Wall Street Places Big Bets on Troubled Securities

8:43 p.m. | Updated

Goldman Sachs is picking up some of the pieces from the wreckage of the American International Group.

On Wednesday, the Federal Reserve Bank of New York announced that it had sold assets with a face value of $6.2 billion to Goldman, which trumped four other investment banks for the securities.

The auction — the second such sale this year — signals the renewed interest in mortgage-related investments and other risky securities at the center of the financial crisis. In recent months, banks, hedge funds and other big investors have been snapping up the bonds, betting on a rebound in their prices.

“There’s a saying: there are no bad bonds, there are just bad prices,” said Evan Lorenz, an analyst at Grant’s Interest Rate Observer. “If you can get them at the right price, you can make a good amount.” The A.I.G. assets, held in an investment vehicle known as Maiden Lane II, were acquired in 2008 as part of the insurer’s taxpayer-financed bailout. The Federal Reserve Bank of New York created the vehicle — and financed it with a $19.5 billion loan — to absorb troubled securities sitting on the insurer’s books.

In all, the government pumped more than $182 billion into A.I.G. to help stabilize the broader financial system. With the proceeds from this sale and a similar one last month, the New York Fed expects to recoup all of its money on Maiden Lane II by early March. The Treasury Department still owns nearly 77 percent of A.I.G. stock; the New York Fed has other outstanding loans related to A.I.G.

“I am pleased with the continued interest in these assets,” William C. Dudley, the president of the New York Fed, said in a statement.

Goldman and other investment banks have been beneficiaries of the government’s rescue of A.I.G.

To protect against potential losses on risky securities, Goldman and other firms had purchased billions of dollars of insurance from A.I.G., known as credit-default swaps. With A.I.G. on the brink of collapse in 2008, the New York Fed set up another investment vehicle — known as Maiden Lane III — to buy those troubled assets from the banks. The controversial deal, referred to as a backdoor bailout, allowed the banks to avoid losses on the securities.

Now, some of those banks are looking to profit as A.I.G. recovers.

Last year, A.I.G. tried to buy back $15.7 billion in bonds from the federal government. But the New York Fed rejected the offer in early 2011 in an effort to open up the auction process and bolster the potential return for taxpayers.

“After careful review, the Federal Reserve Bank of New York and the board of governors of the Federal Reserve System 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 statement at the time.

While the sales process got off to a rocky start amid market turmoil last summer, investor interest has since returned. In January, Goldman approached the New York Fed, offering to buy a chunk of assets from Maiden Lane II that had a face value of $7 billion. The Fed subsequently held an auction for the bonds, with Credit Suisse emerging as the top bidder.

Credit Suisse quickly sold off the securities to clients, including hedge funds and other banks. Given the strong demand, the Swiss financial firm submitted an unsolicited bid to the New York Fed for another portion of A.I.G. assets, prompting the latest auction.

The auction attracted Barclays Capital, Morgan Stanley and the Royal Bank of Scotland, according to the Fed’s statement. Ultimately, Goldman won out with a bid of an unspecified sum.

In a statement, the New York Fed said only that “the winning bid represented good value for the public.” Profits from the sale will be reported on April 16 as part of Maiden Lane II’s regular reporting schedule.

A Goldman spokesman declined to comment.

Bonds with a face value of roughly $6 billion still sit in the Maiden Lane II portfolio. The New York Fed said it would use BlackRock Solutions, the adviser hired to wind down the portfolio, to run a “a competitive sales process” for the remaining assets.

After the initial Maiden Lane II loan is paid back in March, any further proceeds will be split between A.I.G. and the New York Fed. The first $1 billion or so will go to the insurer’s subsidiaries, with the government collecting the bulk of the remainder. The New York Fed’s share will flow to the Treasury Department, as part of the normal operating process.

Azam Ahmed contributed reporting.