New York Fed Sells $6.2 Billion of Bonds From AIG Rescue to Goldman Sachs

The Federal Reserve Bank of New York sold $6.2 billion in face value of mortgage bonds it assumed in the rescue of American International Group Inc. (AIG) to Goldman Sachs Group Inc. (GS), allowing one of its bailout loans to be repaid.

The New York Fed said it sold the bonds through a “competitive process” after Credit Suisse Group AG (CSGN) made an unsolicited offer to buy assets held by a vehicle called Maiden Lane II LLC (FARBML2). The sale will allow the repayment of the central bank’s loan to Maiden Lane II, which was originally $19.5 billion, according to a statement posted on the New York Fed’s website.

Today’s sale was the second such this year, following a Jan. 19 disposition of about $7 billion of mortgage bonds to Credit Suisse. The New York Fed’s sales were in response to unsolicited bids, after a series of auctions last year were blamed for damaging prices. So far, the latest sales haven’t curbed a rally in home-loan bonds, with analysts at Morgan Stanley and Bank of America Corp. saying they are contributing to the gains.

“When the market saw there was a deep bid for this paper, the momentum picked up,” said Bryan Whalen, co-head of mortgage bonds at Los Angeles-based TCW Group Inc. which oversees $118 billion. “Both the end buyers as well as the Street are willing to put money to work. It doesn’t seem like the momentum is slowing, if anything, it looks like it’s picking up.”

The New York Fed in June ended its earlier plan to sell Maiden Lane II assets through regular auctions, following sales of about $10 billion. The face value of the assets had dwindled to about $21 billion when the auctions were halted.

Selling Piecemeal

The New York Fed began selling the bonds piecemeal after rejecting a $15.7 billion bid from New York-based insurer 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 (BBMDA60P) and option adjustable-rate mortgage debt.

Typical prices for the most-senior bonds tied to option ARMs climbed to 55 cents on the dollar last week from 49 cents in October and November, according to Barclays Capital data. That’s down from last year’s high of 65 cents in February. Option ARMs allow borrowers to pay less than the interest they owe by increasing their balances.

The Fed was owed about $6.7 billion on the loan to Maiden Lane II as of Feb. 1, not taking into account proceeds from last month’s transaction. About $6 billion in bonds remain in the Maiden Lane II portfolio, based on disclosures from the Fed.

‘Continued Interest’

“I am pleased with the continued interest in these assets and am especially gratified that the New York Fed’s loan to ML II will be repaid as a result of the sale announced today,” New York Fed President William C. Dudley said in the statement.

The Fed made another loan to help bail out AIG to a vehicle called Maiden Lane III LLC, and was owed about $9.6 billion under that facility as of Feb. 1, according to the New York Fed’s website. The central bank is also owed about $4.6 billion from its rescue of Bear Stearns Cos.

The New York Fed “will dispose of the remaining securities in the ML II portfolio individually and in segments over time as market conditions warrant through a competitive sales process, while taking appropriate care to avoid market disruption,” the regional bank said. “There will be no fixed timeframe for the sales; at each stage, the Federal Reserve will only transact if the best available bid represents good value for the public.”

Michael DuVally, a spokesman for Goldman Sachs, and Steven Vames, a spokesman for Credit Suisse, declined to comment.

To contact the reporter on this story: Caroline Salas Gage in New York at csalas1@bloomberg.net; Jody Shenn in New York at jshenn@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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