Fed rejects AIG offer for mortgage bonds

[zoog]

Hm, wonder what's going on here? This was some of the toxic stuff that the Fed took from AIG to keep them from going under. Now they want it back, but the Fed says no.

(Reuters) - The Federal Reserve rejected a $15.7 billion bid from American International Group for a pool of mortgage-backed securities on Wednesday and said it will sell off the bonds over time instead.

AIG made its offer March 10, seeking to buy the assets of a vehicle called Maiden Lane II. The Fed set up the entity during the depths of the financial crisis to take the securities off AIG's hands and help prevent the collapse of what was then the world's largest insurer.

The offer started what amounted to a public auction for the assets, with Wall Street sources pointing to heavy bid interest from a number of banks.

One source familiar with the bid process told Reuters last Friday that some parties were hoping for an auction of the whole pool rather than parts.

But the Fed said Wednesday the public interest would be better served by selling the assets in the portfolio "individually and in segments over time as market conditions warrant through a competitive sales process."

[swgprop]

Re: Fed rejects AIG offer for mortgage bonds

Damn good question considering it appears the offer was pretty much for full value. By the same token though, why would AIG offer to buy it back?

Financial Overview of the Facilities

Maiden Lane Facilities as of 3/24/2011 ($millions)
	Original FRBNY Senior Loan Balance	Accrued Interest	Cumulative Paydown Amounts	Current Senior Loan Balance with Accrued Interest	H.4.1 Fair Value*
Maiden Lane LLC	$28,820	$660	$(5,349)	$24,130	$25,589
Maiden Lane II LLC	$19,494	$488	$(7,141)	$12,841	$15,900
Maiden Lane III LLC	$24,339	$583	$(11,993)	$12,930	$22,919
Source: Federal Reserve Board H.4.1, Federal Reserve Bank of New York. * Portfolios remarked quarterly. Reflects 12/31/10 prices applied to the portfolio as of the reporting date.

[ASH]

Re: Fed rejects AIG offer for mortgage bonds

Perhaps those assets are less 'toxic' than was supposed. At the time, the Fed maintained it was only accepting assets of the highest quality, which happened to be illiquid during the crisis. What if they were telling the truth, and this particular set of assets isn't actually junk?

[swgprop]

Re: Fed rejects AIG offer for mortgage bonds

Perhaps those assets are less 'toxic' than was supposed. At the time, the Fed maintained it was only accepting assets of the highest quality, which happened to be illiquid during the crisis. What if they were telling the truth, and this particular set of assets isn't actually junk?

If you look at the breakdown of the assets they are predominantly subprime, Alt-A and Option ARMs. Doesn't get much worse than that....

maiden-lane-2-chart1.gif

[ASH]

Re: Fed rejects AIG offer for mortgage bonds

If you look at the breakdown of the assets they are predominantly subprime, Alt-A and Option ARMs. Doesn't get much worse than that....

[ATTACH=CONFIG]3823[/ATTACH]

Hmmm... so much for a simple explanation. Very curious.

[mmr]

Re: Fed rejects AIG offer for mortgage bonds

Even if the assets are "toxic", if AIG can buy them at a low enough price, they could make an enormous return on their investment.

According to the detailed portfolio securities listing, the par value of the Maiden Lane II securities at February month-end was $31.2 billion (i.e., if there were no further credit losses, one might expect to get this much principal back from the securities, plus interest.)

AIG has access to very detailed information about all of the mortgages underlying these securities, and would be able to estimate as well as anyone else how many of the remaining mortgages might yet default (keep in mind that the borrowers who have somehow managed to keep making payments after four years of economic deterioration, home price collapse, etc. might have a better than average chance of making it through the cycle and ultimately repaying their mortgage.)

Simplistically, let's assume that AIG thinks that 30% of the remaining borrowers will default; that would imply that they would ultimately receive ~$22 billion in principal payments on the underlying mortgages. If AIG were to pay $16 billion for the portfolio, they would then receive $22 billion of mortgage principal over the next 3-5 years (plus interest on the mortgages), equating to a double-digit annual return.

As an insurance company that relies heavily on interest income to pay fixed obligations (annuities, life insurance settlements, etc.), how many other places could AIG possibly find a double-digit (albeit highly risky) return in a ZIRP environment? Of course they could have the math wrong and lose money even relative to the lower purchase price, but in that case, the Fed may well be there to bail them out again.

[swgprop]

Re: Fed rejects AIG offer for mortgage bonds

Aaah, thanks for the clarification - the underlying UPB of the assets is > 30 billion. The 15 billion figure is FMV. So ostensibly the Fed figures they can get > 50% of UPB on the open market.

[zoog]

Re: Fed rejects AIG offer for mortgage bonds

It's still interesting that other banks were also interested, and that they wanted to buy the entire portfolio, not bits and pieces. Knowing that some of these mortgages are going to default (if they haven't already), wouldn't they rather pick and choose the more profitable ones and leave the junk to the Fed? That's the part that sounds like potential shenanigans to me.

...The offer started what amounted to a public auction for the assets, with Wall Street sources pointing to heavy bid interest from a number of banks.

One source familiar with the bid process told Reuters last Friday that some parties were hoping for an auction of the whole pool rather than parts...

[swgprop]

Re: Fed rejects AIG offer for mortgage bonds

It's still interesting that other banks were also interested, and that they wanted to buy the entire portfolio, not bits and pieces. Knowing that some of these mortgages are going to default (if they haven't already), wouldn't they rather pick and choose the more profitable ones and leave the junk to the Fed? That's the part that sounds like potential shenanigans to me.

Agreed. I can see some vulture funds wanting to take it all for .50 on the dollar (or less) but can't imagine any entity willing to pay much more than that.

[thriftyandboringinohio]

Re: Fed rejects AIG offer for mortgage bonds

Agreed. I can see some vulture funds wanting to take it all for .50 on the dollar (or less) but can't imagine any entity willing to pay much more than that.

I think this situation is fascinating, in my overly simplistic view of the world
The two parties are the Federal Reserve and AIG. The Fed is owned by private banks (FIRE), AIG owned by US Treasury (taxpayers).
Therefore the two REAL parties are FIRE and taxpayers
The property has passed between them before, sold by taxpayers to FIRE.

I'm very confused about the nature and value of the property. But I'm confident FIRE will eat taxpayer's lunch again.
So I'll asses the value of the property by where it ends up.
FIRE will keep a valuable asset; worthless toxic junk will return to taxpayer.

[WildspitzE]

Re: Fed rejects AIG offer for mortgage bonds

sounds like a great way for the fed to get a valuation of the assets, and the expected cashflow to be generated by them.