On April 23, Deutsche Bank and Barclays agreed to buy the $7.5 billion of CDO bonds being marketed by the Federal Reserve Bank of New York (FRBNY). As has happened in the past with other Maiden investment vehicles, these Maiden Lane III bonds are being auctioned off to re-coup an investment made by the FRBNY when it seized assets from AIG in return for a bailout in 2008. It is speculated that the consortium paid between 66 and 68 cents on the dollar for the pool while the second place group bid 65 cents. Barclays and Deutsche had a pricing edge going into bidding because their group already owned the subordinate classes and had an interest-rate swap counterparty position on the CDOs, meaning it would be easier and cheaper for them to deconstruct the CDOs, and sell off the underlying CMBS bonds to the market.
When news first broke of the Maiden Lane III offering, consisting mostly of AM and AJ bonds, pricing slumped and many traders headed to the sidelines to wait out this unusual glut of supply being dumped on the market. Things have returned to normal after the sale, but some volatility may still persist as the winning group sells off small pieces of the deal it did not pre-sell to large investment groups.
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