In its biggest disclosure of the securities accepted to stabilize capital markets, the Fed said yesterday it had unrealized losses of $9.6 billion on the assets as of Dec. 31. The bonds, swaps and notes were taken in from Bear Stearns, once the fifth-biggest Wall Street firm by capitalization, and AIG, which had been the world’s largest insurer.
The losses on securities backed by assets such as home loans in Florida and California signal that U.S. taxpayers may be forced to reimburse the central bank through the Troubled Asset Relief Program, according to Christopher Whalen, managing director of Torrance, California-based Institutional Risk Analytics.
“The numbers basically confirm that Treasury is going to have to take some TARP money and reimburse the Fed,” said Whalen, whose financial-services research company analyzes banks for investors. “It is essentially up to the Treasury to get the Fed out of this.”
The central bank lent $2 trillion to financial institutions and has not disclosed information about most of the collateral backing those loans.
Treasury spokesman Andrew Williams declined to comment.
Pressure to Disclose
The Fed report follows requests from lawmakers to identify the collateral and a lawsuit by Bloomberg News. Fed Chairman Ben S. Bernanke pledged to boost disclosure, assigning Vice Chairman Donald Kohn to lead the effort.
The central bank has refused to name the borrowers, the amounts of loans or the assets banks put up as collateral under most of its programs, arguing that doing so might set off a run by depositors and unsettle shareholders. Disclosure is less of a concern for New York-based AIG, now 80 percent owned by the federal government, and Bear Stearns, taken over by New York- basedJPMorgan Chase & Co. a year ago.
Bloomberg, the New York-based company majority-owned by New York MayorMichael Bloomberg, sued Nov. 7 under the Freedom of Information Act on behalf of its Bloomberg News unit. The public is an “involuntary investor” in the nation’s banks, according to an April 15 court filing by Bloomberg.
In the report, the Fed detailed its assets in three limited liability corporations, all called Maiden Lane for a street in Lower Manhattan that runs past the New York Fed.
The $9.6 billion in losses are unrealized because they represent the difference between the fair value of the security under accounting rules and the amount outstanding. The losses become real if the principal isn’t returned.
Maiden Lane I is a $25.7 billion portfolio of Bear Stearns securities related to commercial and residential mortgages. JPMorgan refused to buy them when it acquired Bear Stearns to avert the investment bank’s bankruptcy.
The Fed’s losses included writing down the value of commercial-mortgage holdings by 28 percent to $5.6 billion and residential loans by 38 percent to $937 million as of Dec. 31, the central bank said. Properties in California and Florida accounted for 45 percent of outstanding principal of the residential mortgages.
Maiden Lane II contains almost $11 billion of outstanding subprime mortgage-backed securities from the AIG transaction that the Fed said lost $180 million so far. The fund also contains $6.2 billion of Alt/A adjustable-rate mortgage-backed securities that the report said has $936 million of unrealized losses. The Fed values $11.4 billion of assets in Maiden Lane II with mathematical modeling.
About 19 percent of the mortgage-backed securities are rated speculative-grade, or BB+ at Standard & Poor’s, according to the Fed. About 40 percent are given the top rating of AAA.
Maiden Lane III has lost $2.6 billion after being created Oct. 31 to buy collateralized debt obligations from AIG counterparties, according to the Fed. CDOs in this unit include three parts of a high-grade asset-backed security known as TRIAX 2006-2A, totaling about $3.2 billion. Maiden Lane III also has two parts of a commercial mortgage-backed CDO called MAX 2007-1 A-1 with a face value totaling $7.5 billion. The fair value of those two is less than half that much, or $3.3 billion, according to the central bank.
The case is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).
They are not done yet either they are Lobbying the pig bama and the filth in our government to DUMP more of their SHIT on you too!
Banks Lobby To Screw Taxpayers Out Of Billions
Yesterday the Wall Street Journal reported that the banking industry is aggressively lobbying the Treasury Department to "expunge" the warrants granted to the government when banks took TARP funds. Just counting the warrants issued by Goldman Sachs and JP Morgan Chase, the two biggest banks that have said they would like to pay back the TARP immediately, the cost of this giveaway could be as high as $2.7 billion.
The warrants were issued when the government bought preferred stock in banks. They give the government the right to purchase common stock in the banks for the next ten years, and were an essential part of the promise to taxpayers that the TARP would be an investment rather than a straight out giveaway.
Most of those warrants are currently underwater because the actual stock prices of the banks are less than the exercise price. This means they would be worth nothing if they had to be exercised today. But because the warrants have a 10-year lifespan, with 9 and half years left to run, they have the potential to be worth far more.
The banking sector lobbyists have been arguing that they should be allowed to purchase the warrants back at deeply discounted values, or perhpas even have them cancelled outright on the grounds that they are currently worthless. Of course, even the most junior banker knows that out of the money options are not actually worthless if there is potential for them to come into the money in the future. This is just a scam.
"Over nine years or so, Goldman Sachs’ and JP Morgan’s stock prices could rise substantially to the benefit of U.S. Taxpayers or whoever owns the warrants. It would be a massive loss to taxpayers if the U.S. Treasury retired these warrants for free," <>University of Louisiana at Lafayette economist Linus Wilson tells Clusterstock.
The U.S. Treasury holds 88.4 million of JP Morgan’s TARP warrants. These warrants on JPM are worth $20.20 each or about $1.79 billion according to Wilson's estimates based on options pricing models. Wilson estimates that the government's 12.2 million warrants on Goldman Sachs are currently worth $74.87 each or about $914 million dollars.
Wilson says that it is a bad idea to encourage the banks to buy the warrants at market prices, given their well-known capital weaknesses. Instead, the Treasury should sell the warrants to 3rd party investors.
Section 4.9 of the Securities Purchase Agreement for the Capital Purchase Program requires the U.S. Treasury to sell the warrants to 3rd party investors if the issuing bank is not willing to buy them for “fair market value.” For Goldman and JP Morgan that value is a lot closer to $3 billion than zero. Hopefully the Treasury Department is smart enough not to get bamboozled by the lobbyists into going along with another huge giveaway to the banking secotr.
What do you say time to get the pitchforks and bring back public hangings?