Posted on 03/29/2008 1:26:20 PM PDT by Ernest_at_the_Beach
Two days ago, I wrote here on the widely-reported $30 billion loan that the Federal Reserve made as part of brokering the acquisition of the Bear Stearns Companies by JP Morgan Chase (the "St. Patrick's Day Massacre").
I now have much more information on what this deal is all about. I guessed quite wrong about the deal structure. The $30 billion loan is not a term repo as I originally thought. Nor is it likely to generate monetary losses for taxpayers. (In fact, the opposite is true.)
But it is something bold and different that's worth understanding. In fact, it's a major milestone event in the monetary and financial history of the United States.
Before I launch into this, let me set the context by reminding you why all this financial mumbo-jumbo is important: it's because of politics. Even before the full effects of the credit crisis make themselves felt, we're already deeply into a paroxysm of "the sky is falling! What is the government going to do about it?" I'll be posting as much as I can on this subject in the coming days and weeks, because there is at least as much danger to the real economy from a mad dash toward new regulations and Federal involvement, as there is from the financial-system disorders themselves.
Keep reading...Some of my information comes from this somewhat-cryptic press release by the Federal Reserve Bank of New York, and some from private sources.
During the critical days of March 14, 15, and 16, while Morgan was madly trying to discern the outlines of what they were being asked to buy, they identified a portfolio of assets that they were not willing to finance. They asked for the Fed's help in guaranteeing the value of the portfolio. Several accounts agree that Bear Stearns hurriedly marked this portfolio to market as of March 14, producing a valuation of $30 billion, and the Fed agreed to lend this money to Morgan as a condition of agreeing to the acquisition.
Relatedly, it appears that the Fed (both the Reserve Board in Washington and the New York Fed that directly participated in the negotiations) was involved heavily in setting the lowball price of $2/share offered to Bear Stearns shareholders. (In interviews, Morgan CEO Jamie Dimon will only say that "a lot of factors were involved.") The Fed knew very, very well that the Bear deal would be perceived as a government bailout of a Wall Street firm, so they went out of their way to ensure a smackdown of Bear's shareholders.
How the public sees this is one thing. (The mendacious news media have done nothing to dispel the impression that the fatcats made out like bandits.) Much more importantly, however, the Fed sent Wall Streeters a brutally clear warning not to expect that they will be made whole the next time they get into trouble. The sight of Jimmy Cayne going from near-billionaire to 60-millionaire in just over a year will keep a lot of plutocrats under control for a long time to come.
At any rate, the Fed's $30 billion loan was announced as part of the acquisition on the evening of March 16 in New York. Over the following week, everyone got a chance to catch his breath and re-examine the asset portfolio that was guaranteed by the loan. And as a result, the Fed restructured that transaction. They announced the restructuring on March 24, and this is where things get really interesting.
The New York Fed has created a new limited-liability company, and they hired BlackRock Financial Management to run it. (BlackRock, the division of Merrill Lynch Investment Managers, not BlackStone, the publicly-owned private-equity firm.)
The New York Fed lent $29 billion to the new LLC, for a term of 10 years, which may be renewed at the Fed's option. Morgan put in $1 billion, in the form of a subordinated note. This is a key feature of the re-structured March 24 transaction, since in the original March 16 deal, the Fed was going to speak to the whole $30 billion.
The LLC will use the loan proceeds to acquire the Bear asset portfolio. And they plan to sell out the assets gradually as market conditions improve, over the next ten years or less.
Morgan's $1 billion note will take the first losses on the portfolio, if there are any. In essence, Morgan owns a 10-year call-spread on the deal, long at $29 billion and short at $30 billion. The first people to be paid out (after the LLC's operating expenses) will be the Fed. They get back their $29 billion, plus interest at the discount-window rate.
After the Fed get their money back with interest, Morgan will get back their $1 billion, plus interest at a rate equal to the Fed's discount rate plus 450 basis points (totalling 7% at the moment). That's the most that Morgan can make on the deal. Anything left after the principal and interest payments all goes to the Fed.
Depending on the liquidation value of the portfolio (which in turn depends on the original valuation and future market conditions), the New York Fed stands to make a significant amount of money here, well beyond their $29 billion investment.
Now there is still a big question mark: no one I've corresponded with knows for sure what the composition of the asset portfolio actually is. It appears to be a mixture of residential and commercial mortgage-backed securities, some with agency guarantees and some without.
And here is the key thing that makes this different from anything the Fed has ever done: the deal is essentially a trade. The New York Fed has funded the purchase of assets for a significant amount of time, in the full expectation that they will make a profit.
This is exactly the kind of deal that private actors like Bill Gross and Warren Buffett have been eyeing for months now. We do not know the specifics of the mark-to-market that Bear applied to the portfolio on March 14. It would be exceptionally interesting to know if they valued parts of it at 95 cents on the dollar, 70 cents, or somewhere else. Because the Fed's ratification of that valuation would put a floor under the MBS market as a whole, and potentially go a very long way toward resolving the overall credit crisis.
