By Steven K. Beckner

(MNI) – The New York Federal Reserve Bank’s announcement Wednesday
evening that it will offer to sell the mortgage-backed securities in its
so-called Maiden Lane II portfolio should not be seen as the beginning
of a Fed “exit” from its accommodative monetary policy.

The sale of the MBS assets, formerly owned by American
International Group (AIG) has no monetary policy implications, Market
News understands.

Nor does it signal any impending shift in policy or move toward an
exit– any more than the U.S. Treasury’s plan to sell securities held by
Fannie Mae and Freddie Mac in its conservatorship have any monetary
policy import.

AIG had offered to buy back all of the assets in Maiden Lane II, a
special purpose vehicle created in 2008 to absorb the assets of the
insurance giant when it became insolvent due to losses on credit default
swaps it had sold against MBS.

However, late Wednesday, the New York Fed announced that it and the
Fed Board of Governors had rejected AIG’s offer and that it had instead
decided to offer the assets for sale to multiple bidders to maximize
returns on sale of the assets.

“After careful review, the Federal Reserve Bank of New York (New
York Fed) and the Board of Governors of the Federal Reserve System
(Board) judged that the public interest in maximizing returns from any
sale and promoting financial stability would be better served by an
alternative approach to realizing value that is also more consistent
with normal market practice,” the New York Fed said in a public
statement.

“In light of improved conditions in the secondary market for
non-agency residential mortgage backed securities (RMBS), and a high
level of interest by investors, the Federal Reserve believes that
conditions are right for ML II to begin more extensive asset sales while
taking appropriate care at all times to avoid market disruption,” the
statement continued. “In light of this decision, the New York Fed has
changed the investment management objective for ML II consistent with
such sales.

The New York Fed announced that it will use its investment manager,
BlackRock Solutions to “dispose of the securities in the ML II portfolio
individually and in segments over time as market conditions warrant
through a competitive sales process.”

It said “there will be no fixed timeframe for the sales and at each
stage the Federal Reserve will only transact if the best available bid
represents good value for the public.”

The New York Fed expressed the belief that “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.”

“The Federal Reserve believes that this will maximize sale proceeds
while also reducing the likelihood that any one institution ends up with
concentrated exposure to these assets,” it added.

BlackRock Solutions is expected to circulate the first bid list
sale early next week.

The current practice of the Fed’s policymaking Federal Open Market
Committee is to reinvest proceeds of maturing mortgage-backed securities
in its general securities portfolio, which is separate from the Maiden
Lane portfolios. This prevents any shrinkage of the Fed balance sheet or
bank reserves.

There has been talk of discontinuing this and resuming the practice
of allowing maturing MBS to run off, thereby allowing some modest
“passive” shrinkage of the balance sheet. Only much later would outright
sales of MBS or other assets be contemplated.

No such decision has been made as yet and are unlikely to be made
until sometime after the Fed completes the $600 billion program of
long-term Treasury purchases scheduled to conclude at the end of June.

Selling securities out of Maiden Lane II does not have the same
impact on reserves as would selling securities from the system open
market account.

** Market News International **

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