Reuters: Financial Services and Real Estate: Citigroup wins latest auction of US toxic AIG assets

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Citigroup wins latest auction of US toxic AIG assets May 24th 2012, 18:23 By Adam Tempkin Thu May 24, 2012 2:23pm EDT NEW YORK, May 24 (IFR) - Citigroup won the Federal Reserve's latest auction of toxic mortgage assets on Thursday, scooping up $1.67bn in securities that the US government inherited in the 2008 bailout of AIG. The auction, postponed from last week, was the latest sell-off as the United States moves to liquidate the roughly $87bn of assets it acquired in the $182bn rescue of AIG, known collectively as the "Maiden Lane" portfolios. Citigroup beat out six other broker-dealers -- Deutsche Bank, Goldman Sachs, Guggenheim Securities, Merrill Lynch, Morgan Stanley and RBS -- in the auction. The distressed securities helped bring down AIG, then the largest US insurer, and are largely backed by the kinds of toxic residential mortgages that came to symbolize the financial crisis. But residential mortgage-backed securities (RMBS) have come back into vogue with investors in recent weeks, as they have largely been outperforming the traditional stock and bond markets. The securities sold on Thursday from the Maiden Lane III portfolio bundled RMBS together in complex packages of derivative investment products known as collateralized debt obligations (CDOs). Citigroup acquired US$1.67bn in slices of the so-called Duke Funding High Grade I Ltd. CDO. The auction, due to take place on May 17, was delayed due to technical documentation issues. "There was additional information concerning the Duke CDO that had not been made available for the bidders," the Federal Reserve said last Friday in explaining the postponement. Securitization specialists told IFR that bidders had been seeking more information about interest-rate swaps -- a secondary layer of speculative trades tied to the securities -- before the auction could go ahead. The CDOs sold on Thursday were originally packaged and sold in 2005 by Wachovia, a now-defunct banking corporation that eventually merged with Wells Fargo. It was the second sale of Maiden Lane assets this week. On Tuesday, Credit Suisse beat out six other broker-dealers bidding on $691 million in Maiden Lane CDOs. In the run-up to the latest auctions, several of the bidding dealers were offering their own clients resecuritizations of the CDOs -- that is, repackaging the toxic assets in a form containing at least one tranche with a triple-A top grade investment rating. Over the past month, with the market buffeted by volatility driven by the eurozone crisis, non-agency RMBS cash bonds -- those backed by mortgages without US government support -- have outperformed all other risky-asset sectors, researchers at JP Morgan said. One reason is that mortgage bonds are less correlated to the outside events -- economic, political and otherwise -- that tend to affect competing asset classes. Link this Share this Digg this Email Reprints

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