Thursday, July 3, 2008

Fed's Bear Stearns assets worth $29 billion

Readers no doubt recall that the Federal Reserve loaned $30 billion to JP Morgan against certain Bear Stearns assets to, ahem, induce the bank to go forward with the deal. The arrangement got reworked on the fly, and in the end, the Fed loan was reduced to roughly $29 billion as JP Morgan agreed to assume $1.15 billion of risk. The assets were placed in a holding company to be managed by BlackRock.

There is a bit of disparity in the reports on the state of play. The Financial Times indicates that the Fed's said the loan balance was adjusted last week. The central bank also indicated that the value of the assets was now $28.8 billion (or $28.9 billion, if you prefer Bloomberg's story). Either way, the losses this quarter were conveniently roughly equal to the JP Morgan's first loss position.

Even though mortgage-related securities fell this quarter by more than the amount of the markdown, but recall that the central bank did not take them on at quarter-end. As the Financial Times noted:

The Fed marked the securities in the portfolio to current market prices. Analysts said that when the Fed assumed the assets back in March, they were cheaply valued, which would explain why the portfolio remains relatively unchanged.

However, one aspect of the deal that some observers took issue with was that the value used for the assets for the purpose of the loan was Bear Stearns' marks as of March 14, the Friday before the deal was cobbled together. Recall also the deal was renegotiated from a price of $2 per share to $10, and the Fed's loan arrangements were revised during that period. Query why the collateral value was not based on a price the week of March 17.

Thus, there may be nothing amiss here, but the results so far look awfully convenient.

The Bloomberg article includes a wee bit of good news, that there was no use Primary Dealer Credit Facility:

The Fed also reported that it had no direct loans outstanding to bond dealers as of yesterday under a program aimed at easing the credit crisis.

Today's lending figures indicate that Wall Street is using the Fed only as an emergency backstop, rather than as a continuing source of funding, said Macroeconomic Advisers LLC senior economist Brian Sack. Treasury Secretary Henry Paulson warned dealers and investors this week they shouldn't operate as if Fed funds were ``readily available.''

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