Holding themselves to a high model of transparency, the Federal Reserve may have slipped in this short new year. Its Federal Bank of New York has been accused of showing favoritism to certain banks and shutting others out in recent auctions.
According to Bloomberg, the Federal Reserve Bank of New York allegedly invited more than 40 broker-dealers to participate in a number of auctions in 2011 but in two recent ones, it only invited Goldman Sachs Group Inc. (GS), Credit Suisse Group AG (CSGN) and Barclays Plc (BARC) to bid on $13.2 billion in bonds offered in two sales. The bank narrowed its process with fewer banks after poor prices last year.
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
Nobody likes to be excluded and the firms that had not been selected are annoyed to lose potential profits from the auction opportunities. With this behaviors, questions have been raised on whether whether the Fed got the best price for U.S. taxpayers in the $182.3 billion AIG bailout. In January, the New York Fed re-started sales of the company’s assets.
Maiden Lane II LLC
Last March, the New York Fed announced plans to sell bonds in the 2008 product, Maiden Lane II LLC, which they hard purchased for AIG holdings for a cash infusion. According to Bloomberg, its portfolio includes bonds backed by home loans with high default rates, including subprime, Alt-A and option adjustable-rate mortgages. While difficult to put a value on them, there is the potential for large profits.
In a March 30 statement, the New York Fed said that it would “dispose of the securities in the ML II portfolio individually and in segments over time as market conditions warrant through a competitive sales process,” and that it would also “entertain investor inquiries to acquire specific parcels of securities where these offer superior value.”
It added after rejecting a $15.7 billion AIG offer for the pool by saying, “Offering the Maiden Lane securities for sale individually and in segments rather than as a single block will give a larger set of investors opportunity to bid for the assets. This will maximize sale proceeds.”
In 2011, 22 banks bought the bonds auctions with Bank of America Corp. and Citigroup Inc. as the top buyers. Prior to the auctions, the bank placed the amount it would sell and when on its website while dealers distributed the individual securities names offered and and the second- best bids, according to Bloomberg.
But the sales didn’t last long as the New York Fed stopped them in June after it got rid of $10 billion in face value of them and received criticism for hurt credit markets.
Flip the calendar year over and on Jan. 19, the bank started sales again when it sold approximately $7 billion of assets to Credit Suisse, even aftter Goldman Sachs submitted an unsolicited bid while Barclays and Bank of America had been invited to partake. auction. Goldman Sachs won the auction for $6.2 billion of bonds just this week along with Barclays(second-highest offer), Morgan Stanley and RBS Securities Inc. participating. ed in that sale.
So much for transparency: the regional bank didn’t the auctions until after their close. Winners had been selected from their previous bids with Wall Street firms, and their clients who bid on the assets, had to sign non-disclosure agreements that put a gag order of offering discussions.
This week’s $6.2 billion sale to Goldman Sachs allows the repayment of the central bank’s loan to Maiden Lane II (FARBML2), which was originally $19.5 billion. While the Fed hasn’t disclosed the prices paid, it was owed about $6.7 billion on its loan to the facility as of Feb. 1, not taking into account proceeds from last month’s transaction. About $6 billion of assets remain in the vehicle, based on Fed disclosures.
The New York Fed said Feb. 8 that it “will dispose of the remaining securities in the ML II portfolio individually and in segments over time as market conditions warrant through a competitive sales process, while taking appropriate care to avoid market disruption.”
A separate facility, Maiden Lane III (FARBML3) LLC, helped retire credit-default swaps that were sold by the insurer to protect banks from losses on securities tied to subprime mortgages. AIG said in March 2009 that Goldman Sachs received $12.9 billion from the insurer to settle securities-lending and credit-swap contracts from the 2008 bailout. The Fed was owed about $9.6 billion as of Feb. 1 from its loan to Maiden Lane III.