When two weeks ago it was disclosed that AIG is willing to pay $15.7 billion for the same toxic securities that two years ago caused AIG to sell 92% of itself to an involuntary taxpayer, and currently make up Maiden Lane II (which is marked on the Fed's books by BlackRock at $15.9 billion) we asked why this process is not open up to broader public auction. After all these are taxpayer assets and should receive an arms-length treatment in recouping best returns for the taxpayer. It seems that other bidders are now starting to appear. The FT reports: "Barclays is among a group of investors weighing a rival bid for a portfolio of mortgage-backed securities that has already drawn a $15.7bn offer from AIG, people familiar with the matter said. AIG, which wants to buy back the assets to reduce its obligations to the government while finding a higher-yielding use for its cash, went public with its bid earlier this month after the New York Fed did not respond to a preliminary offer made in December."
It appears that the Treasury had been hoping to quietly get the deal done where AIG buys the toxic mortgages at a preferential price so that Geithner can than proceed to sell off bits and pieces to bankers at a lowball IPO valuation where the deficit would once again be borne out by US taxpayers.
People familiar with matter said the Treasury had sought to help broker a deal between the insurer and the New York Fed, reasoning that management’s knowledge of the some 800 securities might help squeeze more profits out of them and maximise taxpayers’ returns on their AIG investment. Fed officials remain concerned how a quick deal with AIG might appear to the public, the people said.
At AIG, the plan to buy back the portfolio of mostly subprime mortgage securities has been part of its strategy as it emerges from government ownership.
It is stunning that even the Fed is more concerned about its PR image than Tim Geithner, who has overstayed his welcome at the US Treasury by over two years. It also goes to show just how greatly Geithner believes he is protected against populist anger by moneyed interests who would do anything to indirectly get their hand on the Maiden Lane II portfolio by purchasing IPO shares in fresh start AIG.
As for how AIG should know MLII better than other - this is debatable. After all, it was this portfolio among many others, that AIG had no idea would send the company into Treasury-mediated receivership.
The insurer has stockpiled about $20bn in cash to purchase the Maiden Lane II assets and similar securities.
“It’s a very different story with or without these securities,” Robert Benmosche, AIG’s chief executive, told the Financial Times. “We can improve yields by 3-4 per cent.”
The increase, Mr Benmosche said, would help AIG reap an additional $500m-$700m in annual income.
Of course, others can do the same math, and reap the same benefit. The only question is at what cost. And here is where the AIG offer is nothing but a stalking horse, even if the Treasury will fight to make sure Benmosche is the winning bidder with his lowball bid. However, as we speculated, others are realizing this could be a potential goldmine, now that the Fed is urgently reflating any and all assets.
Other financial institutions may have reached the same conclusions.
“We have been told that someone else was putting together a bid,” Mr Benmosche said. “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.”
Barclays and the New York Fed declined to comment.
On the lookout for more profitable uses of excess capital stockpiled in the wake of the crisis, many banks and investment firms have turned to formerly distressed assets.
Goldman Sachs bought more than $8bn in mortgage-backed securities from State Street in December, people familiar with the matter have said.
It would be very ironic if the general population, especially those who are actively seeking credit, realizes that to the lender banks it is a less risky proposition to acquire toxic mortgage portfolios than to lend out money to those who actually need it at this time (but are delighted to hand it out to those who have no need).
More strategically, it appears this could be the very first appearance of a crack between the tactics of the Fed and the Treasury. Up until now both had operated as a ponzi cabal, in which one buys the other's debt, and remits the interest back in the form of revenue. Should the implied PR fallout persist, the results could be certainly very amusing and worth following.