BlackRock Fund Said to Be Seller in Mortgage-Bond Auction

BlackRock Inc. is winding down one of the biggest wagers made on bonds backed by souring U.S. mortgages during the financial crisis.

The world’s largest money manager sold $3.7 billion of the $22 billion of securities it bought from UBS AG six years ago to Credit Suisse Group AG in yesterday’s auction of mostly subprime-mortgage bonds, according to a person with knowledge of the transaction, who asked not to be named because the information wasn’t public.

BlackRock, whose clients were told at the time it was targeting annual returns of more than 15 percent, sold the securities after gains fueled partly by a recovery in U.S. housing and unprecedented stimulus from the world’s central banks. The New York-based firm realized “significant” performance fees in the first quarter on a plan to liquidate a separate 2007 mortgage fund, Chief Financial Officer Gary Shedlin said today on a conference call with analysts.

Farrell Denby, a spokesman for BlackRock, declined to comment, as did Megan Stinson, a spokeswoman in New York at UBS and Jack Grone of Credit Suisse. Data on market trades yesterday from the Financial Industry Regulatory Authority signal Credit Suisse placed the bonds with clients, with a similar amount of debt being bought and sold by dealers.

BlackRock’s RMBS Opportunities Master Fund LP paid $15 billion for the total pool of securities in May 2008, using $3.75 billion of cash raised from investors and a loan from the Swiss bank, according to disclosures at the time by the lender.

‘Best Idea’

While home-loan bonds slumped further after the purchase in the wake of Bear Stearns Cos.’s collapse, many buyers in that period don’t regret it, said David Castillo, a Los Angeles-based managing director at Odeon Capital Group LLC responsible for mortgage sales and trading.

“I can remember three different times in my career when buying seemed like probably the best idea ever, and during the crisis was the best of the three,” Castillo said in a telephone interview. “From 2008 through now, almost every mortgage-backed security has appreciated in price, if it hasn’t been wiped out by losses.”

UBS saw the deal as a way to move the debt off its books, in the face of losses on U.S. mortgages and other risky assets that would later swell to almost $60 billion and help trigger its bailout.

Then-UBS CFO John Cryan said on a conference call with analysts in November 2008 that he didn’t expect the assets subject to the arrangement with BlackRock to come back. “Although, those are famous last words,” he said. “You never know.”

Toxic Assets

This week’s sale is the latest sign that banks and funds are putting the market seizure behind them. In October 2008, after Lehman Brothers Holdings Inc.’s bankruptcy widened the crisis, UBS jettisoned $38.7 billion of other toxic assets into a fund supported by Switzerland’s government and central bank. Last November, the company agreed to buy back the Stability Fund’s assets for $3.8 billion.

UBS’s loan to the BlackRock fund, which originally totaled $11.25 billion, had shrunk to $2.2 billion as of March 31 as the bonds paid down, according to disclosures by the bank in May. The size of the borrowing was less than 55 percent of the value of the collateral, with the loan accounting for just $300 million of the bank’s risk-weighted assets under regulatory capital rules.

BlackRock, which after the crisis has managed or advised on large mortgage-bond sales for other investors and governments including the Federal Reserve Bank of New York and the Netherlands, sold the bonds this week in an “all or nothing” auction, meaning dealers had to bid on the entire block, either to hold on their own books or to fill client orders.

Largest Auction

Yesterday’s offering was the largest widely marketed auction of non-agency securities sold in a single block since at least 2010, according to Empirasign Strategies LLC, which tracks securitization-market trading. Including sales where bonds could be bought individually or in smaller groups, it was the 10th-largest since then.

The BlackRock fund still holds other mortgage bonds from the purchase, the person said.

Credit Suisse paid more than 73 cents on the dollar, said another person with knowledge of the sale, who asked not to be named because the transaction was private. While the discount to face value was less than the 32 percent paid by BlackRock’s fund, calculating returns would also require knowing the value of remaining securities, as well as how much of the debt had been repaid at par with the proceeds from foreclosure sales and refinancings and how much principal had been lost to defaults.

The types of subprime securities sold by UBS in 2008 have returned about 69 percent since the end of 2010, rising 7.8 percent this year, according to Barclays Plc index data.

(Updates with trading data in fourth paragraph.)
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