Late Thursday afternoon, long after the markets had closed and many on Wall Street had long since evacuated for the long weekend, the Federal Reserve revealed its estimates for the value the Bear Stearns assets it accepted as collateral for the $28.9 billion loan JP Morgan Chase used to buy the firm and prevent its bankruptcy. That collateral was worth just $28.8 billion, according to the Fed.
What this means is that the decline in the collateral value has already eaten through a good chunk of the $1.15 billion of exposure JP Morgan agreed to take as part of the deal. The collateral has already declined by 3.7% in a couple of months. Much of the collateral consists of mortgage linked securities, so unless that market turns around sharply, it seems likely that taxpayers will be forced to foot the bill for Bear Stearns collapse.
Indeed, The New York Post reported this morning that a hedge fund investor in JP Morgan is predicting further declines in the collateral values. Taxpayers are on the hook for any decline past the $1.5 billion hit JP Morgan agreed to take. The Fed is being criticized for not revealing more about the assets that make up the collateral. JP Morgan says it is bound by a confidentiality agreement not to comment.
Hedge Fund Report: Bear Buyout Could Cost Taxpayers [New York Post]
Posted by beentheredonethat , Jul 07, 2008 8:40AM
TO: MR. Guest
RE: Taxpayer
Fess up now or your going to be waterboarded. It was clear from inception of this deal the taxpayers were the backstop. Something tells me JPM reserved the uspide, if any, for themselves. Wikipedia real bad source for info on FRB....
Posted by ab , Jul 07, 2008 9:39AM
*Something* tells you? Do you mean because that's the way asset-backed loans work?
Posted by Riskybusiness , Jul 07, 2008 9:42AM
Relax people.....The tenor on most of the assets are out past 15 years. Even when doubling historical default probabilities you don't approach the implied defaults found in the market right now. The junk is illiquid, not worthless.
Posted by Anal_yst , Jul 07, 2008 9:49AM
@ beentheredonethat
I linked the fed last week, guess you selectively missed that one. You're so sure of yourself, I have yet to see you back it up with anything but empty rhetoric.
Posted by guest , Jul 07, 2008 11:03AM
"The junk is illiquid, not worthless" -Riskybusiness
"It is not a riddle my friend, it is just something you do not know yet" -Master Po (to grasshopper)
Posted by beentheredonethat , Jul 07, 2008 11:58AM
@9:49
I would refer you to the hedge fund who has money where their mouth is. Discretion prevents me from saying who, but you can be sure they are not mistaken.
Posted by Anal_yst , Jul 07, 2008 12:11PM
@ 11:58
I've got some other "sure things" to sell you if you believe that...
Posted by guest , Jul 07, 2008 12:14PM
Fed actually takes the upside. For once they did something right. Still havent seen anything on the fee arrangement with Blackrock... Kind of strange, three months of cashflow and none of the loan has been paid down.
Posted by beentheredonethat , Jul 07, 2008 12:44PM
@12:11
The "sure thing" is the structure of the deal, not the P&L.
Posted by beentheredonethat , Jul 07, 2008 12:45PM
@9:39 vs. @12:14.....
Who's got it right??
Posted by guest , Jul 07, 2008 12:55PM
@12:45
Let's see who would I wager that the government is more apt to screw, the avg. tax payer or a large US corporation?
Posted by beentheredonethat , Jul 07, 2008 1:50PM
@12:55
Precisley, but last week, under the moniker guest, some jackass was claiming, to the point of exasperation for those who differed, that the taxpayer was nowhere near the hook on the deal. I simply said he was wrong, and now one of the principals has chimed in and has said they most certainly are on the hook. That's all.
Posted by guest , Jul 07, 2008 4:26PM
@12:45
"Any remaining funds resulting from the liquidation of the assets will be paid to the New York Fed."
http://www.newyorkfed.org/newsevents/news/markets/2008/rp080324b.html
Posted by Anal_yst , Jul 07, 2008 4:51PM
@ beentheredonethat
I was saying that the Fed makes $ that could POTENTIALLY cover the loss, even conceivably in the case there is zero recovery (highly unlikely)...if you want to think of the opportunity cost of the fed dropping $28bn of its "profits" from operations to fund the shortfall instead of being payed into the treasury as a hit to the taxpayers, you implicitely assume budget levels will not be adjusted downward to reflect the lack of funding from the fed.
Posted by beentheredonethat , Jul 07, 2008 5:24PM
@4:51
...Ivy League BS (business school or bullshit, pick'em) gibberish. If you are not making $20 million a year you are getting hosed. Especially when you know more than the principals in the deal. From the sidelines, no less. Lehman CFO for you with all them smarts.
