By Al Yoon
The Federal Reserve Bank of New York is set to sell the last of assets
taken on during the bailout of American International Group (AIG) by
next month, based on the current pace.
The New York Fed plans to sell another $11.9 billion in face value of
complex mortgage debt from the vehicle known as Maiden Lane III this
month, which would reduce the amount left in the portfolio to less
than $7 billion.
The completion of the sales will eliminate one of the more reliable
sources of supply of high-yielding debt in a market hungry for such
lucrative investments. Expectations that capital-constrained European
banks would sell their holdings haven't yet panned out, leaving
investors to bid for the Maiden Lane portfolios or the well-picked and
shrinking pool of bonds in the secondary market.
"In some regards, this is the last big shot of supply," a trader at a
primary dealer that participates in the auctions said of the dwindling
Maiden Lane III.
Because the nonagency mortgage bonds that make up the portfolios have
appreciated, the New York Fed could potentially earn double the $2.8
billion profit on its similar Maiden Lane II portfolio, the trader
estimated. As with Maiden Lane II, Maiden Lane III assets are mostly
residential mortgage-related but many have an added layer of
complexity as collateralized debt obligations.
The New York Fed on Monday said sales from Maiden Lane III resulted in
full repayment of the $5 billion of AIG's equity in the portfolio. It
will keep two-thirds of future profits and AIG will get the rest.
About $53 billion in loans for Maiden Lane III and Maiden Lane--used
to facilitate J.P. Morgan Chase & Co.'s (JPM) takeover of Bear
Stearns--were repaid in June. Sales from the Maiden Lane II portfolio
of AIG bonds resulted in payback of a $19.5 billion loan in February.
Many investors are warming to the market following signs that home
prices have found a bottom and delinquencies have peaked. Investors
have used previous auctions as a way to access mortgage debt that is
being held tightly by long-term money managers versus traders that
quickly bought and sold such assets a year ago, analysts said.
"The Fed has been an aggressive seller, and so the Maiden Lane
auctions have provided investors the ability to add exposure in decent
size," said Deepak Narula, a managing partner at Metacapital
Management LP., which bought bonds sold from Maiden Lane II.
But some bonds have slowed or even given back part of their gains as
the European sovereign debt crisis overshadows the market. The "dark
cloud hanging over Europe" is "the only thing keeping us from an
outright bullish call" on nonagency mortgage bonds, analysts at J.P.
Morgan said.
Prices on some nonagency mortgages that posted double-digit losses in
2011 have gained 15% or more this year. Bonds backed by so-called
option adjustable-rate mortgages--one of the riskier types of
nonagency bonds--in June traded at 49 cents on the dollar, up from
42.5 cents on the dollar in December but off highs of 51 cents in
April, according to Amherst Securities Group.
For now, the desire for extra yield has fueled the search for bonds
that are becoming scarcer by the month. Since issuance of new
nonagency bonds is rare, the market is contracting by $15 billion to
$20 billion each month due to the normal paydown of mortgage loans.
The nonagency market is currently about $1.1 trillion.
Demand for the Maiden Lane III assets has virtually erased the
discount that traders had been demanding for the complexity of the
CDOs that made up most of the portfolio, the primary dealer trader
said. CDO bids had been 10% below the value of the underlying mortgage
bonds, he said.
Some of the CDO bids might even represent a premium to the underlying
collateral, he added.
"The Fed is receiving proceeds on sales far greater than expectations
of a few months ago when they first announced it was going to sell,"
he said.
-Jeffrey Sparshott contributed to this article.
Write to Al Yoon at albert.yoon@dowjones.com
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(END) Dow Jones Newswires
July 16, 2012 16:07 ET (20:07 GMT)
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