Inquiring minds are reading the Financial Times article Fed carries losses from Bear Stearns portfolio to spot lies made by Treasury Secretary Tim Geithner (then president of the New York Fed) and Jamie Dimon, current CEO of JPMorgan Chase.
The US Federal Reserve is sitting on significant paper losses on the real estate assets it acquired in the Bear Stearns rescue, with much of the red ink coming from debt used to back some of the most high-profile buy-out deals of the bubble years.
Among the debts weighing on the central bank’s portfolio are those used in financing the acquisitions of Hilton Hotels, which is being restructured, and hotel operator Extended Stay, which is in bankruptcy, people familiar with the matter say.
The Fed holds these and other real estate assets in a vehicle known as Maiden Lane I, which was set up to pave the way for JPMorgan Chase’s purchase of Bear.
The assets in Maiden Lane I – all of which came from Bear’s mortgage desk – were originally valued at $30bn when a final agreement on the portfolio was reached in June 2008 by the New York Fed, its advisers at asset managers BlackRock and JPMorgan.
Conflict of Interest
Please note the above conflict of interest. JPMorgan Chase was advising the Fed on the value of securities it was dumping on the Fed. Geithner had to realize this conflict of interest existed but purposely did nothing about it.
Returning to snips from the article ….
Maiden Lane I was funded with $28.8bn from the New York Fed and $1.15bn from JPMorgan, which agreed to absorb the first $1bn of any losses.
Mr Geithner told Congress in 2008 that the central bank had three “risk mitigants” to protect its interests in the Bear deal: JPMorgan’s agreement to take the first $1bn in any losses; the Fed’s long-time horizon as an investor; and the fact that the central bank’s $28.8bn loan was backed by “a pool of professionally managed collateral”.
At a time when even relatively good mortgage portfolios were getting clobbered to the tune of 30% or more, Geithner had the gall to suggest that JPMorgan taking the first $1 billion loss in a $30 billion portfolio was a risk mitigant. The idea is ludicrous and Geithner knew it at the time.
Moreover, professionally managed garbage is still garbage so that is no mitigating factor either. Here is the pertinent quote from the article “It [Maiden Lane] was the scrapings off the slaughterhouse floor. It started with the things that were not good enough to get securitised.“
Clearly the goal was not to protect taxpayers, but rather to protect JPMorgan from losses it would have had taking unsecuritized garbage on its books at full value. Instead the trash was passed to the Fed.
The treasury [taxpayers] will eventually own that garbage some point down the road.
Jamie Dimon’s Lies
Testifying before Congress last month, Jamie Dimon, JPMorgan’s chief executive, said the New York Fed received “the less risky mortgage assets” on Bear’s books. He added: “It would have been irresponsible for us to take on the full risk of all those assets at the time.”
Given that unsecuritized garbage was passed to the Fed, one can easily spot Jamie Dimon’ lies. The Fed received the worst of Bear Stearns’ garbage, not the best.
The parade of lies still continues.
People familiar with the portfolio said Maiden Lane I’s losses were concentrated in commercial real estate assets, which had a face value of $8.4bn and an estimated worth of $7.7bn when they were acquired by the Fed.
As of September they had been marked down to $4bn, filings show.
Geithner purposely spared JPMorgan from significant portfolio losses.
The final lie in the series: The Fed said the assets were worth $27.1bn at the end of 2009.
Mike “Mish” Shedlock
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