New York Fed Said to Seek Bids for Mortgage Bonds Linked

The Federal Reserve Bank of New York is seeking bids for more of the mortgage bonds assumed in the government rescue of American International Group Inc. as prices on the debt rally, two people with knowledge of the plan said.

After it was approached by a potential buyer, the New York Fed may sell the remaining assets in its Maiden Lane II LLC vehicle, totaling about $6 billion in face value, said the people, who asked not to be identified because the deal is private. Maiden Lane II was created in 2008 to buy holdings that AIG handed the central bank in exchange for a cash injection.

The New York Fed has used two previous sales this year totaling about $13 billion to retire its loan to Maiden Lane II. Those transactions were in response to unsolicited bids, after the New York Fed halted regular and more public auctions last year of about $10 billion that were blamed for damaging prices in credit markets. The latest sales haven’t curbed a rally in home-loan bonds.

“Investors are less concerned now about the supply overhang,” Jeffrey Wheeler, a bond manager at Durham, North Carolina-based Smith Breeden Associates Inc., said on Feb. 13. “The Maiden Lane sales provide a model for how other sales could take place and also highlight how there’s institutional-sized demand when sales are managed properly.”

Jack Gutt, a spokesman for the New York Fed, declined to comment on the potential auction.

Subprime, Alt-A

After inviting more than 40 broker-dealers to take part in the auctions last year, the New York Fed has been turning to a more limited number of dealers in response to reverse inquiries. It began selling the bonds piecemeal after rejecting a $15.7 billion bid from New York-based 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 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 still 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 made another loan to help bail out AIG to a vehicle called Maiden Lane III LLC, and was owed about $9.3 billion under that facility as of Feb. 15, according to the New York Fed’s website.

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