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 portfolio.
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 selling.”
(Adam Tempkin is a senior IFR analyst)
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