Compare and contrast.
From the FT — one maiden (I):
The US Federal Reserve is sitting on significant paper losses on the real estate assets it acquired in the Bear Stearns rescue, with much of the red ink coming from debt used to back some of the most highprofile buy-out deals of the bubble years.
And another (III):
The rising value of collateralised debt obligations bought during the Federal Reserve’s rescue of AIG is one of several factors stirring hopes that the central bank will be able to recover the money it used to bail out the insurer.
Maiden Lane III is the special purpose vehicle created by the Federal Reserve to mop-up assets from failed insurer AIG. Maiden Lane I is the SPV arranged for the Bear Stearns bail-out.
The valuation of these portfolios — in particular the CDOs in Maiden Lane III — has been somewhat contentious. Despite hints and pronunciations from portfolio-managers BlackRock and the US Treasury that the loan is above water, down in part, to rising market values of CDOs — skepticism persists.
What’s interesting is that the Maiden Lane I losses are being pinned on commercial real estate (CRE) and mortgage debt — with the portfolio valued at $4bn in its latest (September) valuation, compared with an $8.4bn face value when it was acquired by the Fed.
Why the deterioration? From the FT:
People familiar with the portfolio said Maiden Lane I’s losses were concentrated in commercial real estate assets, which had a face value of $8.4bn and an estimated worth of $7.7bn when they were acquired by the Fed . . .
About two-thirds of the Maiden Lane I portfolio involved mortgage debt backed by government created entities, people familiar with the matter said.
Those people describe the debt as highly illiquid, a factor that has resulted in its failure to rally strongly as credit markets recovered and interest rates fell.
But CDOs in the Maiden Lane III portfolio are also illiquid, though there doesn’t seem to have been a huge illiquidity premium embedded in the valuations. Indeed, the FT story noted that “selling all the CDOs in the Maiden Lane III portfolio would be tricky because they are complex and illiquid.”
So on the one hand, you have Maiden Lane III, which seems to be recovering despite being illiquid. On the other hand you have Maiden Lane I which is deteriorating because it’s illiquid.
It’s an ugly beauty contest really.
Related links:
Further discussion of Maiden Lane III analysis – Naked Capitalism
AIG and credit default swaps – ISDA
Dead deals, or AIG in pics – FT Alphaville
AIG and the Fed, not above water, but drowning? – FT Alphaville