Fed’s Maiden Lane Holding Bear Stearns-Tied Assets Shrinks

Maiden Lane LLC, the company created by the Federal Reserve Bank of New York in its rescue of Bear Stearns Cos. in 2008, is shrinking at a faster pace as it sells holdings.

The assets of Maiden Lane, used by the U.S. central bank to facilitate the sale of the New York-based investment bank to JPMorgan Chase & Co., were valued at $24.8 billion on April 27, down from $25.6 billion on March 30 and $30 billion at inception, according to weekly Fed data released yesterday. The 4.7 percent decline in the holdings, mostly government-backed mortgage bonds, is the largest since October 2008.

The New York Fed also this month began selling $31 billion of mortgage bonds without government backing acquired in the U.S. bailout of American International Group Inc. after refusing the insurer’s offer to buy back that debt for $15.7 billion. While more-detailed past disclosures indicate some of the Bear Stearns-related bonds were sold last year, the Fed may be ready to speed the pace, according to BNP Paribas SA analysts.

With the AIG-related non-agency mortgage-backed securities being off-loaded by a vehicle called Maiden Lane II at “sizable clips, we see no reason why this wouldn’t be expanded to ML1’s agency MBS,” Anish Lohokare and Timi Ajibola, the New York-based analysts at BNP, France’s largest bank, wrote in an April 21 report. ML1 refers to Maiden Lane, sometimes called Maiden Lane I.

Jack Gutt, a New York Fed spokesman, declined to comment.

Dealer Auctions

In Maiden Lane’s initial transaction, the purchasing vehicle used a $28.8 billion loan from the New York Fed and a $1.2 billion loan from New York-based JPMorgan to buy $30 billion of assets from Bear Stearns, according to its website.

The deal was arranged in March 2008 as the Fed sought to prevent a collapse of the investment bank from deepening the worst financial crisis since the Great Depression. Later in 2008, the Fed used vehicles called Maiden Lane II and Maiden Lane III as part of the U.S. rescue of AIG.

Dealers auctioned off slices of collateralized mortgage obligations held by Maiden Lane with a total notional size of about $400 million this week, according to three people familiar with the sale who declined to be identified because the transaction was private.

The second-best bids for the so-called inverse interest-only slices of CMOs backed by Fannie Mae securities sold April 27 ranged from about 9 cents per notional dollar to 21 cents, according to Empirasign Strategies LLC, a New York-based provider of data on securitization-market trading. Second-best, or cover, bids is information dealers typically provide to investors that don’t win auctions.

Monetary Policy

“This could be an acceleration of the ‘pre-hiking’ that the Fed started with its AIG sales,” Adam Murphy, Empirasign’s president, said, referring to actions by the central bank that represent a tightening of monetary policy before an increase in benchmark interest rates.

Some, or all, of a $1.3 billion reported drop in Maiden Lane’s assets in the week ended April 20 may have reflected a quarterly revaluation of holding prices, rather than sales, BNP’s Ajibol said in a telephone interview.

Prepayments, maturities and recoveries on defaulted debt can also shrink the portfolio’s reported size. Increases can indicate higher valuations, interest payments on assets being held before monthly payments to the Fed are due, or sales of holdings for more than the values at which they are marked.

BlackRock Directed

The New York Fed has been using New York-based BlackRock Inc. to manage the Bear Stearns and AIG portfolios. Through last June, it directed the money manager to reinvest cash being generated by the holdings of Maiden Lane into Treasuries and agency securities, according to its website. Since then, it’s been unwinding Maiden Lane.

Agency mortgage securities carry guarantees from government-supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae. Non-agency mortgage bonds lack that backing.

The New York Fed, in sales being announced on its website, this month has completed four auctions of non-agency securities once owned by New York-based AIG, in which it offered a total of $4.1 billion of bonds.

The AIG- and Bear Stearns-related holdings are separate from the $933 billion of agency mortgage securities owned directly by the Fed after it bought $1.25 trillion of the debt through March 2010 to bolster the economy.

Central Bank

The central bank has expanded its balance sheet to an unprecedented $2.7 trillion, in efforts to put money into the financial system. The Fed’s latest round of $600 billion of Treasury purchases will end in June, though it will continue reinvesting cash generated by current direct holdings, it said April 27.

The value of Maiden Lane’s holdings has shrunk from $29.4 billion last August. The Fed’s loan to the company has been paid down to about $23 billion, the weekly data show.

Agency mortgage debt at year-end accounted for $16.8 billion of Maiden Lane’s $27 billion of assets based on fair value estimates, according to the New York Fed’s latest detailed disclosures on its website. Commercial real estate loans represented the second-largest holdings, totaling $5.1 billion, followed by non-agency mortgage securities at $1.9 billion.

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