Thursday, October 23, 2008

Fed takes $2.7bn loss on Bear

(FT) The Federal Reserve on Thursday said it had suffered a $2.7bn paper loss on the $29bn portfolio of toxic assets it took over from Bear Stearns in March as part of JPMorgan Chase’s

government-brokered takeover of the stricken investment bank.

News of the unrealised losses, revealed in a filing that also showed that American Insurance Group has already used up three-quarters of a $123bn Fed loan, could fuel the political and public backlash over the use of government funds to rescue financial institutions.

However, the Fed is unlikely to recognise any losses on the Bear portfolio, which is managed by BlackRock, for several years. The monetary authorities have stressed they will not sell any assets for at least two years.

Under the cut-price takeover that pulled Bear back from the brink of bankruptcy, JPMorgan has agreed to shoulder the first $1bn of losses on the portfolio.

Investors were eagerly awaiting the Fed’s valuation of the Bear assets to try to gauge the current market value of troubled mortgage-backed securities.

The value of the Bear portfolio fell from $29.5bn to $26.8bn over the past three months, the Fed said. The paper losses on the Bear assets, which include derivatives, asset-backed securities, and mortgages, were at the lower end of analysts’ forecast of a $2bn-$6bn loss.

News that AIG has drawn down some $90bn in government aid – more than the Fed’s original loan of $85bn – will raise concerns over the insurer’s health.

AIG, which sold an 80 per cent stake to the government in exchange for the aid, has been scrambling to sell assets to pay back the two-year loan and an additional $37.8bn liquidity injection but has so far not announced any large disposal.

Edward Liddy, AIG chief executive, told a television programme on Thursday that the group might need more financial help.

A number of politicians have criticised the US Treasury and the Fed for bailing out Bear and AIG and offering to spend $250bn buying stakes in several banks.

Officials have maintained that, without their intervention, JPMorgan would never have bought Bear and AIG would have collapsed with catastrophic consequences for global finance.

Separately, General Electric said it would tap a new Fed short-term borrowing facility when it starts next week. The programme is aimed at restoring liquidity in the troubled market for commercial paper.

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