Banks and Governments Entities in a Bidding Fight over Holding Toxic-Assets: Answers That Should Make Contrarians More Confortable

Do you remember the questions that I asked earlier this month, and that were worrying me as a contrarian?

So what is it that worry me so much? It's the fact that governments are the worst "investors" you can think of. They never make a profit, and are 100% wrong when timing the market. Yet, if we were at a major top, it would mean that the US Treasury — and to a lesser extent, the UK government — are actually timing their selling very well. So is it possible that we are actually not at a top, and that yet another higher one is coming? How likely would that scenario be? This is an open question, and I would like to hear your opinion.

Well the answer is completely unbelievable and show just how much the sentiment is playing and fooling everybody during this non-recovery, market bounce. It happens that instead of selling at the top of the market — worrisome for contrarian, as it would invalidate their idea — banks and governments entities are entering a bidding fight over who gets to hold what just two years ago was called toxic-assets as they have become great investments again!

New York Fed Declines AIG’s Offer for Maiden Lane II Mortgage-Bond Assets

American International Group Inc. (AIG), the bailed-out insurer, was rebuffed by the Federal Reserve Bank of New York in its bid to repurchase a portfolio of mortgage- backed securities for $15.7 billion.

The New York Fed will instead sell the assets individually and in blocks, the regulator said yesterday in a statement posted on its website. BlackRock Inc. (BLK), the New York Fed’s investment manager, will issue the first bid list next week, according to the statement.

“We had anticipated we would have the opportunity to buy these assets at a fair price by January 2011 and earn a return on them for the benefit of the U.S. taxpayer,” Mark Herr, a spokesman for New York-based AIG, said in an e-mailed statement. “Now, we must make up for lost time and lost earnings.”

AIG handed the mortgage bonds, known as Maiden Lane II, to the New York Fed in 2008 in exchange for a cash injection that helped save the company from collapse. The insurer, which sold non-U.S. businesses and returned to profit last year, said it was bidding for the securities to boost investment returns.

The New York Fed and the Board of Governors “judged that the public interest in maximizing returns from any sale and promoting financial stability would be better served by an alternate approach,” according to the statement

AIG, which is 92 percent-owned by the U.S. government, made public on March 10 a bid for the pool of mortgage bonds. The U.S. government’s rescue of AIG, initiated in 2008, is valued at $182.3 billion.

Maiden Lane II holds assets that AIG had purchased with collateral turned over by Wall Street banks through securities- lending deals. When the housing market collapsed, AIG couldn’t reimburse banks that wanted their collateral back, prompting the Fed to make about $22.5 billion available to Maiden Lane II to take the assets off the company’s balance sheet.

The value of some of the securities subsequently rebounded and the bonds have paid coupons, reducing the Fed’s investment in the facility. At the same time, AIG has lowered its obligations under the bailout by selling units including non- U.S. life insurers and a consumer lender.

AIG Chief Executive Officer Robert Benmosche, 66, told the New York Times DealBook that the New York Fed’s decision is “a huge problem” for the company. He hasn’t decided whether to bid on some of the Maiden Lane II assets, DealBook reported.

Jonathan Hatcher, an analyst at Jefferies Group Inc. in New York, said the government will be able to attract more investor interest through its plan to sell the assets in pieces.

“That’s a huge block, which there’s a limited number of bidders for,” Hatcher said in a phone interview. “If they’re going to break it up into much more digestible-size pieces, I think theoretically they should get the best execution.”

Credit Suisse Group AG (CSGN), Morgan Stanley and Barclays Plc (BARC) are each seeking groups of investors to make bids, people with knowledge of the discussions said last week.

The securities, backed by so-called subprime, Alt-A and other home loans, had a face value of about $39 billion when turned over to the Fed. The figure is now about $31 billion, after homeowners defaulted, moved or refinanced, according to AIG’s disclosures.

“We have been told that someone else was putting together a bid,” Benmosche said in an interview with the Financial Times this month. “I think we can offer a little more, but the price we offered is about it. Until I see a competing bid, I’d have to wait and see.”