Here’s the Fed’s Exclusive Invite for Mortgage Bonds

The Federal Reserve Bank of New York announced that it invited nine Wall Street dealers to bid for residential mortgage bonds, valued at $2.5 billion. The bidding is a move to unwind a portfolio created during the 2008 bailout of American International Group (NYSE:AIG).

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According to the New York Fed, the bid process was launched after it received several “strong” inquiries to buy the structured debt, known as collateralized debt obligations. In 2006, the two “Triaxx” CDOs on offer were packaged with residential mortgage-backed securities containing jumbo and Alt-A loans. These loans are larger than those that fit into government programs or had limited documentation.

These CDOs were the crux of the credit crisis, and were fueling more risky lending, eventually causing steep losses for investors and banks that were relying on their high credit ratings.

The auction would be the second from the Maiden Lane III portfolio in less than a month. Previously, eight dealers formed unusual alliances to increase their chances of winning an auction for $7.5 billion of commercial mortgage-backed security CDOs. Both Deutsche Bank AG (NYSE:DB) and Barclays (NYSE:BCS) won the auction and had investors purchase the majority of CMBS from them.

Two Harbors Investment Corp. (AMEX:TWO) and other investors could develop similar demand for residential mortgage assets, and have been adding the underlying RMBS in recent months. According to analysts, many investors are attracted to their chances of buying debt that likely has extra yield over the underlying securities that have already rallied 10 percent this year, despite the CDO structure adding a layer of complexity that limits buyers.

The dealers planning to bid on the Triaxx CDOs include: Barclays, Deutsche Bank, Citigroup (NYSE:C), Credit Suisse Group (NYSE:CS), Goldman Sachs Group (NYSE:GS), Bank of America (NYSE:BAC),  Bank of America’s Merrill Lynch, Morgan Stanley (NYSE:MS), Nomura Holdings (NYSE:NMR), and Royal Bank of Scotland Group (NYSE:RBS). Dealers must submit their bids for the CDOs on May 10. The Federal Reserve Bank of New York said that it would sell the CDOs only if the bids represented a good value and did not disrupt the market.

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