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Opinion

Credit market’s taste for the toxic returns

Having spurned AIG’s approach, the New York Fed is under pressure to achieve top dollar.

The sale by the Federal Reserve Bank of New York of three tranches of non-agency US RMBS in New York by mid-April was a stark illustration of the extent to which the securitization market has rallied in the US. The assets on the block were part of the Maiden Lane II portfolio that the New York Fed bought from stricken insurer AIG in October 2008. In the three sales the agency successfully offloaded securities with a face value of nearly $2.5 billion – ably demonstrating the kind of credit market buoyancy that $2 trillion of quantitative easing will buy.

The assets that went under the hammer are part of the New York Fed’s November 2008 bailout of AIG. With Maiden Lane II it acquired sub-prime RMBS assets with a face value of about $40 billion at about 50 cents on the dollar. (The New York Fed subsequently pumped a further $24.3 billion into AIG to buy a portfolio of CDOs, Maiden Lane III. The original $28 billion Maiden Lane loan in March 2008 facilitated the bailout of Bear Stearns). The face value of the entire Maiden Lane II pool was $16.4 billion on December 31 last year.

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