Maiden Lane Update…….Almost Done
- Posted by ToddSullivan
- on June 25th, 2012
redit Suisse ($CS) bought four of six complex mortgage-debt securities up for auction by the Federal Reserve Bank of New York, according to the New York Fed’s website. The assets, which have a total face value of $4.2 billion, were taken on during the 2008 bailout of American International Group ($AIG).
The sales of the collateralized debt obligations raise the total face amount sold from the portfolio known as Maiden Lane III to about $23.4 billion this year. Credit Suisse bought nearly $3.5 billion of the CDOs, while Royal Bank of Scotland PLC’s ($RBS) RBS Securities and Morgan Stanley ($MS) each bought one other CDO. The sales have become barometers for demand of residential- and commercial-mortgage securities. The underlying bonds are the type of nonguaranteed securities that have fluctuated in value since 2008 as the vagaries of the real-estate recovery make them difficult to assess and as they’ve been especially sensitive to economic events that have roiled financial markets.
But the mortgage bonds have held up better than other risky debt in recent weeks, in part as the housing market shows signs of bottoming and many funds have raised money to buy the securities that offer high yields, analysts said. The loan made by the New York Fed to fund the Maiden Lane III portfolio already has been paid off after multiple sales. Loans similar to crisis-era Maiden Lane portfolios have also been repaid.
The fair value of ML III was $12B as of last Wednesday after the last round of sales meaning the current & pending sales will materially reduce the remaining balance. There has been some discussion in the blogsphere claiming that the “complexity” of many of these securities would hamper additional sales. Clearly that is not the case as demand has stayed high as each offering had 8-9 bidders.
I have said for months now and still maintain that both the Fed and Treasury want to have this wrapped up (including liquidation (or near liquidation) of Treasuries common stock stake in $AIG) well before the elections. The goal would be to not allow it to become an election issue and in fact allow for a victory lap for both agencies, an exit at a taxpayer profit.
The rate of current offerings assures at least the Fed will be out withing weeks and with the $$ $AIG will see from these sales (~$7B) they can take at current prices >20% of the Treasuries stake off the market, taking their ownership down to ~42% of the outstanding shares (I am assuming future ML sales for values near current and an $AIG stock price that stay ~ near current levels) from today’s 60%. I also expect $AIG to use 100% of the funds from ML sales to repurchase shares direct from the Treasury.
What seems to be being lost by the general investing public is the scope of the cap shrink $AIG is undergoing as the Treasury stake is liquidated. There seems to be an assumption the Treasury is dumping extra shares onto the market when the reality is that each Treasury sale, because $AIG is such a large buyer actually shrinks the share count. Excluding the ~$7B they will get from the ILFC IPO (that will be used t repurchase shares), $AIG will repurchase ~$15B worth of shares alone this year, all from the Treasury. With a sold BV of $57/shares they are buying them now at 60% of book meaning each share they buy is the equivalent of buying $1 worth of assets for $.60. A fantastic return for shareholder funds.
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Todd's investing strategy is essentially long with the rare short. He seeks to buy undervalued issues with an upcoming catalyst that will help them realized.... More »
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