New York Fed Said to Weigh Sale of Some AIG Mortgage Debt

The Federal Reserve Bank of New York may sell a block of the mortgage bonds it assumed from American International Group Inc. (AIG) after being approached by a potential buyer, according to two people familiar with the matter.

The central bank may hold a one-time auction for about $7 billion of the securities, said the people, who declined to be identified because the deliberations are private. The winner may need to buy all of the debt offered, one of the people said.

The New York Fed in June ended a plan to sell a group of the assets assumed in AIG’s 2008 rescue through a series of auctions, following sales of about $10 billion in face value of mortgage securities. The assets, held by a vehicle called Maiden Lane II, had dwindled to about $21 billion when the auctions were halted.

Investors and traders blamed the earlier auctions for causing prices to tumble. After values fell further and trading shriveled as Europe’s debt crisis intensified, the planned sale could be either helpful for the market or “a disaster,” said Paul Norris of Dwight Asset Management Co.

“The hope was that the Fed would sit back with this Maiden Lane II portfolio and not talk about it until the market had some strength to it,” said Norris, a senior money manager at the Burlington, Vermont-based firm, which manages and advises on more than $50 billion of assets.

Jack Gutt, a spokesman for the New York Fed, and Mark Herr, a spokesman for New York-based AIG, declined to comment. Dow Jones reported the potential sale earlier today.

Asked to Bid

A list of four or five dealers, including Goldman Sachs Group Inc., may be asked to assemble bids, the people said. More than 40 bond brokers were invited to participate during the initial sales. Michael Duvally, a spokesman for the New York- based Goldman Sachs, declined to comment.

The New York Fed began selling the bonds piecemeal after rejecting a $15.7 billion bid from AIG for the entire pool in March. The portfolio includes securities backed by the types of home loans with some of the highest default rates, such as so- called subprime, Alt-A and option adjustable-rate mortgage debt.

A rout in the market for the bonds has eased, with typical prices of top-ranked securities tied to Alt-A ARMs unchanged at 48 cents on the dollar in the month ended Jan. 4, after plunging from last year’s high of 68 cents in February to the lowest since 2009, Barclays Capital data show. Alt-A loans fall between prime and subprime in terms of expected defaults.

To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net;

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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