New York Fed Seeks Bids for CDO Holdings in Maiden Lane III

The Federal Reserve Bank of New York is seeking bids for parts of two collateralized debt obligations tied to real-estate debt, after acquiring the securities in the government rescue of American International Group Inc. (AIG) in 2008.

The New York Fed invited nine broker-dealers including Barclays Plc, Credit Suisse Group AG and Goldman Sachs Group Inc. to compete for the so-called Triaxx CDOs held within its Maiden Lane III LLC portfolio, the district bank said today in a statement on its website. Bids will be due May 10.

The auction is “in response to several strong” unsolicited bids for the assets, the New York Fed said.

The central bank has been selling debt acquired in the AIG bailout in response to demand this year after halting a series of auctions last year blamed for roiling credit markets. Barclays and Deutsche Bank AG teamed to buy $7.5 billion of CDOs tied to commercial mortgages from Maiden Lane III on April 26.

That followed sales of $19.2 billion of home-loan bonds to Credit Suisse and Goldman in January and February that helped the Fed unwind its separate Maiden Lane II vehicle at a profit of $2.8 billion for taxpayers. Maiden Lane III acquired CDOs that sliced mainly mortgage-backed securities into new bonds with varying risks, while Maiden Lane II held securities that packaged individual home loans.

Higher Quality

The outstanding balance of Triaxx CDOs in Maiden Lane III totaled $2.5 billion as of March 31, according to data posted on the New York Fed’s website. The deals differ from most of the CDOs insured by AIG and later taken over by the Fed by containing more higher-quality securities backed by so-called prime jumbo mortgages, rather than riskier subprime debt.

Typical prices for the most-senior securities backed by fixed-rate jumbo mortgages created during the housing bubble were 91 cents on the dollar last week, according to Barclays data. That’s up from 89 cents in December, a smaller rally than among notes tied to riskier loans, which fell more last year.

Jumbo home loans are ones larger than allowed in government-supported programs, currently as much as $729,750 for Federal Housing Administration loans for single-family properties in some areas. Limits range from $417,000 to $625,500 for Fannie Mae (FNMA) and Freddie Mac loans with the lowest costs for borrowers using 20 percent down payments.

ICP Asset Management

The Triaxx CDOs were created and managed by ICP Asset Management LLC. The New York-based company and its founder Thomas Priore were sued by the Securities and Exchange Commission in 2010 for allegedly making trades for the vehicles that broke rules limiting risk, and failing to get required approvals for transactions from AIG and bond insurer FGIC Corp., another victim. Priore denied wrongdoing.

The Fed’s Maiden Lane III vehicle unwound credit-default swaps that AIG had sold to protect counterparties against losses. The facility bought the underlying assets that AIG insured for banks, sparing the Wall Street firms from any losses. Lawmakers criticized the payments as a “backdoor bailout” of the companies.

Three Triaxx CDOs, including the two being auctioned by the Fed, in August joined investors including AIG trying to intervene in a court case seeking approval for Bank of America Corp.’s proposed $8.5 billion settlement over faulty mortgage bonds. The CDOs, represented by lawyers from Miller & Wrubel PC, said in a filing that “many observers” believe the amount was too small, and they held $2.2 billion in affected securities.

The New York Fed’s three Maiden Lane vehicles were part of the group of 22 bondholders that negotiated the agreement, which is still before a state judge.

To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net; Caroline Salas Gage in New York at salas1@bloomberg.net

To contact the editors responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net; Christopher Wellisz at cwellisz@bloomberg.net

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