On the other hand, the New York Fed are very savvy traders. If they intend to make a profit with this vehicle, they don't necessarily want people to know their basis.
The transaction has been described by several of my correspondents as essentially a SIV ("structured investment vehicle"). This description strikes me as only superficially valid. A traditional SIV is dependent on continuous access to short-term repo funding, at low enough interest rates to finance the long-term paper held by the SIV. It therefore faces significant market and liquidity risk as interest rates move up and down.
I don't think the Fed's new LLC faces any risk that they will lose their short-term funding. (Even though there is mysterious language in the Fed's press release about an obligation of the LLC to pay the Fed interest at the current discount rate.) If anything, this is more like a hedge fund or a private equity fund than a SIV. I'd like to know if BlackRock got the standard two-and-twenty compensation structure for managing the vehicle.
To sum up, the New York Fed has entered the market for mortgage-backed securities as a direct participant, going far beyond their traditional role as a lender of last resort. This is a deeply significant and historic change, destined to have major repercussions. I've heard much apprehension and outright fear about the ultimate results, but so far, no one has been able to predict what they might be.
And in addition, many are questioning whether it needed to be done at all. In the days between March 16 and March 24, the Fed opened up its discount window to investment banks and broker-dealers. Some people believe the $30 billion probably could have been funded in the normal repo market after March 17, making the new 10-year LLC unnecessary. I'm not convinced of that.
Much of the general public is still going to react to this story as if the Fed has wantonly and illegally flushed $30 billion in tax money down the toilet. This sweet delusion will continue as long as the media can use it to sell fishwrap.
Forget about that. The real question, and the real danger, is: have the Fed embarked on an eyes-open strategy of direct participation in financial markets that will have extraordinary consequences?
We live in interesting times.
LOL!
Maybe we should discuss derivatives? Then you'd only show your ignorance on one topic at a time.
I wonder if he uses EPI?
Personally, I’d like to see the “Bush has bought 10,000 acres in Venezuela [sic]” thing again. I wonder where he found that?
The people here who are “ignorant” are those who, due to inability to discuss issues honestly, make up things out of thin air and attribute them to the people they disagree with....and then call those people the ones who are stupid, ignorant, and other pejoratives.
You are as pathetic as your friends.
Maybe we should discuss derivatives? Then you'd only show your ignorance on one topic at a time.
Better yet...why don't you discuss the "Federal Reserve's 'general tax fund'" with groanup. He's the one who's been posting about it....and claiming others have, as well. Discuss that, and the derivatives issue, with groanup....till you're blue in the face, as far as I'm concerned. Both of you would then be far less annoying and perhaps take your dishonesty and lies out on each other. LMAO!
Questions for Paul O'Neill
March 30, 2008
Q: Do you feel bitter about your service for the Bush administration?
A: No. Im thankful I got fired when I did, so that I didnt
have to be associated with what they subsequently did.
Q: Do you think it was appropriate for the Federal Reserve
to lend a helping hand to Bear Stearns and save a private
investment company from its own bad decisions?
A: I would say they didnt save Bear Stearns. They saved
the financial system from a panic collapse. I reject the
notion that they helped Bear Stearns. Bear Stearns was
destroyed.
BSC exposure, as of year end June 2007
CalPERS: 2007 Annual Investment Report: Broker Fees and COMMISSIONS PAID REPORT http://www.calpers.ca.gov/invest/investmentreport-2007/ investment_operations/bc.asp?report=broker_commission Partnership Shares Commission (Dollars in Thousands) Bear Stearns & Company, Incorporated 1,292,125,920.00 839.35 Bear Stearns Asia, Limited 20,587,600.00 23.22 Bear Stearns International Trading 2,988,208.00 99.31 Bear Stearns Securities Corporation 1,760,025,427.03 1,350.16
Or, could it be nickie, that you are looking at a commission report? LOL!
Nic is not an idiot.
Nic is not an idiot.
Nic is not an idiot.
LOL!
This is funnier than ex-Texan breathlessly posting that Bear insiders sold 27 million shares in February.
About .075 cents (That's 3/40th of a cent) per share. Pretty good rate.
Wait a minute. My math is wrong. In June of 07 BSC was worth about $150 per share. So Calpers had over 60% of its pension money in BSC and, apparently, a lot more in Bear’s subs. I don’t know what the subs were worth but I’ll bet you Calpers was approaching 100% BSC. That would mean Calpers is now wiped out. Too bad.
Good rate for Bear or Calpers? I know that business has been dog eat dog for about 15 years now, right?
Calpers.
I know that business has been dog eat dog for about 15 years now, right?
At least.
