The Federal Reserve Bank of New York just announced that it has sold the entirety of the MAX CDO holdings from its Maiden Lane III LLC (ML III) portfolio to Barclays Capital and Deutsche Bank Securities following a competitive bid process.

The New York Fed decided to move forward with the deal only after knowing that the winning bid represented good value for the public. This transaction considerably lessens the ML III portfolio and loan at a desirable price, according to the Fed announcement.

"I am pleased with the level of interest and the results of this process, especially with the strength of the winning bid, which represents good value for the public and significantly exceeds the original price ML III paid for these assets," said William C. Dudley, President of the New York Fed. "This successful sale marks another important milestone in the wind-down of our crisis-era intervention."

On April 18, the Fed announced that it had asked eight dealers a bid scheduled for April 26 on $7.5 billion of assets from the portfolio. The eight dealers include Barclays, Citigroup Global Markets, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley and Nomura Securities.

Interestingly, ahead of the bidding deadline, the banks paired off into three groups to conduct the bids. Nomura joined the team of Merrill and Morgan Stanley; Citigroup, Goldman and Credit Suisse teamed up to bid while Barclays and Deutsche Bank formed the third group.

"The Deutsche Bank group seems to have the advantage there since they control the junior piece of that deal, and Barclays controls the interest rate swaps embedded in the transactions," said one investment banking analyst.

According to several market reports ahead of the bidding deadline, Merrill, Morgan Stanley and Nomura said that that they plan to repackage the CDOs into a re-securitization that would allow a new investment-grade bond to be formed.

"Rather than unwinding and having all the separate tranches, they can re-securitize and have higher quality and lower quality tranches to sell," said investment banking analyst. "The strategies are going to differ based on the customers interest they get on the other side of this sale. Another option would be to keep the CDO intact or to liquidate it. The winning bidder may end up employing more than one of those strategies."

Consistent with the current investment objective of ML III, the New York Fed, through BlackRock Solutions, will continue to explore the sale of assets held by ML III. There is no fixed timeframe for future sales. At each stage, the Fed will sell an asset through a competitive process and only if the best available bid represents good value, while taking appropriate care to avoid market disruption.



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