N.Y. Fed continues Maiden Lane III unwind with RMBS CDO bidding

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--N.Y. Fed continues Maiden Lane III unwind with RMBS CDO bidding
--Triaxx CDOs backed by prime jumbo and Alt-A private mortgages
--Dealers at last Maiden Lane III CDO sale teamed up to improve bids
(Adds size of portfolio in fifth paragraph.)
By  Al Yoon
Of DOW JONES NEWSWIRES
NEW YORK  (Dow Jones)-- The Federal Reserve Bank of New York  on Friday said it invited nine  Wall Street  dealers to bid for complex residential mortgage bonds with a face value of  $2.5 billion  as it unwinds a portfolio created during the 2008 bailout of  American International Group  (AIG).
The competitive bid process was launched after the New York Fed received several "strong" inquiries to buy the structured debt known as collateralized debt obligations, or CDOs, the New York Fed said on its website.
The two "Triaxx" CDOs on offer were packaged in 2006 with residential mortgage-backed securities containing jumbo and Alt-A loans, which are larger than those that fit into government programs or had limited documentation. Such CDOs were at the heart of the credit crisis, fueling more risky lending and later causing steep losses to investors and banks that had counted on their high credit ratings.
Some banks chosen to bid next week were paid billions of dollars in 2008 to unwind CDO trades that they had with AIG during the financial crisis.
The proposed sale would be the second in two weeks from the portfolio known as Maiden Lane III, which held  $47 billion  in assets at face value at year end 2011. Eight dealers last week formed three alliances to boost their chances of buying  $7.5 billion  of commercial mortgage-backed security CDOs in a New York Fed auction ultimately won by  Deutsche Bank  and  Barclays .
Similar demand could develop for the residential mortgage assets as many investors, including  Two Harbors Investment Corp.  (TWO), have been adding the underlying RMBS in recent months. The CDO structure adds a layer of complexity that limits buyers, but some investors may relish the chances of purchasing such debt that likely has extra yield over the underlying securities that have already rallied up to 10% this year, analysts said.
"Complex and less liquid RMBS CDOs are attractive investment opportunities, said  Jonathan Lieberman , head of the residential mortgage securities team at  Angelo, Gordon & Co. , which manages  $24 billion .
Bill Roth , co-chief investment officer at Two Harbors, on Thursday said he could be interested in the Maiden Lane III mortgage assets if they fit into the firm's real estate investment trust mandate.
Dealers asked to bid on the Triaxx CDOs are  Barclays  (BCS, BARC.LN),  Citigroup  (C),  Credit Suisse  (CS, CSGN.VX),  Deutsche Bank  (DB, DBK.XE),  Goldman Sachs Group  (GS),  Bank of America Merrill Lynch  (BAC),  Morgan Stanley  (MS),  Nomura Holdings  (NMR, 8604.TO) and  Royal Bank of Scotland  (RBS, RBS.LN).
Bids for the CDOs are due on  May 10 . The New York Fed said it would sell the CDOs only if bids represented a good value to the public, and that it would take care to avoid disrupting the market.
Dealers are likely measuring investor demand for the CDOs as a whole versus the individual parts that are typically easier to trade. Dismantling the CDO structures could be difficult and costly, as seen by the two dealer groups that were outbid last week but had intended to repackage or sell pieces of the "MAX" commercial real estate CDOs.
"I think the MAX trade showed that there is [investor] demand for CDOs still in CDO form," said  Jeffrey Wheeler , a portfolio manager at  Smith Breeden & Associates .
-By  Al Yoon , Dow Jones Newswires; 212-416-3216; albert.yoon@dowjones.com
-- Serena Ng  of  The Wall Street Journal  contributed to this article.

  (END) Dow Jones Newswires
  05-04-12  1348ET
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