The Federal Reserve Bank of New York has sold a significant portion of its Maiden Lane II portfolio to Goldman Sachs. The residential mortgage-backed securities were sold through a competitive process and had a current face value of $6.2 billion. 

Goldman beat out four other firms, Credit Suisse, Barclays Capital, Morgan Stanley and RBS Securities.

It was the New York Fed's second bulk sale in 2012 of subprime and Alt-A RMBS the central bank purchased from American International Group's subsidiaries as a part of the insurer's government bailout. The latest transaction was prompted by an unsolicited offer from Credit Suisse, which won the first competitive process on Jan. 19. 

Proceeds from both sales will allow the repayment of the entire remaining outstanding balance of the senior loan the New York Fed made to ML II on the next payment date in early March. 

The original amount of the senior loan was $19.5 billion. 

The New York Fed said the broker-dealers competing in the most recent transaction were selected based on the strength of reverse inquiries they submitted recently for large parcels of the portfolio. 

It decided to move forward only after determining that the winning bid represented good value for the public. Net proceeds from the sale will be reported as part of the portfolio’s normal reporting schedule on April 16.

"I am pleased with the continued interest in these assets and am especially gratified that the New York Fed's loan to ML II will be repaid as a result of the sale announced today," said William C. Dudley, president of the New York Fed, in a release today.

Market participants said the impact of the sale on secondary trading in subprime and Alt-A RMBS has been limited.

"It seems that the market reaction has been much more positive this go-around as the remaining bonds traded in large chunks, and market participants are increasingly starved for assets," said Walt Schmidt, a mortgage strategist at FTN Financial Capital Markets

"Last year at this time, the market was under the assumption that new issuance would start before the end of 2011," he said. "I think the market has now resigned itself to the fact that new-issuance is not likely anytime soon in the current regulatory/political environment and that investors simply want to book higher-yielding assets."

The Jan. 19 transaction originated with a reverse inquiry by Goldman. In addition to Credit Suisse, Barclays Capital and Bank of America Merrill Lynch also submitted bids.

As of press time, it couldn’t be determined what price Goldman paid for the securities. However, Credit Suisse's previous winning bid contained prices for RMBS in the portfolio ranging from 43 cents to 45 cents on the dollar, according to a source whose firm had signed the non-disclsoure agreement required by the underwriter.

That firm, however, did not buy any of the securities because it had lined up with Barclays' bid, which the source said placed second, according to a story by John Hintze in this month's ASR monthly.

Today's Transaction

Consistent with its March 2011 announcement regarding the disposition procedures for ML II, which allowed for these types of reverse inquiries, the New York Fed directed BlackRock Solutions to conduct a sale via a competitive process.

The New York Fed, through BlackRock Solutions, will dispose of the remaining securities in the ML II portfolio individually and in segments over time depending on market conditions, while taking care to avoid market disruption. There will be no fixed timeframe for the sales. At each stage, the Federal Reserve will only initiate transactions if the best bid represents good public value.

Following repayment of the New York Fed’s senior loan, additional proceeds will be allocated as per the ML II agreement. Proceeds from additional asset sales that are allocated to the New York Fed will be included in the Federal Reserve’s remittances of income to the U.S. Treasury. 

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