Bloomberg News

New York Fed Sells AIG Rescue CDO Debt to Bank of America

May 10, 2012

American International Group Inc. (AIG) signage is displayed on the entrance to the building located at 72 Wall Street in New York. Photographer: JB Reed/Bloomberg

American International Group Inc. (AIG) signage is displayed on the entrance to the building located at 72 Wall Street in New York. Photographer: JB Reed/Bloomberg

The Federal Reserve Bank of New York said it sold parts of two collateralized debt obligations to Bank of America Corp. (BAC:US), giving the lender at least a temporary stake in some of the funds that objected to its proposed $8.5 billion home-loan bond settlement.

Winning bids that were “materially higher” than the prices the Fed paid “demonstrate continued interest in these assets and represent good value for the public,” William C. Dudley, president of the New York Fed, said in a statement on its website.

The district bank said May 4 it was inviting nine broker- dealers to compete for the so-called Triaxx CDOs that are backed by residential-mortgage notes and held within its Maiden Lane III LLC portfolio, which acquired the securities in the 2008 government rescue of American International Group Inc. (AIG:US) It said it had received unsolicited bids for the assets.

The New York Fed has been selling debt acquired in the AIG bailout in response to demand this year, using brokers as intermediaries. It halted a series of 2011 auctions in June after they were blamed for roiling credit markets. Barclays Plc and Deutsche Bank AG (DB:US) teamed up last month to buy $7.5 billion of CDOs tied to commercial mortgages. The banks broke apart the transactions, selling the underlying bonds to investors.

‘Elevated Demand’

“While the feasibility of collapsing” the Triaxx CDOs “for restructuring purposes remains to be seen, we expect there should be healthy demand” from investors, Bank of America analysts led by Chris Flanagan wrote in a May 4 report. “The non-solicited bids” for the debt showed the “elevated demand for high quality paper that provides yield in the current zero interest-rate environment.”

The Fed sold $19.2 billion of home-loan bonds to Credit Suisse Group AG and Goldman Sachs Group Inc. in January and February, helping unwind its separate Maiden Lane II LLC vehicle at a profit of $2.8 billion for taxpayers. Maiden Lane III acquired CDOs that sliced mainly mortgage-backed securities into new bonds with varying risks. Maiden Lane II held securities that packaged individual home loans.

The outstanding balance of Triaxx CDOs in Maiden Lane III totaled $2.5 billion as of March 31, according to data posted on the New York Fed’s website. John Yiannacopoulos, a spokesman for Charlotte, North Carolina-based Bank of America, declined to comment.

Faulty Bonds

In August, three Triaxx CDOs, including the two whose parts the Fed sold today, joined investors including AIG trying to intervene in a court case seeking approval for Bank of America’s proposed $8.5 billion settlement over faulty mortgage bonds created by Countrywide Financial Corp. The bank bought the lender in 2008.

The CDOs, represented by lawyers from Miller & Wrubel PC, said in a filing that “many observers” believe the amount was too small, and they held $2.2 billion in affected securities.

The New York Fed’s three Maiden Lane vehicles were part of the group of 22 bondholders including BlackRock Inc. and MetLife Inc. (MET:US) that negotiated the agreement, which is still before a state judge.

The more mortgage repurchases forced by lenders’ flawed underwriting, the better for the Triaxx CDOs, because the “putbacks” reduce losses on bonds they hold, said Manal Mehta, a partner in San Francisco at hedge fund Branch Hill Capital, which has bet against Bank of America.

‘Taxpayer Bailout’

Some of the risk held in CDOs insured by AIG was created through credit-default swaps duplicating actual securities, sometimes several times, according to Mehta. “If every dollar of putbacks is successful, would AIG have required as big of a taxpayer bailout?”

The Triaxx deals differ from most of the CDOs insured by AIG and later taken over by the Fed by containing more higher- quality securities backed by so-called prime jumbo mortgages, rather than riskier subprime debt.

About 35 percent of the collateral of one of the Triaxx CDOs is jumbo bonds and 30 percent of the other, with the rest mainly tied to so-called Alt-A loans, according to the Bank of America report. Countrywide services 34 percent of the underlying loans and Bank of America about 4 percent, according to the report.

Jumbo loans are larger than allowed in government-supported programs, currently as much as $729,750 for Federal Housing Administration debt for single-family properties in some areas. Alt-A mortgages fall between prime and subprime in terms of expected defaults.

AIG shares (AIG:US) rose 1 percent to $32.14 as of 4:15 p.m. in New York trading.

To contact the reporters on this story: Caroline Salas Gage in New York at csalas1@bloomberg.net; Jody Shenn in New York at jshenn@bloomberg.net

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


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Companies Mentioned

  • BAC
    (Bank of America Corp)
    • $15.59 USD
    • -0.03
    • -0.19%
  • AIG
    (American International Group Inc)
    • $54.16 USD
    • -1.01
    • -1.86%
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