02/10/2012

Buysiders Fussing Over Goldman Auction

Buysiders are grumbling about Goldman Sachs’ strategy for unloading $6.2 billion of subprime-mortgage bonds it purchased from the Federal Reserve in a Feb. 8 auction.

The complaints focus mainly on how Goldman calculated what it would take to win the securities, which resided within the Fed’s Maiden Lane 2 vehicle. Some investors groused that the bank had asked what they would be willing to pay if it flipped pieces of the book to them, but ultimately chose to hold onto many of the positions instead. “They took down the whole thing without selling to customers,” one source said. “They essentially front ran their customers.”

Others complained that when they were given a shot at the securities, it was for 2-3 cents on the dollar more than Goldman had paid — a markup they characterized as too steep.

But one buyside source came to Goldman’s defense, pointing out that the bank had to beat out other bidders for the portfolio. He maintains that the prices Goldman is seeking are in fact 2-3 cents higher than what other banks’ clients said they would fork over for parts of the portfolio, but aren’t substantially higher than the institution’s actual cost. “That strikes me as sour grapes.” he said. “To Goldman’s credit, they recognized there was strong demand for the bonds, so they bid up and were successful in securing the portfolio. And they took risks, no question about that, because no one is obligated to pay the higher prices.”

A Goldman official also denied that the bank planned to retain any part of the portfolio, and insisted the bank was in the process of distributing all of the securities.

Any of the versions of Goldman’s strategy would essentially represent a wager that a recent rise in mortgage-bond values is going to continue. The Maiden Lane sale was the second of late, as the Fed seeks to liquidate devalued investments that it took on in its crisis-era bailout of AIG. The previous offering saw Credit Suisse snap up $7 billion of home-loan paper on Jan. 19 — with the prices for such securities jumping by 2-4 cents on the dollar as the bank distributed the holdings to clients.

Those gains appeared to hold through this week’s auction. Meanwhile, the values of swaps referencing Markit Group’s ABX index have been gradually rising.

The Fed had assigned a value of 49 cents on the dollar to Maiden Lane 2’s assets just ahead of the Feb. 8 sale, which is slightly higher than the market average for comparable securities. The entity now holds $6.2 billion of investments, mostly subprime-mortgage securities.

A number of factors could influence whether prices keep rising. It bodes well for Goldman that investors appear comfortable with the Fed’s auction strategy — that is, allowing banks to line up buyers for chunks of the Maiden Lane portfolio before pulling the trigger. That differs from the climate that took hold when the Fed took an initial stab at selling the assets early last year by rapidly circulating large bid lists, driving down values. “The [latest Maiden Lane 2] transaction went well because the street was not asked to put on risk,” one source said. “If they had tried to sell that many assets [via bids wanted in competition], it would have driven prices lower as investors would have stepped back to see where things cleared.”

Some investors are even rooting against continued gains. That’s mainly the case among opportunistic fund managers who need to sell backers on the idea that their targeted products remain undervalued. “It makes it harder to raise capital when the whole market rallies and investors perceive there are no opportunities left,” one player said.

Back Print