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Somewhere, Robert Benmosche is probably saying “I told you so.”
The Fed’s dump this week of subprime-mortgage bonds formerly belonging to AIG , of which Mr. Benmosche is the CEO, has led to a selloff in risky credit products, Serena Ng and Matt Wirz reported this morning (Bloomberg had its own story on it).
AIG, you might recall, earlier this year offered the Fed $15.7 billion to buy back these old bonds. AIG got a little peeved when the Fed rejected that offer in favor of selling them on the open market.
Now there are doubts about how well the Fed has timed its sales and whether it will be able to get as much for the bonds as AIG was offering. According to Serena:
One senior mortgage trader notes that if AIG bought the whole Maiden Lane II portfolio today, it would pay 25% less than what the insurer originally offered, because market prices have fallen so much.
There were also other banks that were once willing to buy the entire portfolio in one fell swoop, maybe paying more than AIG.
And longstanding worries that the Fed’s sales would disrupt the market have come true in spades, with the turmoil spilling over into junk bonds and other credit corners.
Thing is, though, the Fed really didn’t have a choice. Had it just sold the bonds back to AIG without a competitive bidding process, there would have been howls of outrage that the government was kowtowing to a company at the center of the financial crisis. (Here’s the New York Fed’s explanation.)
Still, it’s another example of how stuff you do to rescue the economy one day can come back to bite you in unforeseen ways down the road.
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When will this clown circus ever end?
The Fed isn’t a distressed seller. If they don’t get the pricing they are after they simply pull the bonds as they did with the seventh auction.
The article’s premise is ridiculous. AIG was saved from making yet another huge mistake in its long history of mistakes. Since this firm is “too big to fail”, I call the Fed’s decision a lucky break. All of this nonsense about the Fed putting the Maiden Lane on the market is like saying that the rotting meat that’s been cooking for 2 hours could have been somehow made edible if we’d just cooked it for two more.
AIG and Benmosche were not right and can’t say “I told you so” because they were prevented from making a very bad investment mistake. You can say “I told you so” when you are right about something, not when you were so very wrong but someone else’s actions prevented you from making the mistake.
As the article implies, there was a middle ground between selling them to AIG without a competitive bidding process, and selling them piecemeal on the open market over time. That would have been to have a competitive bid process for the entire portfolio. Then, if AIG got them, fine, they paid market price.
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MarketBeat looks under the hood of Wall Street each day, finding market-moving news, analyzing trends and highlighting noteworthy commentary from the best blogs and research. MarketBeat is updated frequently throughout the day, helping investors stay on top of what's happening in the markets. The Wall Street Journal's Chief Markets Commentator Dave Kansas and MarketBeat lead writer Matt Phillips spearhead the MarketBeat team, with contributions from other Journal reporters and editors. Have a comment? Write to marketbeat@wsj.com or write Dave at dave.kansas@wsj.com or Matt at matt.phillips@wsj.com.
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