By Adam Tempkin and Karen Brettell
April 26 (IFR/Reuters) - Barclays and Deutsche Bank on
Thursday won a fierce bidding war for a portfolio of toxic
assets the US government acquired in the 2008 bailout of
insurance giant AIG.
The Federal Reserve announced it had selected the two banks
to buy two vast collateralized debt obligations (CDOs),
consisting of bundles of commercial mortgage bonds, which have a
face value of $7.5 billion.
The CDOs helped bring down AIG, which needed a
massive federal bailout, and were not long ago seen as the kind
of toxic re-packaged real-estate assets that spurred the
But with interest rates at current lows, even the worst of
the mortgage bonds underlying the CDOs are now much more
attractive investments -- just one reason that nearly every
major Wall Street bank entered the auction.
Barclays and Deutsche Bank beat out two
rival consortia, one comprised of Bank of America, Morgan
Stanley and Nomura, and the other grouping Citigroup, Goldman
Sachs and Credit Suisse.
The Fed did not disclose how much the winners would pay,
although the assets were widely estimated to fetch around 60
cents on the dollar.
The banks likely bid greater than 65.6 cents on the dollar,
suggesting that the winner paid full market value for their
bonds, according to a research article published on Thursday
afternoon by CMBS strategists at Amherst Securities. The
analysts also reported that Deutsche Bank and Barclays were able
to pre-place all of the underlying CMBS bonds.
"I am pleased with the level of interest and the results of
this process, especially with the strength of the winning bid,"
said William Dudley, president of the New York Fed.
All the groups of banks were actively soliciting their own
bids from investor-clients before Thursday's auction, indicating
the CDOs are likely to be quickly re-sold - perhaps broken down
into their constituent mortgage bonds or even re-packaged as
Analysts who track AIG for Sanford C. Bernstein & Co said in
a report earlier this month that the winning bidders would be
able to realize a profit from breaking apart the CDOs and
re-selling the separate pieces "in classic Wall Street
But not all investors have been impressed by the real value
of the assets, however they may be re-sliced and diced, as
nearly half those underlying mortgage bonds are junk-rated.
"I probably would shed few tears for the type of investors
inclined to get involved here," said Chris Sullivan, chief
investment officer of the United Nations Federal Credit Union.
"They're big boys and girls who probably feel quite confident
arriving at independent valuations of these structures," he
The Fed selected Barclays and Deutsche Bank just hours after
bidding closed on the CDOs, part of a vast portfolio of former
AIG assets known as Maiden Lane III.
Thursday's sale is the latest move by the US government to
unwind holdings it acquired in a slew of bailouts it undertook
with taxpayer dollars during the depths of the financial
"This successful sale marks another important milestone in
the wind-down of our crisis-era intervention," the New York
Fed's Dudley said.
AIG, then the world's largest insurer, was just minutes from
bankruptcy -- it had no money to pay out credit default swaps it
owed on these very same CDOs -- when the government stepped in
to save the company in September 2008.
Maiden Lane III eased some of AIG's obligations by buying
CDOs from the insurer's counterparties. In exchange for being
bought out at 100 cents on the dollar, the counterparties agreed
to terminate the swaps.
That deal was widely criticized as being a back-door bailout
of the banks that AIG did business with, some of whom were
bidders in Thursday's auction.
The latest auction was limited only to the eight banks that
bid on Thursday -- all of whom were specifically invited to bid
by the Federal Reserve.
A CLOSE FINISH
Market sources familiar with today's auction said that the
bids from each of the partnerships were very close in price, and
on the high side compared to what the Fed was expecting.
Moreover, Barclays and Deutsche Bank won the bonds by a small
margin, not a large gap.
Several investors complained that the fees charged by the
consortia to investor clients for aggregating their bids for
presentation to the Fed were "egregious".
The Citigroup/Goldman Sachs/Credit Suisse group and the Bank
of America/Morgan Stanley/Nomura consortium were asking investor
clients to compensate them 25 basis points more than the dollar
price of each bond.
"Implementing the large bid-aggregation fee transformed the
consortiums winning bid into a losing bid and kept them from
winning the auction," said one trader.
While Barclays and Deutsche Bank did not mention a
bid-aggregation fee in its partnership announcement sent to
clients, traders said that the banks would ultimately charge a
fee to unwind an embedded swap tied to the CDOs that Barclays
was counterparty on.
The two European banks were favored to win the auction,
because they already had a vested interest in the two complex
securities on offer.
Deutsche Bank owned junior tranches of the two CDOs being
sold and today's successful bid means that it, along with
Barclays, now holds majority ownership in the structure.
Barclays, meanwhile, is counterparty to a swap that is tied
to the CDO, and this swap needs to be unwound before the deal
could be "unlocked" and broken into the individual CMBS assets,
market participants said.
That is exactly what investors want -- the individual CMBS
backing the CDOs are valued in the markets at more than the CDO
"You will have more investors to buy them. It is easier to
sell the individual parts," said Ron D'Vari, chief executive
officer at NewOak Capital in New York.
This differs from the approach taken by the two other
consortia, which planned to sell the securities either in their
current form as CDOs, or as a repackaged product known as a
re-remic, which would allow a new investment-grade bond to be
The re-remic approach would have attracted more hedge fund
types which like the riskier parts of the restructured CDOs
because they would offer hefty yields, D'Vari said.
The commercial real estate securities market has come under
pressure in recent days, partly on concerns whether the
individual CMBS issues from MAX CDO deals would come to market.
When the US government sold a chunk of other AIG assets last
year that were primarily backed by residential mortgages, the
resulting glut in supply wreaked havoc with that sector of the
D'Vari said some of these underlying CMBS face refinancing
risks as some of the loans will mature later this year and in