Will Anyone Ask Geithner and Bernanke About Maiden Lane?
Maiden Lane LLC was an entity established to take on the toxic assets of Bear Stearns when it was purchased by JP Morgan. Bernanke hired Blackrock to oversee the pool. During his Senate Finance Committee confirmation hearing on January 21, Timothy Geithner said he said that he thought Maiden Lane’s disclosure was "adequate."
On December 29, the central bank’s Board of Governors wrote a report to Congress saying that it didn’t expect “any net loss to the Federal Reserve or taxpayers” from the Bear Stearns holdings.
Feb. 4 (Bloomberg) — U.S. taxpayers may be stuck with losses on $30 billion of Bear Stearns Cos. assets owned by the Federal Reserve even though the central bank has said otherwise, according to Robert A. Eisenbeis, Cumberland Associates Inc.’s chief monetary economist.
“There is no prospect for a profit on the assets,” Eisenbeis wrote in a report yesterday. “Losses are mounting.”
The CHART OF THE DAY illustrates the extent of the losses since June, when the Fed began providing data on the holdings’ value. The biggest declines were recorded after quarterly mark- to-market adjustments.
Last week’s total was $4.22 billion, as shown in the chart. JPMorgan Chase & Co. is responsible for the first $1.15 billion under terms of an agreement completed in June, when the company took over Bear Stearns. The Fed picks up the rest.
“The transaction was not structured with adequate over- collateralization to protect the taxpayers from losses,” based on the risks associated with housing-related assets at the time, Eisenbeis wrote.
Maiden Lane II and III were set up to rescue AIG:
To stabilize the banking system, the Fed decided to quarantine some of AIG’s riskiest holdings. Especially worrisome: the tens of billions of dollars’ worth of insurance AIG had sold to banks on toxic mortgage securities. If those mortgage securities continued to fall in value and AIG couldn’t pay out on the insurance, known as credit default swaps, the banks would lose desperately needed capital.
So the Fed created Maiden Lane III, an entity named after the location of the central bank’s New York branch, to buy the assets from the banks and cancel the insurance. The Fed put in $15 billion of its own capital and took an additional $5 billion from AIG, which had received the money from Treasury. Maiden Lane used the $20 billion to purchase so-called collateralized debt obligations—the toxic mortgage securities that AIG had insured for banks—with a face value of $46 billion, paying 43¢ on the dollar. AIG also paid the banks $26 billion in insurance payouts on the CDOs.
The result: The banks were paid in full for securities that were virtually impossible to sell in the marketplace. That strengthened their balance sheets, helping them to better weather the financial crisis in recent weeks. "It certainly seems like it was a good deal for the [banks]," Maurice R. "Hank" Greenberg, former chairman and current major shareholder of AIG, wrote in a letter to AIG management. AIG and the banks declined to comment.
But beyond the basic framework, little is public about Maiden Lane III. Société, Deutsche Bank, and Goldman Sachs received money, but the Fed didn’t disclose how much each got. And the list of recipients is likely longer than those three banks. Nor does the Fed offer any clue about the composition of the 100 or so CDOs it now owns. An exhibit in a Dec. 2 regulatory filing by AIG provides most of the specifics, but AIG only makes public a heavily redacted version.
The few known details about Maiden Lane III raise questions about the Fed’s risk-taking. The central bank usually makes short-term loans that the borrower must repay within a few months. In this case, the Fed will recoup its capital on the CDOs only if the securities pay off or can be sold to outside investors. That’s a dicey bet. Merrill Lynch (MER) sold similar securities last summer for just 22¢ on the dollar. Since then, the housing market on which they’re based has deteriorated even further.
The anxiety could grow if the central bank remains silent. "If the Fed doesn’t want to give us the specifics, they should tell us something that makes us comfortable that they are properly capitalized and not presenting an undue risk to the financial system," says veteran Fed watcher Jim Bianco of Bianco Research. "The integrity of the Fed is in play here."
Business Week filed an FOIA request to get a list of banks that have sold toxic collateralized debt obligations to Maiden Lane III. The SEC refused, saying that ‘the requested filing "contains confidential commercial or financial information” and releasing it would "cause substantial competitive harm” to AIG."
Never mind, that AIG is effectively a ward of the state given all the taxpayer dollars it has received over the past five months. And the CDOs that the banks are selling to Maiden Lane III are not likely to come back onto the market anytime soon. Indeed, the whole rationale for Maiden Lane III is to help the banks rid themselves of some of their toxic assets and eliminate AIG’s ongoing contractual obligation to provide insurance on those ailing securities.
For taxpayers, the issue here isn’t one of trying to pry into AIG’s trading history. It’s trying to keep track of all the money the government is spending and whether taxpayers are getting a fair deal.
To date, Maiden Lane III has purchased CDOs with a combined face value of more than $60 billion. The Fed is providing more than $24 billion in funding. Many of the banks selling CDOs have already obtained billions in dollars in payments from AIG as part of the insurance coverage on those assets. So, in effect, the banks selling CDOs to Maiden Lane III have been largely made whole.
None of this is to say, Maiden Lane III was a bad idea. But the Maiden Lane III transaction may be a model for the Obama administration, which is considering creating so-called "bad banks" to buy rotting assets from financial institutions. (One of the architects of Maiden Lane III was Treasury Secretary Tim Geithner, who was president of the New York Fed when the transactions took place). If taxpayers are going to be on the hook for all those ailing bank assets, taxpayers have a right to know which banks are doing the selling and at what prices.
President Obama is right in calling for more accountability from the Wall Street firms that get bailout money. But accountability doesn’t just stop with the banks. The government doling out the cash needs to be accountable for its actions too.
The market is tanking after Geithner’s vague announcement this morning. It’s going to be hard to inspire confidence when there’s no transparency.