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The Fed, Wall Street Prepare to Unleash Crisis 2.0 (Update1)

(Story updated with the announcement that Triaxx was sold to Bank of America.)

NEW YORK (TheStreet Ratings) -- The Securities and Exchange Commission and AIG AIG accuse its manager of fraud, while Bank of America BAC and Bank of New York Mellon BK are fighting it in a multibillion lawsuit.

Now Federal Reserve Bank of New York is looking to send it back to Wall Street, where it will likely be broken up and sold to eager investors in spite of its notorious past.

That is the strange, bizarre world of the Triaxx.

While it may sound like a character from The Transformers, Triaxx is actually a collection "subprime" mortgages packaged into a vehicle called a collateralized debt obligation (CDO).

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Vehicles like Triaxx are coming back in style as large, institutional investors look to juice fixed-income returns while corporate and U.S. debt yields hover near record lows. That's why the New York Fed said last week that it had received "several strong reverse inquiries for holdings" from Wall Street banks looking to sell the the high-yielding Triaxx assets and it plans to auction it off later this month.

Nine of the largest Wall Street banks -- including Citigroup C , Goldman Sachs GS and Morgan Stanley MS -- expressed interest in the Triaxx, the Fed statement said, and those banks will "invited" to bid on the assets.

Bank of America's Merrill Lynch unit was the winner of the auction, the Fed announced on Thursday.

"The winning bids, which were materially higher than the original prices paid, demonstrate continued interest in these assets and represent good value for the public," said William Dudley, president of the New York Fed in a statement.

The sale of Triaxx is not a first for the Fed. The assets are being sold off as part of its plans to unload billions in toxic assets called "Maiden Lane." Maiden Lane was purchased from AIG during the height of the financial crisis and the sale is part of a bigger government auction of AIG debt taken on by the Fed. Last month the government successfully sold off the MAX CDO assets it a move that was applauded by industry watchers.

But unlike the other Maiden Lane assets already sold by the Fed, the Triaxx CDO is more of a notorious villain of the 2008 financial crisis and may present more of a challenge for banks looking to break it up and sell it off in pieces.

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Triaxx hit the market in 2006 as an AAA-rated security that was reportedly sold to investors as having little subprime exposure. Three years later the CDOs were cut to junk status after the subprime market collapsed and it was discovered the vehicle was filled with bad and allegedly misplaced home loans.

In 2010, the SEC filed a lawsuit against Triaxx's collateral manager, ICP Asset Management, for what it argues were "fraudulent practices and misrepresentations" that caused the CDOs to plummet in value. Among other things, the SEC alleges ICP traded $1 billion of securities with inflated prices and misrepresented investments to investors.

A spokesman for the SEC did not return calls for comment or to give an update on the status of the lawsuit or the impact of the Fed sale.

Last year AIG also sued ICP, alleging fraud caused losses that pushed the insurer to near bankruptcy, according to Bloomberg.

Calls to ICP's president, Thomas Priore, were not returned.

An AIG spokesman said its lawsuit is "still pending and is in the early stages of motion practice" and declined to comment further.

But the Triaxx saga in the financial markets doesn't end there; the CDO is also currently suing major banks.

Trustees for the CDO are one of over 126 "objectors" to an $8.5 billion settlement of Countrywide mortgage "putback" claims that was inked last year. Triaxx is listed in court documents as one of "530 trusts that have claims for damages that approach or exceed $100 billion," according to a letter filed in March before New York Supreme Court Judge Barbara Kapnick.

As it happens, another objector against the Countrywide settlement is AIG. So while AIG is suing Triaxx, both are working together in suing the banks.

So for those of you keeping score: Triaxx is being sued by Wall Street; Walll Street is suing Triaxx; and the Fed is looking to unload Triaxx on investors.

Welcome to high finance.