, though there is no fixed timetable for any sales, the Fed said.
The value of the MAX CDOs, originally arranged by Deutsche Bank, in the Maiden Lane III portfolio are based on pools of commercial mortgage-backed securities. Their tranches carry junk ratings from Standard & Poor's.
AIG's has a $5 billion interest in Maiden Lane III
The Fed said it will decide whether to sell the assets based on the strength of the best bid, adding that it will proceed with the sales only if this "represents good value for the public."
Maiden Lane III grew out of the purchase of $29.3 billion in collateralized debt obligations from certain counterparties to an AIG unit. It was a key part of the $182 billion rescue of the insurance company.
AIG put $5 billion of equity in the portfolio, which is accruing interest, and the company is also entitled to a third of the profits after the Fed's loan that funded Maiden Lane III is repaid.
The insurer expected an increase in the value of its stake in Maiden Lane III by about $685 million if the New York Fed liquidates the portfolio at its estimated fair value, according to AIG's 2011 10-K filing.
The fair value of the remaining portfolio was around $17.59 billion as of last week.
The New York Fed added that it will seek to make any sales without disrupting the market, after some analysts blamed the sale of securities from Maiden Lane II last year for a dramatic selloff and widening in spreads across securitized products.
It suspended sales from Maiden Lane II when demand started to fall off and they created a glut in the market.
Since then, improved market sentiment and a dearth of high yielding assets is likely to aid demand for these riskier bonds, analysts said.
"The market sentiment is pretty positive at this point. Given this low interest rate environment, people are chasing yields right now," said David Yan, head of CDO/CLO research at Credit Suisse in New York.
The New York Fed said it will provide details on prices paid for the assets after it sells its last position.
The group of dealers invited to bid on the Maiden Lane III assets is larger than those for Maiden Lane II, when five firms were asked to provide bids. These were Barclays, Credit Suisse, Goldman, Morgan Stanley and RBS Securities.
The Fed has been criticized for limiting the pool of bidders and requiring large bulk purchases, which critics say limits price competition and benefits dealers to the detriment of the public interest.
"It basically guarantees lower proceeds and plays into the hands of the big dealer, because they are the only ones that have the capital to take down a larger trade," said Adam Murphy, president of Empirasign Strategies in New York, which tracks trading in securitized debt.
The New York Fed held three auctions in February to sell the $20.5 billion in risky assets from Maiden Lane II. Credit Suisse Group AG bought roughly $13 billion worth of the Maiden II bonds, while Goldman Sachs purchased about $6.2 billion.
Credit Suisse also bought the first tranche of Maiden Lane bonds in January with a face value of $7 billion.