DJ UPDATE: N.Y. Fed Ends AIG Maiden Lane Chapter With $6.6 Billion Profit
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By Al Yoon and Erik Holm
The Federal Reserve Bank of New York on Thursday profitably closed the book on its crisis-era seizure of American International Group Inc.'s (AIG) most toxic assets, selling the last of the complex securities that have evolved from being Exhibit A of the financial crisis into one of the hottest buys around.
The New York Fed announced a profit of about $6.6 billion from selling the second of two portfolios of mortgage-related assets taken on during the controversial 2008 bailout of AIG. Gains from the portfolio, known as Maiden Lane III, added to the $2.85 billion in gains registered earlier this year after the New York Fed exhausted sales of similar, but less complex, bonds from another AIG-related vehicle.
The New York Fed since April has been selling off about $47 billion in face value of complex mortgage assets from Maiden Lane III, which in late 2008 paid about 47 cents on the dollar to acquire securities insured by a unit of AIG. Proceeds from earlier auctions resulted in the full paydown of a $24 billion loan the New York Fed provided to purchase the assets in the portfolio. With that obligation satisfied and a $5 billion equity contribution from AIG repaid, the insurer is entitled to one-third of the proceeds from the latest sale.
The net gain of about $6.6 billion includes $737 million of accrued interest from the New York Fed's loan to Maiden Lane III, the regional Federal Reserve bank said in a statement.
AIG can put the proceeds toward repurchases of its shares from the U.S. Treasury Department, which still owns a 53% stake in the company as a result of its participation in AIG's $182.3 billion bailout. AIG has spent $8 billion buying back stock from Treasury this year and said it hopes to use funds raised from the Maiden Lane III sale and other asset dispositions to further reduce the government's stake.
Helping the latest sales of Maiden Lane III assets was a tailwind of demand for risky assets as investors have been on the hunt for higher returns, in contrast to headwinds in 2011 as investors fled to safe havens. Signs of stability in commercial and residential real estate have also led such investors as Metacapital Management L.P. to raise money for purchases of such assets this year.
An auction of 21 collateralized debt obligations with a total face value of some $3 billion on Thursday capped the Maiden Lane III sales, which have been a key source of supply for institutional investors. The number of private-label mortgage-backed securities outstanding, especially those backed by home loans, has dropped since 2008 as new issues haven't kept up with loans that have defaulted or been paid down.
The market for the so-called nonagency mortgage bonds--which haven't been backed by U.S. entities like Fannie Mae--is shrinking by as much as $180 billion a year, providing strong technical support, said Chandrajit Bhattacharya, a strategist at Credit Suisse, whose traders were among the biggest winners at Maiden Lane II and Maiden Lane III sales. Signs of "light at the end of the tunnel" in the housing market have further fueled the rally, Mr. Bhattacharya said.
The demand for yield has shrunk returns on subprime residential mortgage-backed securities to less than 7% this month from nearly 9% in June, Credit Suisse data show. The RMBS yield decline has led many buyers to the CDOs, once scorned for their role in disguising risks that helped trigger the worst financial crisis since the 1930s.
Some Maiden Lane assets "were an attractive opportunity because they carry higher yields due to their complexity and more limited liquidity," said Jonathan Lieberman, head of residential and consumer loans at Angelo, Gordon & Co, which bought at Maiden Lane III sales.
Among the companies that found the yields attractive was AIG. Chief Financial Officer David Herzog said earlier this month that the insurer participated in a "vast majority" of the Maiden Lane III auctions and bought securities with a market value of $7.1 billion. The average yield of the bonds AIG purchased was 9.7%, according to a company presentation.
The sales were conducted by BlackRock Inc. (BLK).
A $19.5 billion loan for the Maiden Lane II portfolio of RMBS once held by an AIG unit paid off as that debt was sold in February. Sales from the Maiden Lane portfolio used for J.P. Morgan's Bear Stearns purchase resulted in repayment of a $28.8 billion loan in June.
-Write to Al Yoon at firstname.lastname@example.org and Erik Holm at email@example.com
--Serena Ng contributed to this article.
(END) Dow Jones Newswires
August 23, 2012 13:19 ET (17:19 GMT)
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