Maiden Lane puts pressure on MBS market
When the Federal Reserve decided to block American International Group's (AIG) attempt to buy back its portfolio of subprime assets, the government took a bet the notes would be worth more on the open markets. According to mortgage-backed securitization traders, that decision is proving to be a risky gamble. They say the latest round of MBS sales from the Maiden Lane II vehicle that holds the government's AIG toxic residential loans is being met with waning enthusiasm. Reports in The Wall Street Journal and Structured Credit Investor both call it "investor fatigue." Further sources inside the government say the street is generating rumors in an effort to manipulate the markets. One source said the weekly sales will continue as planned. In a letter to the Fed, one MBS trader said, "if you charge ahead and bleed out one or two lists a week for the next 10 to 12 weeks, prices will continue to go lower, and in the interest of maximizing value for the taxpayer, I think it is time to re-engage the large portfolio bid you had or make available to other counterparties the ability to bid large chunks of what you have left to sell." Roughly two-thirds of the bonds offered last week sold, a source tells HousingWire. This would be a huge shift from the more successful offerings in April. The Federal Reserve did not immediately comment or confirm. However, one trader cited the added pressure on bond prices being created by weekly Maiden Lane offerings. Maiden Lane is the name of several residential mortgage securitization platforms created to clear toxic mortgage investments. The original Maiden Lane was created to facilitate the merger of JPMorgan Chase (JPM) and Bear Stearns. Maiden Lane II was created to alleviate capital and liquidity pressures on AIG from its securities lending program by purchasing $20.5 billion in RMBS from several of AIG’s U.S. insurance subsidiaries. It is primarily mortgages supported by either Fannie Mae or Freddie Mac, the government-sponsored enterprises. Also in large volume are RMBS made up of pools of option ARMs and alt-A mortgages. Here is a chart of the Fed's wind down of Maiden Lane II: Write to Jacob Gaffney. Follow him on Twitter @JacobGaffney.