Having lost two court cases in lawsuits filed by Bloomberg, Fed Reveals Bear Stearns Assets It Swallowed in Firm’s Rescue.
In a 4:30 p.m. announcement in a week of congressional recess and religious holidays, the central bank released details of securities bought to aid Bear Stearns’s takeover by JPMorgan Chase & Co. Bloomberg News sued the Fed for that information.
The Fed’s vehicle known as Maiden Lane LLC has securities backed by mortgages from lenders including Washington Mutual Inc. and Countrywide Financial Corp., loans that were made with limited borrower documentation. More than $1 billion of them are backed by “jumbo” mortgages written by Thornburg Mortgage Inc., which now carry the lowest investment-grade rating.
“The Fed absorbed that risk on its balance sheet and is now seen to be holding problematic, legacy assets,” said Vincent Reinhart, a resident scholar at the American Enterprise Institute in Washington who was the central bank’s monetary- affairs director from 2001 to 2007. “There is both an impairment to its balance sheet and its reputation.”
By putting taxpayers at risk in financing the rescue, the central bank was engaging in fiscal policy, normally the domain of Congress and the U.S. Treasury, said Marvin Goodfriend, a former Richmond Fed policy adviser who is now an economist at Carnegie Mellon University in Pittsburgh.
The Bear Stearns assets include bets against the credit of bond insurers such as MBIA Inc., Financial Security Assurance Holdings Ltd. and a unit of Ambac Financial Group, putting the Fed in the position of wagering companies will stop paying their debts.
The Fed disclosed that some of Maiden Lane’s assets were portions of commercial loans for hotels, including Short Hills Hilton LLC in New Jersey, Hilton Hawaiian Village LLC in Hawaii, and Hilton of Malaysia LLC, in addition to securities backed by residential mortgages.
The portfolio also includes $618.9 million of securities backed by Countrywide, mortgages now rated CCC, eight levels below investment grade.
Assets in Maiden Lane II totaled $34.8 billion, according to the Fed, which set their current market value in its weekly balance sheet at $15.3 billion. That means Maiden Lane II assets are worth 44 cents on the dollar, or 44 percent of their face value, according to the Fed.
Maiden Lane III, which has $56 billion of assets at face value, is worth $22.1 billion, or 39 cents on the dollar, according to the Fed’s weekly balance sheet. A similar calculation for the Bear Stearns portfolio couldn’t be made because of outstanding derivatives trades.
“The Federal Reserve recognizes the importance of transparency to its financial stability efforts and will continue to review disclosure practices with the goal of making additional information publicly available when possible,” the New York Fed said in yesterday’s statement.
Bloomberg filed freedom of information lawsuits against the Fed in April and November of 2008. The Fed fought Bloomberg every step of the way. Sanity prevailed in court.
With this disclosure, everyone should now be able to clearly see what many of us knew all along: The Fed was not seeking to protect weak banks as it alleged, but rather to protect itself from having to disclose billions of dollars of pure garbage on its balance sheet.
Clearly the first Maiden Lane operation was such a rousing success the Fed needed to do repeat performance, only bigger. Thornburg, Countrywide, Hilton, MBIA, and Ambac are all in the mix.
Now, after nearly two years of delays, the New York Fed has the gall to issue the statement ““The Federal Reserve recognizes the importance of transparency…”
If Bernanke and Geithner were Pinocchio, their noses would be a mile long.
Mike “Mish” Shedlock
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