Worse than that. They’re only 136 million shares outstanding. Calpers owned Bear many times over. LOL!
6.03.2007
The greater fool
http://wcvarones.blogspot.com/2007/06/greater-fool.html
Are you a teacher or other public employee?8.03.2007Look what your masters are doing with your pension money. They lost a bunch of it buying tech stocks in the tech bubble, so now they're trying to make up for it by buying the worst mortgage securities:
Banks Sell 'Toxic Waste' CDOs to Calpers, Texas Teachers Fund
http://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=aW5vEJn3LpVw
Where's CalPERS?
http://wcvarones.blogspot.com/2007/08/wheres-calpers.html
In June I noted that CalPERS was stupidly buying the riskiest tranches of asset-backed investments, so-called "toxic waste" CDOs. The idiots at CalPERS were swindled by banks like Bear Stearns and Citigroup, which wanted to get the toxic waste off their own books as quickly as possible.With even the highest tranches now taking huge losses, the CalPERS toxic waste is probably nearly, if not totally, worthless.
So where is CalPERS spokesman Clark McKinley? No apologies to the employees whose retirement funds were squandered? No plans to sue the pants off of the banks? Step up, McKinley.
3.17.08
CalPERS holds less than $200 million in Bear Stearns bonds
http://www.pionline.com/apps/pbcs.dll/article?AID=/20080317/DAILY/848075852/1012/REG...However, the pension fund owns 1% to 1.5% of Bear Stearns equity, which has plunged in value.
The Ten Largest Holding of CalPERS, the Biggest U.S. Investor
December 10, 2007
Can you name the biggest American investor? No, it's not Warren Buffett; as a matter of fact, it is not a person. It is CalPERS, the California Public Employees' Retirement System, which handles the retirement for well over a million California employees. It's total investments are now at about $254 billion, with investments in stocks, bonds, mutual funds, private equity, real estate, and venture capital.SETTLEMENT NEWS: CalPERS, Hedge Fund Both Going After NYSE; Class-ActionCalPERS Stock List (Excel spreadsheets)
Company Shares Book Price Book Value Mkt Price* Market Value* BEAR STEARNS COS INC 637,400 41.50 26,450,986.08 140.08 89,286,992.00 BLACKROCK INC 295,600 129.29 38,219,117.51 139.17 41,138,652.00 JP MORGAN INTL DERIVATIVES LTD 555,000 5.77 3,202,197.60 7.99 4,434,450.00 JPMORGAN CHASE + CO 19,800,061 22.20 439,524,172.81 42.00 831,602,562.00 LEHMAN BROTHERS HLDGS INC 3,624,153 30.97 112,257,806.59 65.15 236,113,567.95
Status Sought In Fight Over Allegations Of Trading Violations
June 25, 2007
CalPERS is seeking class-action certification in its lawsuit against seven New York Stock Exchange specialist firms, the latest instance of institutional investors going to court to ensure they get the best price for their trades.......After reviewing dozens of transcripts from NYSE and SEC interviews and data from millions of trades, CalPERS attorneys are readying a class certification motion to be submitted to the federal court in New York by a June 29 deadline, Mr. McKinley added. Separately, Sea Carriers is also seeking class action status in its case against the NYSE, specialists, floor brokers and a list of firms that reads like a who's who on Wall Street, including Goldman Sachs Execution & Clearing, LP, Banc of America Securities LLC and Bear, Stearns & Co.
March 18, 2008
Q: What’s the impact on CalPERS?
A: Last year CalPERS shares invested in Bear Stearns were worth $180 million. At the $2 buyout price, they’re now worth a paltry $1 million. In addition, CalPERS has roughly $200 million worth of Bear Stearns bonds, the value of which has been firmed up by the actions of the Fed and JPMorgan.
http://www.sacbee.com/103/story/793297.html
The California Public Employees’ Retirement System (CalPERS) has posted its first negative returns in 2-1/2 years due to the subprime mortgage crisis and high oil prices, the fund announced last week. For the final quarter of 2007, CalPERS reported a total return of -0.5%, which equals a loss of $1.6 billion. The plan’s consultant, Wilshire Associates said that the fund’s investments underperformed their respective benchmarks by 0.9%. Overall, CalPERS saw returns of 10% for 2007, compared to 15.4% for 2006.
http://www.mmexecutive.com/more/editorial.html?pc=mutual_funds
Hmmmm......$1 million worth of stock at $2 a share would be 500,000 shares. If those 500,000 shares were worth $180 million last year, the stock must have hit $360 a share.
Too bad the highest it ever reached was a little less than $173.
I must admit, I’m no longer getting this . . . has nic gone into “full kitchen sink mode,” or something else? There was a FReeper, who passed, who would flood a thread with text in order to “dilute” his earlier inconsistencies. I’m wondering if our friend is trying to do the same thing.
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