Posted by guest , Jul 07, 2008 5:55PM
Here we go again. Just curious: how is a hedge fund invested in JP Morgan a "principal" in the deal?
The "principals" in the deal were JP Morgan, Bear Stearns, and the Federal Reserve.
The $29 billion lent from the Federal Reserve to JP Morgan to indemnify Bear Stearns is an asset-backed loan from the Federal Reserve. The money loaned comes from the Federal Reserve, not the taxpayers. If it was a loan from the taxpayers, there would have to be Congressional legislation authorizing a loan from the U.S. Treasury, which happened during the Carter Administration. There is no such legislation in this instance because the money came from Fed funds, which are managed separately (and independently)from the U.S. Treasury. I could be wrong, but I think BlackRock has 10 years to sell the assets before the loan is considered in default.
Let's assume an hypothesis. If ten years passes, and BlackRock is able to recover only $25 billion on the assets, where does the remaining money come from? $1 billion is recovered from JP Morgan, and the remaining $3 million is outstanding. It is taken as a loss by the Federal Reserve, which was the original lending party. Does this mean that Congress must pass a law appropriating $3 billion to the Federal Reserve? No. The Fed can absorb the loss, and if it needs to, make it up from fees it charges and interest it collects in the future. (This is how the Federal Reserve accumulates money outside of public appropriations.)
The worst thing that happens to the tax payer under this hypothesis (taking place ten years from now) is that the Federal Reserve does not have that $3 billion to add to its yearly surplus, a portion of which is "poured over" -- just to be helpful -- into the U.S. Treasury. But the point of the Federal Reserve is not to be a money-making machine for the Treasury, the point is that it is there to lend stability to the financial system.
Where does my information come from? The extensive Federal Reserve website, public bills, the New York Times, and the Wall Street Journal.
Posted by Anal_yst , Jul 07, 2008 5:57PM
@ beentheredonethat
If I'm wrong, plese, I implore you correct me, but enough with the vagaries already. You've said effectively nothing (besides that you're apparently privy to private deal information) about a dozen times now.
Posted by beentheredonethat , Jul 07, 2008 6:48PM
@5:55
Parallel investing
Posted by Anal_yst , Jul 07, 2008 9:18PM
@ 555
Glad to see I'm not the only one able to use teh interwebs.
@ beentheredonethat
So we've determined from your keen insight, what, that you've invested in JPM? Do you want a cookie or a medal? Unless you're willing to provide us with additional information to support your claim, whats the point in even teasing our eyes with vague allusions?
@ Carney
The post report is about as vague as beentheredonethat's comments, providing no details as to how taxpayers are on the hook, so-to-speak.
By no means am I suggesting that there's a non-zero probability of taxpayers being "on the hook", I have just yet to see any cogent argument as to how that would happen, while reading plenty to suggest that such is not the case.
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Posted by guest , Jul 08, 2008 12:58AM
@5:55 Re: The point of the Fed is to lend stability to the financial system.
What if what the Fed did with Bear lends the opposite of stability to the U.S. financial and political system?
Check out this argument against the Bear/JPM publicly-funded bailout. (C'mon people, the Fed is an independent entity WITHIN THE GOVERNMENT.)
"The clear historical role of the Federal Reserve has been to manage the composition of Federal liabilities (by varying the mix of Treasury securities and monetary base - currency and bank reserves - held by the public). The recent transaction is a dangerous break from that role, in which unelected bureaucrats are committing public funds to facilitate private business transactions and selectively defend the holders of corporate securities. Only Congress has the Constitutional right, by the representative will of the people, to commit public funds. The Bear Stearns deal is a dangerous precedent and a dilution of Congressional prerogative."
http://www.hussmanfunds.com/wmc/wmc080331.htm
Posted by guest , Jul 08, 2008 1:15AM
The Fed is in independent entity within the government, but it still doesn't operate with taxpayer funds. Banks that want to be national banks have to permanently deposit a certain amount of their reserves with the Fed, and receive shares of the Fed in return. A bank can't alienate its shares, but receives annual dividends from the Fed. That's the original source of funds. On top of that, the Fed charges fees on necessary services it performs for banks, and interest on loans it makes. The Fed generally operates in the black, and contributes excess funds to the U.S. Treasury.
You can argue that the Fed exceeded its mandate with the Bear Stears/JP Morgan deal, as the commenter @ 12:58 a.m. does. However, even if you accept that argument, the Fed didn't risk taxpayer funds by doing so. It risked its own funds, which are available to it within the system described in the first paragraph of this comment.
Posted by guest , Jul 08, 2008 8:42AM
@1.15--in the event of the Fed's liquidation, or bankruptcy, who gets their excess capital?