Goldman Sachs Group Inc. approached the Federal Reserve Bank of New York with a bid for a block of the mortgage bonds assumed from American International Group Inc., prompting the central bank to weigh an auction of the debt, three people familiar with the matter said.
The central bank may sell securities held by its Maiden Lane II vehicle with a face value of about $7 billion, said the people, who declined to be identified because the deliberations are private. New York-based Goldman Sachs may have sought the bonds for itself or clients, they said. Four or five dealers may be asked to assemble bids this month, they said.
“Goldman’s never been bashful, I call them opportunistic as a compliment,” Steven Delaney, an analyst at San Francisco-based JMP Securities LLC who covers real estate investment trusts that invest in mortgages, said today on Bloomberg Television. “But Goldman’s not the only major investor that sees value” in U.S. home-loan bonds with government backing after prices slumped, he said.
Michael DuVally, a spokesman for Goldman Sachs, declined to comment, as did the New York Fed’s Jack Gutt and Mark Herr of New York-based AIG. The Wall Street Journal reported yesterday the potential sale and Goldman Sachs’s bid.
The New York Fed halted in June a plan to sell the Maiden Lane II assets through a series of auctions after its sales of about $10 billion roiled markets, dragging down everything from high-yield corporate bonds to commercial-mortgage securities as Wall Street dealers sought to reduce risk after building their inventories. AIG turned over the holdings to the New York Fed in 2008 as part of its rescue.
The central bank said last year it might resume selling the bonds “individually and in segments over time as market conditions warrant through a competitive sales process.” Securities with a face value of $21 billion remained when the auctions were halted. The Fed valued the Maiden Lane II holdings at about $9.1 billion as of this week.
Values of so-called non-agency mortgage securities fell further and trading shriveled as Europe’s debt crisis intensified after the end of the auctions. Paul Norris, a senior money manager at Burlington, Vermont-based Dwight Asset Management Co., said that because the prospect of additional Fed sales has been weighing on the market, a successful auction could be positive.
In a “disaster” scenario, a Fed sale could disrupt the market again by creating too much supply, said Norris, whose firm manages and advises on more than $50 billion of assets.
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. The New York Fed began unloading the bonds piecemeal in April after rejecting a $15.7 billion bid from AIG for the entire pool the previous month.
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, according to Barclays Capital data. The bonds had plunged from last year’s high of 68 cents in February. Alt-A loans fall between prime and subprime in terms of expected defaults.
A Fed auction may help the $1.1 trillion market for non-agency securities by offering new information on current values, JMP’s Delaney said. Trading has been limited in recent months, he said.
If the portfolio is sold to an individual investor or group assembled by dealers in an “all-or-nothing” process, that may obscure bids on specific securities and “a lack of price discovery is inherently not good,” said Adam Murphy, president of Empirasign Strategies LLC, a New York-based provider of data on securitization-market trading.