Thursday, July 3, 2008
JP Morgan Takes $1 Billion Hit Over Bear Stearns Assets
In late June, the Federal Reserve completed its financing of the Bear Stearns bailout arrangement, contributing $28.8 billion to the newly created Maiden Lane LLC, a Delaware limited liability company. JP Morgan, for its part, put up $1.15 billion. The Bear Stearns assets being financed were valued at about $30 billion in March, consisting mainly of mortgage backed securities and related assets.
The Fed now says the assets, which were re-evaluated by the Fed and Blackrock Inc., are now valued at about $28.9 billion. Black rock will be managing the sales of teh assets over the next 10 years. This first hit in Bear's assets will be taken by JP Morgan Chase, because, as per the agreement with the Fed, JP Morgan stands responsible for the first $1 billion drop in value, and the Fed is responsible for the balance.
Ok, color me biased, but this is just too pat to be a coincidence. First, the Fed and JPM make an arrangement where JPM takes the first $1 billion hit. Next, they announce that the portfolio has lost $1 billion. Has anyone asked the parties involved why JPM was asked, and agreed to, accept responsibility for exactly $1.15 billion? I mean, the Fed is putting up $28.9 billion. They might as well have put in another $1.15 billion.
What I'm trying to say is that the Fed and JPM already knew that they were going to have to downgrade it by about $1 billion. That is why JPM was asked to chip in with the exact same amount of $1.15 billion, and now, after the deal has been financed and completed, they announce the same drop in asset value. In return, they got the Bear Stearns HQ building, which is valued at slightly above the $1.15 they lost in the asset downgrade.
I'm not saying there's anything wrong with this backroom deal, but when there's so much smoke and lack of transparency, there's bound to be something wrong at the core of the deal.
Secondly, NY Fed head honcho Timothy Geithner has stated in testimony before the Senate Banking Committee that the Fed will release quarterly updates about the portfolio. Again, nothing wrong with that, except that... the Fed does not follow normal accounting rules. They write their own rules, in a 161 page document called the 'Financial Accounting Manual for Federal Reserve Banks', which has no rules for adding on something like the Bear Stearns arrangement onto the Fed's balance sheets. What this means is that Fed can make up the rules about what to do and what to show, or not show, on the books, as far as Bear Stearns is concerned.
To make matters worse, the Fed's accounting manual is not publically available. Bloomberg's Jonathan Weill had to file an FOIA request to get a redacted copy from the Fed. The whole deal smells of a pre-cooked arrangement where the bad news is slowly being doled out, in small installments, so nobody gets mad. Be interesting to know what other little 'hand-shake' arrangements have been made between the Fed and JP Morgan. I'm sure we'll find out. Soon...
Reference:
http://online.wsj.com/article/SB121512941642228217.html
http://www.bloomberg.com/apps/news?pid=20601039&sid=a70JZmfcakF0
The Fed now says the assets, which were re-evaluated by the Fed and Blackrock Inc., are now valued at about $28.9 billion. Black rock will be managing the sales of teh assets over the next 10 years. This first hit in Bear's assets will be taken by JP Morgan Chase, because, as per the agreement with the Fed, JP Morgan stands responsible for the first $1 billion drop in value, and the Fed is responsible for the balance.
Ok, color me biased, but this is just too pat to be a coincidence. First, the Fed and JPM make an arrangement where JPM takes the first $1 billion hit. Next, they announce that the portfolio has lost $1 billion. Has anyone asked the parties involved why JPM was asked, and agreed to, accept responsibility for exactly $1.15 billion? I mean, the Fed is putting up $28.9 billion. They might as well have put in another $1.15 billion.
What I'm trying to say is that the Fed and JPM already knew that they were going to have to downgrade it by about $1 billion. That is why JPM was asked to chip in with the exact same amount of $1.15 billion, and now, after the deal has been financed and completed, they announce the same drop in asset value. In return, they got the Bear Stearns HQ building, which is valued at slightly above the $1.15 they lost in the asset downgrade.
I'm not saying there's anything wrong with this backroom deal, but when there's so much smoke and lack of transparency, there's bound to be something wrong at the core of the deal.
Secondly, NY Fed head honcho Timothy Geithner has stated in testimony before the Senate Banking Committee that the Fed will release quarterly updates about the portfolio. Again, nothing wrong with that, except that... the Fed does not follow normal accounting rules. They write their own rules, in a 161 page document called the 'Financial Accounting Manual for Federal Reserve Banks', which has no rules for adding on something like the Bear Stearns arrangement onto the Fed's balance sheets. What this means is that Fed can make up the rules about what to do and what to show, or not show, on the books, as far as Bear Stearns is concerned.
To make matters worse, the Fed's accounting manual is not publically available. Bloomberg's Jonathan Weill had to file an FOIA request to get a redacted copy from the Fed. The whole deal smells of a pre-cooked arrangement where the bad news is slowly being doled out, in small installments, so nobody gets mad. Be interesting to know what other little 'hand-shake' arrangements have been made between the Fed and JP Morgan. I'm sure we'll find out. Soon...
Reference:
http://online.wsj.com/article/SB121512941642228217.html
http://www.bloomberg.com/apps/news?pid=20601039&sid=a70JZmfcakF0
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