March 25, 2011 / 2:56 PM / 7 years ago

Bidders hope for Fed Maiden Lane II auction-source

* AIG made $15.7 bln offer on March 10

* Fed took troubled assets off AIG hands during crisis

* Less interest in break-up of assets - source

By Ben Berkowitz

NEW YORK, March 25 (Reuters) - The Federal Reserve has not yet started a sale process for the mortgage-backed securities American International Group (AIG.N) bid on this month, but a de facto auction has begun that ought to be formalized, a person familiar with the process said on Friday.

AIG surprised markets on March 10 with a $15.7 billion cash bid for the assets of Maiden Lane II, a vehicle established during the depths of the financial crisis to help save AIG from collapse by taking bad assets off its books.

AIG took the offer public after months of fruitless behind-the-scenes negotiations with the Fed, which would make a $1.5 billion profit under the terms of the company’s offer. It effectively served as a first shot that created interest from other institutions.

“We expected that others would bid,” the source said on condition of anonymity. “We understood that a number of large institutions have already modeled it.”

The securities have increased in value since 2008, making them an attractive investment, either for an insurer looking for better returns on capital or for a bank looking for a distressed asset that stands to appreciate.

As of March 23 the portfolio was worth $15.9 billion, according to Fed data, unchanged from the last balance before AIG took its bid public.

The Fed has been very tight-lipped, saying only that it was aware of AIG’s offer and its long-standing interest and would ultimately act in the best interest of taxpayers.

The source said the “safest” way for the Fed to do that was to hold a formal auction, bring in an outside advisor like BlackRock Inc (BLK.N) to evaluate the bids, and then announce a winner.

“If the price goes up to 16 (billion dollars), 16.2, 16.3, 16.4, what it will tell the world is the Fed has opened up the process. By its very nature, there are few who could bid that kind of money,” the source said.

Both AIG and the Fed declined to comment. The U.S. Treasury, which owns 92 percent of AIG, also declined to comment. BlackRock was not immediately available to comment.

AIG shares fell 0.4 percent to $36.19 in morning trading. The stock is down 0.8 percent since it made the offer, and down 16 percent since a recapitalization deal closed in January.

That deal paid off AIG’s credit line with the Fed and consolidated the government’s interest in the company in the Treasury stake. (Reporting by Ben Berkowitz, additional reporting by Kristina Cooke in New York, David Lawder in Washington and Aaron Pressman in Boston; editing by John Wallace)

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