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N.Y. Fed sells AIG bailout assets to Merrill Lynch


NEW YORK (Reuters)—The New York Federal Reserve on Thursday said it sold all its TRIAXX collateralized debt obligations from a portfolio of assets that was used in the government bailout of insurer AIG to Merrill Lynch following a competitive bid process with eight other Wall Street firms.

Terms of the sale of the assets from the portfolio known as Maiden Lane III were not disclosed, though the New York Fed did say the assets were sold at a profit.

Merrill, the broker-dealer unit of Bank of America Corp., beat out Barclays Capital, Citigroup Inc., Credit Suisse Group, Deutsche Bank, Goldman Sachs Group Inc., Morgan Stanley, Nomura and RBS Securities.

"The winning bids, which were materially higher than the original prices ML III paid, demonstrate continued interest in these assets and represent good value for the public," said New York Fed President William Dudley in a statement.

Nearly two week ago, the New York Fed said it "invited" the nine broker-dealers, "based on their expressions of interest," to submit bids for the TRIAXX CDOs, which are backed by subprime mortgages.

The combined principal value of all the TRIAXX CDO securities in the Maiden Lane III portfolio was about $2.5 billion as of March 31, according to the latest Fed data.

The fair value of the Maiden Lane III portfolio was $20.21 billion on May 2, according to Fed data.

As a part of the government bailout of insurer American International Group Inc. in 2008, the New York Fed lent $24.3 billion to finance the purchase of securities for Maiden Lane III, while AIG took a $5 billion equity stake.

RBS and Barclays had the next closest, or so-called "cover," bids on one of the larger chunks of TRIAXX mortgage CDOs, said investors familiar with the sale.

The TRIAXX CDO 2006-1A had an original face value of $2.25 billion, but its balance had fallen to $992 million as of March 31, according to the latest New York Fed data.

These TRIAXX CDOs will likely start trading intact, instead of being dismantled into their mortgage components, because their structure provides certain protections against losses that make it attractive to some investors.

"Given the extraordinary demand for what could be described today as 'outsize yield' among investors such as insurers or pensions who must fund increasingly burdensome forward obligations, opportunities such as today's CDOs cannot be overlooked," said Chris Sullivan, chief investment officer of the United Nations Federal Credit Union.

"There seems to have been exceptional demand lately for complex structures versus their underlying components, primarily for the sizeable return advantages," Mr. Sullivan said.

In light of improving demand for this type of risky investments, the New York Fed said it will continue to explore through BlackRock Solutions, the investment manager for the Maiden Lane portfolio, the sale of the rest of the assets in Maiden Lane III.

"There is no fixed time frame for future sales," the New York Fed said.

The New York Fed completed the sale of all the remaining securities from its Maiden Lane II portfolio in February, which had $20.5 billion worth of risky mortgage bonds owned by several AIG insurance subsidiaries.

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