Unusual Alliances Amongst Banks as Bidding Heats up for A.I.G. Assets

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Unusual Alliances Amongst Banks as Bidding Heats up for A.I.G. Assets

In the darkest days of the financial crisis, the Federal Reserve created Maiden Lane III, a special purpose vehicle which took on $30 billion in assets from American banks in exchange for bailout funds. While the banks had insured most of the assets through American International Group, Inc. (NYSE:AIG), the insurer did not have the means to settle all of the claims in its state at the time.

Now, it seems that the same banks that sold the assets into Maiden Lane III at fire sale prices are back again, bidding on these same securities. In order to recover some of the cost of the $182 billion bailout of American International Group, Inc. (NYSE:AIG), the New York Fed will be auctioning off this package of commercial real estate securities, which they are calling the “MAX C.D.O.” (collateralized debt obligation), today. BlackRock securities will be organizing the sale.

What is interesting about this auction process in particular is the cooperation amongst banks as they line up to bid on the assets. Barclays (BCS) and Deutsche Bank (DB) have been the latest to announce a bidding partnership. However, this isn’t the first partnership announced as Goldman Sachs (GS), Citigroup (C) and Credit Suisse (CS) have combined resources to form one group, while Bank of America (BA) and Morgan Stanley (MS) have formed another.

The Barclays PLC (NYSE:BCS) and Deutsche Bank AG (NYSE:DB) has a strong competitive position to bid at the auction, with Barclays being a party to a contract that must be unwound for the C.D.O. to be split up and repackaged as smaller securities. Any eventual bidder faces some concession to Barclays in order to do this, giving Barclays an advantage in being able to offer a bid price without worrying about what a concession may cost. In addition to this advantage, Deutsche Bank AG (NYSE:DB)  already owns part of the C.D.O. Both Barclays PLC (NYSE:BCS) and Deutsche Bank are already working on developing investor interest in the securities that underlie the C.D.O. in advance of the auction. All of the banks would likely look to part out the large pool of securities into smaller pieces to a variety of investors, if successful with this bids.

This unusual cooperation suggests that the banking industry is still nervous about taking on considerable risky asset positions alone, and they view such partnerships as an appropriate method of sharing risk, and bringing combined strengths together in order to achieve their objectives.




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