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Barclays, Deutsche Bank Win Auction of Toxic AIG Assets.

Byline: Adam Tempkin and Karen Brettell, Reuters

April 26 (IFR/Reuters) - Barclays and Deutsche Bank on Thursday won a fierce bidding war for a portfolio of toxic assets the US government acquired in the 2008 bailout of insurance giant AIG.

The Federal Reserve announced it had selected the two banks to buy two vast collateralized debt obligations (CDOs), consisting of bundles of commercial mortgage bonds, which have a face value of $7.5 billion.

The CDOs helped bring down AIG, which needed a massive federal bailout, and were not long ago seen as the kind of toxic re-packaged real-estate assets that spurred the financial crisis.

But with interest rates at current lows, even the worst of the mortgage bonds underlying the CDOs are now much more attractive investments -- just one reason that nearly every major Wall Street bank entered the auction.

Barclays and Deutsche Bank beat out two rival consortia, one comprised of Bank of America, Morgan Stanley and Nomura, and the other grouping Citigroup, Goldman Sachs and Credit Suisse.

The Fed did not disclose how much the winners would pay, although the assets were widely estimated to fetch around 60 cents on the dollar.

"I am pleased with the level of interest and the results of this process, especially with the strength of the winning bid," said William Dudley, president of the New York Fed.

All the groups of banks were actively soliciting their own bids from investor-clients before Thursday's auction, indicating the CDOs are likely to be quickly re-sold - perhaps broken down into their constituent mortgage bonds or even re-packaged as AAA-rated securities.

Analysts who track AIG for Sanford C. Bernstein & Co said in a report earlier this month that the winning bidders would be able to realize a profit from breaking apart the CDOs and re-selling the separate pieces "in classic Wall Street fashion".

But not all investors have been impressed by the real value of the assets, however they may be re-sliced and diced, as nearly half those underlying mortgage bonds are junk-rated.

"I probably would shed few tears for the type of investors inclined to get involved here," said Chris Sullivan, chief investment officer of the United Nations Federal Credit Union.

"They're big boys and girls who probably feel quite confident arriving at independent valuations of these structures," he said.

UNEXPECTED RISKS

The Fed selected Barclays and Deutsche Bank just hours after bidding closed on the CDOs, part of a vast portfolio of former AIG assets known as Maiden Lane III.

Thursday's sale is the latest move by the US government to unwind holdings it acquired in a slew of bailouts it undertook with taxpayer dollars during the depths of the financial crisis.

"This successful sale marks another important milestone in the wind-down of our crisis-era intervention," the New York Fed's Dudley said.

AIG, then the world's largest insurer, was just minutes from bankruptcy -- it had no money to pay out credit default swaps it owed on these very same CDOs -- when the government stepped in to save the company in September 2008.

Maiden Lane III eased some of AIG's obligations by buying CDOs from the insurer's counterparties. In exchange for being bought out at 100 cents on the dollar, the counterparties agreed to terminate the swaps.

That deal was widely criticized as being a back-door bailout of the banks that AIG did business with, some of whom were bidders in Thursday's auction.

Unlike previous government sales of Maiden Lane assets, the latest auction was limited only to the eight banks that bid on Thursday -- all of whom were specifically invited to bid by the Federal Reserve.

While investors may be taking on risk no matter how the CDOs are eventually re-sold, there are also broader risks for the mortgage bond market if and when they are liquidated, not least because of the size of the portfolio.

When the US government sold a chunk of other AIG assets last year that were primarily backed by residential mortgages, the resulting glut in supply wreaked havoc with that sector of the bond market.
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Publication:Property and Casualty 360
Date:Apr 26, 2012
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