by Adam Tempkin
NEW YORK, April 8 (IFR) - Wall Street never does anything
for free. But the upside of getting involved in this week's
high-profile auction of the first bid list off of the New York
Fed's Maiden Lane II portfolio might have provided enough
reason for there to be an exception, sources say.
A dealer frenzy took place this week to get a piece of the
Federal Reserve's inaugural US$1.5bn bid list of distressed AIG
(AIG.N) securities from its US$30bn+ Maiden Lane II RMBS
The sheer advertisement value of being involved in the
high-profile auction - and potential for creating a template
for how future clients can profitably exit their subprime
holdings - meant that many banks worked on behalf of end-user
accounts for free, according to sources close to the trades.
The Fed will be publishing who the purchasers are in a few
months, and dealers wanted the publicity so that they can show
clients that they are plugged in to the market.
"Every dealer wants to be the guy to buy more bonds than
anyone. The Street fell all over itself to work for free," said
a managing director at a large bank's RMBS desk.
"There was no 'bid-ask'," he said, meaning that dealers
were not looking to make a profit from investors they
represented, as is the typical practice for secondary trading
of RMBS. "Usually they need at least half a [basis] point for
doing this trade, but not in this case."
Often a buyside account is aware of the step-up that the
dealer is getting from purchasing bonds and flipping it to
them, but no such price differential existed for bonds on the
Maiden Lane bid list.
"For example, dealers told their accounts, 'If your bid is
$60, that what we'll ask for, and we'll cross the bonds over to
you,'" said the RMBS banker.
Why work for free? First of all, the trading color one can
get from being involved and talking to hundreds of accounts can
be very helpful. Secondly, one investor noted that the Fed's
Maiden Lane II is not the only portfolio out there.
There are multiples of Maiden Lane-type assets in various
accounts, sources said. As the market recovers, this creates an
opportunity for dealers to use the ML II trading experience as
a template for other clients looking to get rid of their
non-agency RMBS distressed assets.
"The dealers can tell clients, 'Look, the Fed has been
successful working itself out of its portfolio. You should
think about it...and by the way, we traded X% of the first bid
list at these levels,'" said an investor.
Word on the Street is that Citigroup (C.N) bought nearly
one-third of the US$1.5bn bid list this past week on behalf of
its client, AIG - who originally owned the securities to begin
with. At the height of the financial crisis, the Fed bought
the securities in order to rescue AIG.
The Fed rejected an outright bid of US$15.7bn from AIG two
weeks ago for the entire Maiden Lane II porfolio, reasoning
that auctioning it off in blocks would fetch a better price and
would prevent too much of it from ending up with one bidder.
"This list seemed to trade at, or above, most of the price
guidance we saw," said Adam Murphy, president of Empirasign
Strategies, a capital markets data provider.
"There's a lot more product to sell, so it's hard to make a
strong argument that subsequent lists will trade snugger. I
think they'll trade wider because of the volumes involved, but
not much wider because of the deliberate nature of the
(Adam Tempkin is a senior IFR analyst)
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