New York Fed Delays $1.7 Billion Maiden Lane III Debt Sale

The Federal Reserve Bank of New York said it’s postponing a sale that had been scheduled to be completed today of $1.7 billion of debt held in its Maiden Lane III LLC portfolio.

The transaction was delayed to give market participants more time to weigh information about the collateralized debt obligation, according to a person familiar with the matter, who declined to be identified without authorization to speak publicly. The district bank announced the delay in a posting on its website.

The New York Fed had planned to sell two slices of a CDO tied to home loans known as Duke Funding High Grade I Ltd., which was created in 2005 with a unit of hedge-fund firm Ellington Management Group LLC as the manager, according to its disclosures and information from the deal’s prospectus. The central bank acquired the debt during the U.S. government rescue of American International Group Inc. (AIG) in 2008.

The Fed resumed selling securities assumed in the bailout in January after a series of auctions last year were halted when the process was blamed for roiling credit markets. Supply of commercial-mortgage debt from the Fed’s sales of $7.5 billion of CDOs last month is adding to challenges for that market as Europe’s debt crisis deepens, Credit Suisse Group AG analysts said in a report, signaling today’s delay may remove a threat to values. Another sale remains scheduled for next week.

Jim Ankner, a spokesman for New York-based AIG, declined to comment. AIG shares fell 3.8 percent to $29.30 as of 12:37 p.m. in New York.

Interest-Rate Swap

The delay may be related to an interest-rate swap that AIG had provided to the Duke Funding CDO, a derivative terminated after the insurer’s bailout because of contract clauses triggered by ratings downgrades on the company, another person said.

Amounts owed to AIG from the swap were shifted to a lower- ranking priority relative to the CDO’s bond slices, a treatment that the insurer disputed at the time without taking legal action, the second person said. Excluding the CDO from the Fed’s current auction plans would give investors more time to assess the possibility that AIG will revive the conflict.

The New York Fed has sold $29.2 billion in home-loan bonds and CDOs tied to residential- and commercial-mortgage debt this year from Maiden Lane III and Maiden Lane II, a separate vehicle also used in AIG’s bailout. An auction of $690.6 million of CDO slices announced May 11 with the Duke Funding sale is still listed as planned for May 22 on the district bank’s website.

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

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