NY Fed Begins Selling Off AIG Mortgage Securities

The New York Federal Reserve sold 42 of the 52 mortgage-backed securities it put up for sale Monday, as it seeks to wind down a portfolio of assets bought from AIG during the height of the financial crisis.


Notification of the winning bids, as well as the cover, or second highest bids, took longer than expected because of the high participation in the auction.

It is not known if the securities that did not sell failed to receive any bids, or if the minimum bids the Fed set for these securities were not met. A person with knowledge of the auction said any assets not sold will be returned to Maiden Lane II, to be auctioned again at a later date.

The New York Fed said the bonds sold have a notional , or face value of $1.326 billion. That's less than the $1.5 billion notional value of all the bonds put up for auction Wednesday.

The bonds sold are part of a portfolio of 800 residential mortgage-backed securities held in a special purpose vehicle. Called Maiden Lane II, it was formed in 2008 to buy these risky assets from AIG as part of a government bailout of the insurance giant. The Fed paid $20 billion for securities with a face value of $39.5 billion.

At the time, the subprime mortgage market was essentially frozen and these assets were considered untouchable by big investors. Still, they have performed well, paying down principal and paying above average yields.

Last December, AIG offered to buy back all the residential mortgage-backed securities from the New York Fed for $15.7 billion. The Fed recently rejected the offer, figuring with investors' risk appetites returning, it could net a higher profit for taxpayers selling off the securities it estimates have a fair, or market value of $15.9 billion.

Ahead of the auction, market participants anticipated strong interest in these securities from large money managers like hedge funds, in large part because of the high yields they offer.

The Fed declined to say when it will hold the next auction , but it has plans to divulge more information on the sales.

Each month, the Fed will disclose the number and type of bonds sold, but not the price paid. Every quarter it will provide a total dollar figure of the assets sold along with the names of firms that bought the securities.

The Fed will not be disclosing what these firms paid the Fed until after all of Maiden Lane II's assets are sold. Within three months of the final sale, the Fed will disclose who bought what securities, the price they paid and the price the Fed paid when it bought the securities from AIG in 2008.