During the credit crisis of 2008, the Federal Reserve Bank created a vehicle named Maiden Lane II to buy residential mortgages from AIG. The valuation at par of the portfolio was $39.3 billion, as set by Blackrock. Maiden Lane II paid $20.5 billion with $19.5 billion financed by the Fed. The face value is now $30 billion. The portfolio has mostly subprime, Alternate-A Adjusted Rate Mortgages (ARMs) and option ARMs. In March, AIG bid $15.7 billion to buy back the mortgages. At the time, there were other investors such as Barclays, Credit Suisse, Morgan Stanley, Goldman Sachs, Blackrock PIMCO and some large hedge funds interested in the assets and AIG's bid was rejected.
Fast forward three months and AIG's bid now looks attractive. As Maiden Lane II assets have been sold, the banks buying them have hedged their positions by using the Markit ABX and CMBX indices. The bonds that compose those indices are dropping in price, forcing other bonds such as junk or corporate bonds to follow suit. Other side effects include bank default swaps and various Markit CDX indices going higher.
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