Wall Street, Investment Firms Show Interest in Buying Assets Tied to the U.S. Bailout

[Midpack]

I am sure I don't fully understand this, but speaking of scary...hasn't anything changed?

The $47 billion face value in assets, held by the Federal Reserve Bank of New York, are the same kinds of financial instruments that were at the heart of the financial crisis and caused record losses across the financial industry. Plunging values of the securities, called collateralized debt obligations, or CDOs, caused AIG's near collapse and a government rescue in 2008. The $182 billion bailout was widely criticized because a chunk of taxpayer aid was funneled through AIG to large banks.

Now, amid rising investor demand for riskier, higher-yielding assets, attempts by Wall Street firms to buy those same assets may spark further controversy. Some large banks were on the winning end of bets with AIG over the instruments during the crisis, and benefited from the insurer's bailout.

A potential sale of the CDOs by the New York Fed in the coming months, plus the government's recent decision to resume selling some of its AIG stock, could set the stage for the U.S. to recover the bulk of its money from the bailout before the presidential elections this year.

A few interested buyers have approached the New York Fed about the CDOs, the people added, but they don't expect any imminent sales. The New York Fed so far hasn't signaled plans to dispose of the securities, which have been held since the bailout in a vehicle called Maiden Lane III, the people said. The CDOs have a total unpaid principal balance of $47 billion and were valued at 37 cents on the dollar in January.

Behind the interest in the beaten-down securities is an active search for yield by investors, which has spurred price rallies in risky assets from distressed mortgage bonds to junk-rated corporate debt. That demand enabled the New York Fed to sell $19 billion in subprime and other residential mortgage-backed bonds from the AIG bailout in January and February.

"The optics would be really bad," said Ann Rutledge, a principal at R&R Consulting, a structured-finance consulting firm in New York. "The banks were able to lay off their risks to the public during a period of extreme uncertainty, and now they are willing to buy [the CDOs] at a lower price when the downside risk is limited," she added.

Banks Now Desire Assets Tied to AIG Bailout - WSJ.com

 

[MBAustin]

It sounds like some folks think they can now make money by buying up some of the "toxic waste" that was only 95% toxic instead of 99% toxic. If we taxpayers get some of our money back as a result, I think I'm OK with it - as long as the cycle doesn't repeat.

But I'm not an expert so hopefully one of our resident economists will weigh in.

 

[MooreBonds]

I am sure I don't fully understand this, but speaking of scary...hasn't anything changed?


Banks Now Desire Assets Tied to AIG Bailout - WSJ.com

Well, on the one hand, I don't see anything wrong with the fundamental concept of an investor buying an asset that is priced 'appropriately' for the underlying risk. Just because it's a CDO containing (residential?) mortgages - which was a big source of the fiscal disaster - doesn't in and of itself make it bad...as long as it's priced to reflect the true underlying value of the mortgages, which it sounds like it is, at about $.37 on the $1 of loan principle. Someone has to hold the mortgages originated over the past 5 years, so just because some of them are worth less than toilet paper doesn't mean they suddenly disappear into thin air (even though the equity and likelihood of repayment of some of the loans HAS disappeared into thin air).

HOWEVER...I do agree with the comment in the article that finds fault with the fact that the same institutions that unloaded the debt onto the gov't 2-3 years ago at a much higher price during the bailout, now suddenly want to buy it off the feds' hands for a much lower price (aka "avoidance of ginormous losses and writedowns"), courtesy of all of the taxpayers of America.

 

[Midpack]

HOWEVER...I do agree with the comment in the article that finds fault with the fact that the same institutions that unloaded the debt onto the gov't 2-3 years ago at a much higher price during the bailout, now suddenly want to buy it off the feds' hands for a much lower price (aka "avoidance of ginormous losses and writedowns"), courtesy of all of the taxpayers of America.

That's what bothered me too, hence my last underlined quote. Imagine if all of us could be reimbursed for a huge loss, and then buy back in at a big discount. While the banks reimbursed the Fed for the bailout funds, it was at a huge discount IIRC (after write downs and low interest)...where do I sign up?