Bloomberg News

New York Fed Halts AIG Bond Auctions on Market Conditions

June 30, 2011

(Adds analyst comment in sixth paragraph.)

June 30 (Bloomberg) -- The Federal Reserve Bank of New York is halting its sales of mortgage bonds acquired in the rescue of American International Group Inc. after coming under criticism that auctions were damaging credit markets.

“Given prevailing market conditions” for residential mortgage-backed securities, “we do not anticipate any sales of bonds in the near term or until such time as the New York Fed deems it will achieve value for the public,” Jack Gutt, a New York Fed spokesman, said in an e-mail.

The New York Fed began unloading the bonds piecemeal after rejecting a $15.7 billion bid from New York-based AIG for the entire pool in March. As traders blamed declines in debt from high-yield bonds to subprime-mortgage securities on the sales, the bank slowed their pace. Its last auction ended June 9.

“On the surface, this is a positive because these sales will not weigh down the market,” Jason Weiner, a money manager who helps oversee $18.6 billion in fixed-income assets at M&I Investment Management Corp. in Milwaukee, said in an e-mail. “Longer term it will loom over the market until it clears.”

Barclays Capital analysts led by Ajay Rajadhyaksha wrote in a June 10 report that at current prices the portfolio of assets would probably fetch $15 billion “at most,” less than the offer from AIG.

Better Deal

“What I would speculate happened is that the Federal Reserve thought the deal they were going to get in the public market was going to be a lot better than what they were going to get from AIG, and it turned out that was not the case,” Paul Newsome, an analyst with Sandler O’Neill Partners LP, said in an interview.

Mark Herr, a spokesman for New York-based AIG, declined to comment.

The New York Fed has sold $10 billion in face value of mortgage securities assumed in the AIG bailout and held by a vehicle called Maiden Lane II, leaving it with about $21 billion to be auctioned, according to Barclays Capital data.

The New York Fed may choose to resume the auctions at a later point, though “there will be no fixed timeframe for the sales,” Gutt said in the e-mail.

The cost to protect corporate bonds from default, which earlier today dropped as optimism grew that Greece would avoid default, extended declines after the Fed statement.

Investor Confidence

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 4 basis points to a mid-price of 90.9 basis points as of 5:45 p.m. in New York, according to index administrator Markit Group Ltd.

The benchmark gauge, which falls as investor confidence improves and rises as it deteriorates, has dropped from 101 basis points on June 24, the highest level since Oct. 4.

Credit-default swaps indexes used by dealers, hedge funds and other investors to protect against losses on subprime housing debt and commercial mortgages also recovered this week.

One Markit ABX index tied to subprime mortgage bonds that were rated AAA when issued in 2006 has climbed 12 percent after dropping more than 18 percent the previous 11 weeks. The index rose to 40.25 today from 35.9 on June 24, prices from London- based Markit show. A similar index tied to junior AAA ranked commercial-mortgage bonds created in 2007, known as the Markit CMBX, has climbed to 69.3 from an almost nine-month low of 63.7 on June 27.

Prices on these indexes rise as investor confidence improves, reflecting a decline in the cost of protecting against losses.

--With assistance from Jody Shenn, Sapna Maheshwari, Noah Buhayar and Shannon D. Harrington in New York. Editors: Pierre Paulden, Alan Goldstein

To contact the reporter on this story: Caroline Salas Gage in New York at csalas1@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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