The Banking and Strategy Initiative

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The infamous “Maiden Lane II” AIG securities auctioned by Fed | Bailout insight

The Treasury had last sold a tranche of $7 bln to Credit Cuisse which sold it onward to select hedge funds and other investors trying to make a fortune in distressed assets. Credit Suisse also sold its emplyees a repackaged bad mortgage securities as bonus.

The treasury still has $6 bln of securities from AIG’s Maiden lane II vehicle. Distressed mortageg assets from 2008 are trading at 51% of their face value according to the WSJ. Deutsche Bank recently started a $800 bln fund to mop up such assets that are not being easily traded and hampering a lot of hedge fund investors who had expected to be out of it.

The bidders could easily be looking at an ultimate gain of 30-35% to the dollar from its bid rate near 45-48 cents

While many subprime bonds aren’t expected to recover their full face value because of high loan-default rates, investors are again warming to the securities. The bonds’ beaten-down market values already have priced in a weak outlook for housing, and their fat yields are particularly attractive amid the low-interest-rate environment, say analysts.

The current pool is from the New York Fed’s holdings. AIG’s Securities Lending business was stuck with  the lot ofd which the NY fed picked up $40 bln worth to bail out the American insurance giant, at an average cost of 39.5 cents. An additional 2 cents per dollar was paid by AIG to its Maiden Lane II vehicle. The auction proceeds will first return capital to the new York Fed , then AIG and later profits if any will be divided between the two investors in proportion to their investment

With Sup Prime investments yielding 17% in the New Year, Barclays, Credit Suisse, Goldman Sachs, Morgan Stanley and RBS will be bidding for this last pie, the Fed likely turning in a 5-6 c profit on the deal


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