The Federal Reserve Bank of New York plans to continue with its Maiden Lane II (ML II) asset sales despite opposition from some securitization market participants.
According to market reports, in its next ML II auction, the Fed will sell 29 subprime bonds. The deadline for submitting bids on the latest list is 1 p.m. EDT Thursday. Winners will be notified the same day around 2:30 p.m.
However, the Fed's strategy of selling of the bonds on an incremental basis as opposed to a one-off asset sales has been met with some opposition from ABS traders who claim that the drawn-out process has created some pressure on spreads for subprime bonds.
Last Tuesday, at its last auction, the Fed sold only 34 of the 53 bonds due to prices not meeting reserve levels. According to Jesse Litvak, a managing director at Jefferies, of the assets left to sell, the majority are similar to those assets the Fed was unable to trade at its last sale.
Litvak is concerned that if the Fed moves ahead with its strategy and continues to "bleed out 1-2 lists a week for the next 10-12 weeks, prices will continue to go lower."
Instead, Litvak believes that the Fed should reconsider a large portfolio or make available to other counterparties the ability to bid large chunks of what is left to sell form the ML II.
"By taking the approach of pulling the band-aid off nice and fast, I think what [the Fed] achieved is getting the best possible price for the remaining assets, and [the Fed] rids the rest of the market of the dark cloud which hangs over it," he said in an e-mailed comment to ASR.
The Fed maintains that it will charge along with its strategy of controlled asset sales. "The New York Fed is pleased with the execution of its disposition of the Maiden Lane II assets to date, both in terms of the number of dealers bidding on the securities and the levels at which they are bidding, and we have successfully sold the vast majority of the securities that have been put to bid," said a New York Fed spokesperson. "Given the consistently strong market response we will continue disposing of the assets through an open and competitive process, as market conditions warrant."
For some market players, the strategy is paying off and has served to create better transparency on non-agency trades.
Adam Murphy, president of Empirasign Strategies, believes that anyone complaining about how the sales have been handled is way off base.
"They announced the auctions a few days ahead of time and have been pretty forthcoming with the color," he said. "Other lists are discreet with color and only give sellers a few hours heads up. The ML II auctions with their long lead times add structure to a very unstructured and disjointed marketplace."
