Four Wall Street banks were on Tuesday finalizing bids for $7 billion of mortgage-related securities that used to belong to AIG and are due to be auctioned later this week by the Federal Reserve Bank of New York.
Goldman Sachs , Barclays Capital , Bank of America and Credit Suisse will bid on the debt, which was acquired by the New York Fed as part of the bail-out of AIG in 2008. The auction is scheduled to take place on Thursday, with BlackRock Solutions managing the sale, according to people familiar with the matter. The four banks and the New York Fed declined to comment.
The securities, which have a notional value of $7 billion, are part of a $20 billion portfolio housed in a special purpose vehicle called Maiden Lane II. The Fed last spring began efforts to sell the entire portfolio on the open market, but officials suspended the auction during the summer after drawing lacklustre demand, causing the market for subprime and other risky mortgage debt to fall.
This time, the sale will involve just the four banks, who will bid based on the appetite of their investor clients. The banks and investors were required to sign confidentiality agreements so they could scrutinise the portfolio and calculate prices.
The Fed is expected to sell the whole $7 billion in securities to one of the dealers or not sell it at all, if it finds the bids unattractive.
The sale will be widely watched. If the Fed gets a good price, subprime debt could rally because the sale will remove a significant amount of supply that has been hanging over the market, investors said.
Prices of subprime debt fell last week as rumours of the Maiden Lane II sale circulated among traders and investors. The market has calmed, because the sale will be more contained than last year’s auction and the bids will be based on the interest expressed by investors. A widely tracked index of subprime debt on Tuesday rose 2 percent, according to Markit, a data provider.
The New York Fed’s rescue of AIG is one of the most controversial chapters of the government’s response to the financial crisis. AIG remains majority owned by the US Treasury. The Fed rejected a $15.7 billion bid from AIG to buy back the assets last year. Although the repurchase by AIG also would have been controversial, the Fed’s alternative path has yet to deliver a return.