LONDON, Jan 19 (IFR) -
- Fed chooses secrecy in new Maiden Lane II bidding process
- Strictly confidential, limited auction angers those left out ; Credit Suisse wins
Credit Suisse ultimately won the auction today, buying US$7.014bn in face value from the approximately US$20bn remaining in the MLII portfolio of distressed RMBS assets formerly owned by AIG. The portfolio originally had a face value of more than US$30bn, but about US$9.5bn was sold in a public auction process last spring that eventually fizzled and was halted indefinitely.
"I am pleased with the strength of the bids and the level of market interest in these assets," said William C. Dudley, President of the New York Fed, in a prepared statement on Thursday.
The latest auction was prompted by an initial reverse inquiry from Goldman Sachs, but the Fed opted to honor an original commitment it laid out in March 2011 to adhere to a competitive process to dispose of the former AIG-owned distressed securities. It therefore opened up the bid to a limited pool of market players.
As IFR first reported last Friday, America’s largest regional Federal Reserve Bank took bids on the MLII parcel from only four banks: Goldman Sachs, Barclays Capital, Bank of America Merrill Lynch, and Credit Suisse. The auction was tightly under wraps when it started today, as the Fed required the dealers, as well their investor accounts, to sign strict non-disclosure agreements (NDAs) regarding the specific bonds and prices on the bid list.
"I just don't see how running a limited participation secret auction ensures that the taxpayer receives maximum proceeds for their bonds,"; said Adam Murphy, the president of Empirasign Strategies LLC, a capital markets data provider. "This auction seems inconsistent with the more open Fed that Bernanke espouses.";
At the height of the financial crisis, the Fed bought the securities in order to rescue AIG. It was Goldman Sachs' collateral calls on CDS insured by AIG that sunk the company. Even though it didn't ultimately win the auction, Goldman is viewed as the bank driving the latest burst of interest in MLII, given its initial reverse inquiry.
The Fed's abrupt change of course towards a non-disclosed process irked many who were left out in the cold, according to several traders and asset managers. The strategy is in stark contrast to the more public tack taken last spring.
The Fed sold US$9.5bn, or about one-third, of the more than US$30bn portfolio via nine auctions that took place between April 6 and June 9 of last year, but interest started to wane as the increased supply drove bond prices down and global macroeconomic volatility led to a vast de-risking event as investors dumped spread product.
The Fed has long indicated that it never committed to any timetable or schedule for winding down the portfolio of former AIG assets, and was only looking to achieve the best execution possible.
But now, secondary non-agency RMBS paper is on average 30 cents cheaper than last spring, spurring demand for the product once again.
"This MLII thing is a mess,"; said one securitization specialist away from the four bidding banks canvassing the market in a struggle to find the bonds on the list. "(It's) A complete insider deal orchestrated by those responsible for AIG's collapse in the first place. Hedge funds have to sign an NDA just to see the bonds on the list."
A spokesman for the Fed declined comment. However, a press release stated that the pricing for each bond will be disclosed three months after the last ML II asset is sold, "ensuring timely accountability without jeopardizing the ability to generate maximum sale proceeds for the public."
Of course, it has to be a secret auction. What would happen to the President's re-election prospects if Americans understood that the Federal Government owns 3 out of 4 REOs (See January 2, 2012 statement by Ben Bernanke, Fed Chairman) and probably owns 3 out of 4 mortgages in default. In plain English, it means the Federal Government was the real party in interest which dispossessed 3 out of 4 foreclosed American families after rescuing Wall Street by transferring more than $4 trillion from Main Street to Wall Street.
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