By Agnes T. Crane
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

The Federal Reserve got a little taste of what could be a bigger dish of unsavory exit strategies. Auctions of some $30 billion of toxic assets once owned by AIG haven’t gone so well. Only half the latest crop sold, as a fatigued Wall Street fretted about what the glut is doing to mortgage bond prices. The bigger worry, however, is what it says about the fate of the Fed’s whopping balance sheet.

Debt investors have cause for anxiety about the Maiden Lane II portfolio crafted from AIG’s dreck. Two-thirds of it remains to be sold. It’s unfair, though, to put the blame squarely on the Fed. The still-stumbling housing market should be enough to reconsider the value of sub-standard home loans.

The situation still provides a glimpse into the hazards of large asset sales. Even with the best of intentions, they can disrupt financial markets and be harder in practice than theory. The former AIG securities start with a disadvantage. But if the housing market were recovering instead of testing new bottoms, Fed Chairman Ben Bernanke wouldn’t be taking so much heat for what amounts to a tiny fraction of the central bank’s $2.8 trillion balance sheet.

In many ways, that’s the point. Assets are easier to sell when the timing is right. With Maiden Lane II, the Fed can take a break after its next expected sale in July until conditions improve. That’ll be tougher, however, with eventual sales of Treasury and mortgage bonds, which make up the bulk of its holdings, should they meet with similar resistance.
These securities have an admittedly deeper investor base and should be easier to trade than subprime debt. But the Fed’s timing could still turn out way off. Bernanke probably won’t sell the huge stockpile of bonds acquired using two rounds of quantitative easing until the recovery is well under way — a time when investors traditionally shun safe havens like Treasuries for riskier fare.

What’s more, there are lingering uncertainties about Uncle Sam’s credit rating and the overseas appetite for U.S. debt, which could prove dangerous wildcards in the Fed’s plans. As calls grow louder for another round of Fed bond buying, policymakers should pause to consider just how palatable the result might be.