The Fed is back above water on a controversial loan it made to keep Bear Stearns afloat.
The New York Fed said Thursday afternoon that the Bear Stearns assets serving as collateral on a controversial 2008 bailout loan are currently worth $29.4 billion.
That’s some $600 million more than the value of the loan, which the Fed made in response to the first big meltdown of the financial crisis. It’s the first time that loan has been in the black.
The Fed said it also is running paper profits on two loans made to prop up AIG, the troubled insurer bailed out in September 2008 at the peak of the crisis – though the value of those assets has been comfortably above the outstanding loan amount for some time.
All told, the Fed’s paper profit on the three bailout loans in the so-called Maiden Lane portfolios is more than $10 billion – though an economic downturn could send the value of the Fed’s assets tumbling.
The Fed made the Bear loan in March 2008 as the fifth-biggest brokerage firm in the United States staggered toward bankruptcy. The loan was part of a deal in which JPMorgan Chase bought Bear for just $10 a share, or around $1 billion, after Bear ran short of cash.
Under the arrangement, the Fed lent JPMorgan Chase almost $29 billion and took as collateral a portfolio of Bear Stearns assets made mostly of mortgage-related securities. JPMorgan had agreed to buy Bear only if it didn’t have to take on too much exposure to a falling housing market.
The deal enraged critics who questioned the need for a bailout. Further inflaming them, the Fed declined to disclose the composition of the portfolio, saying it would make it harder to manage the assets over the 10-year term of the loan.
But opponents kept pushing the Fed. Rep. Darrell Issa, R-Calif., wrote in a March letter to the Fed that taxpayers had the right to know “whether the assets they now own are ‘scrapings off the slaughterhouse floor,’” which could be expected to lose further value and ultimately cause losses to the Fed at maturity.
The slaughterhouse phrase refers to an assessment of the Bear Stearns assets in a February Financial Times article.
Bloomberg sued over the agency’s failure to turn over records following a formal request, and courts ruled the Fed had a duty to disclose the information.
The Fed then published some information on the assets the Fed received in the Bear Stearns and AIG deals. One analyst concluded the assets in the AIG deals were “horrible quality” notes whose complex structure would make them “weaker in a stress scenario.”
Along with the weakness in the economy, the nature of the assets makes it unlikely the Fed will be able to lock in its gains through sales. And of course, any downturn could subject the Fed portfolios to declines that would wipe out the gains.
But for now, the slaughterhouse scrapings aren’t smelling too bad.