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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.
Mish
GlobalEconomicAnalysis.blogspot.com
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