By Isobel Kennedy
NEW YORK, Jan 13 (MNI) – Prices of asset-backed securities got hit
down late Thursday on news that a bid list consisting of non-agency
residential mortgage-backed securities from the Federal Reserve’s Maiden
Lane I portfolio was circulating in the market.
Market sources confirmed there was a $7 billion
bid-wanted-in-competition list being circulated by BlackRock Solutions,
the New York Fed’s investment manager, and that the bids are due next
Thursday.
They also confirmed the BWIC was spurred by a reverse inquiry from
a large primary dealer bank who made a bid to the New York Fed for the
$7 billion in non-agency securities.
Readers should recall that back in March 2011 the NY Fed announced
it would begin selling Maiden Lane II assets that it acquired in its
first loan to AIG Group in 2008 via the BWIC process. The Maiden Lane II
portfolio consists mostly of non-agency suprime and Alt-A Adjustable
rate mortgages or ARMs.
The Fed was successful in selling about $9.4 billion in face value
from that portfolio in nine separate auctions from April to early June
2011.
But the Fed’s investment manager, BlackRock Solutions, was forced
to halt these sales, however, as the supply finally overwhelmed the
Street and prices faltered. The sales started out being a help to the
non-agency sector because it created price discovery but they ended up
becoming a hindrance.
It is important to remember that next week’s sale is the direct
cause of a reverse inquiry and dealers should therefore not assume that
the Fed has resumed regular sales from Maiden Lane II.
The Fed has stated all along that “Over time, the Federal Reserve
will also entertain investor inquiries to acquire specific parcels of
securities where these offer superior value, though no such bid will be
accepted without being put into competition with other interested
investors. In such cases, investors may submit offers for parcels of
securities directly (without necessarily going through a dealer.”
It is unclear what kind of reception next week’s list will receive
because market sources note that it is being circulated on an AON basis
meaning bidders must bid for “all or none” of those securities. This
will clearly cut down on the type of bidder in the process.
Adam Murphy, President of Empirasign, said the AON restriction
should be lifted.
“It reduces the average execution price because it limits the
number of buyers,” he says.
He also says it will restrict the number of buyers to only the big
players.
That is bad from the standpoint of transparency and price
discovery, and hence, is also bad for the taxpayer, Murphy adds.
It also means that the larger bidders, who would not blink at the
size of the list, are also taking advantage of the AON restriction. In
other words, the competition is reduced and it might create an
opportunity to pick up a large chunk of paper at too cheap a price.
“Bottom line,” one market expert said, “it is not good for the
market because it lowers the execution price.”
But market sources also believe that if the bid is too cheap, the
paper will not trade as it has been clear all along that the NY Fed is
not a forced seller of any of this paper.
On the other hand, if the prices received are good, it could spur
selling from other accounts.
Market sources note that European banks are sitting on about $45
billion of similar non-agency paper. Given the woes of the European
banks in the current crisis they would likely relish the idea of
liquidating some paper if the price was right.
There was also a $3.8 billion BWIC of agency reverse interest only
(MTA I/Os) circulating from BlackRock on Friday. This is also the result
of a reverse inquiry, sources said. This is paper that is owned in the
Fed’s Maiden Lane I portfolio and consists of securities obtained in the
JP Morgan/Bear Stearns shotgun marriage of 2008.
But market sources remind that sales from the Maiden Lane I
portfolio have been taking place on and off for some time and that this
is nothing new. It just happened to coincide with the reverse inquiry to
the Maiden Lane II portfolio, a less frequent occurrence.
Another market expert concurs saying the Maiden Lane I portfolio
has been far more active since its inception in 2008.
“It has been more proactive,” he said, “and while it has been a net
seller it looks like there has been some reinvestment taking place along
the way.”
** Market News International New York Newsroom: 212-669-6430 **
[TOPICS: M$U$$$,MMUFE$,M$$AG$,MN$MO$,MAU0B$]
