The US Federal Reserve lifted the lid on its efforts to shore up the financial system, and in the process, showed a $3 billion loss on the books from its deal to rescue investment bank Bear Stearns.
The Fed provided more details of the huge increase in its balance sheet that occurred over the final months of 2008, rounding out data already issued on a weekly basis. Bank officials also said more disclosure could be on the way.
Combined assets in the Fed system hit $2.25 trillion as of December 31, 2008, up a sharp $1.33 trillion from a year ago.
The US central bank has enacted an alphabet soup of new programs to support the credit markets.
Thursday's statements specifically provided a window into the Fed's Commercial Paper Funding Facility, created in October 2008 to provide liquidity to the CP market, and the three “Maiden Lane” limited-liability companies created by the New York Fed as part of broad-ranging rescue efforts.
Much interest was on the original Maiden Lane LLC, which was formed in mid-March 2008 as part of the orchestrated takeover of the failing investment bank Bear Stearns by JPMorgan Chase.
Some $1.7 billion in gains logged by the CPFF were swamped by the $3.1-billion unrealized loss in Maiden Lane, which included $54 million in “professional fees.”
Maiden Lane was created to hold an asset portfolio that JPMorgan found too toxic to assume in whole, and analysts said Thursday's report bore out that assessment.
Fed figures showed that some 40% of the assets in Maiden Lane were Level 3, or basically illiquid, at year-end. That included $5.5 billion in commercial mortgage loans and $2.4 billion in swap contracts.
All other assets in the fund were dubbed Level 2, with valuations based on prices for similar instruments in active markets.
“Maiden Lane is just a collection of crummy assets so there was always a potential for a loss,” said William Fleckenstein, president of Fleckenstein Capital in Seattle.
Maiden Lane II, a holding company whose assets are dominated by subprime mortgages, logged a $302 million loss. Maiden Lane III managed $45 million in net income on its portfolio of asset-based collateralized debt obligations.
Both are holding companies created when insurance giant American International Group was taken over by the US government in September 2008.
Fed officials said various aspects of the bailout effort also combined to reduce payments made to the Treasury in 2008 to $31.7 billion from $34.6 billion, a decline of 8%.
Still, the Fed's holdings of commercial and residential loans were said to be in relatively good shape, with the majority regarded as performing.
Over time that could create substantial upside, the officials said, as real estate markets recover.
Fed officials said they were mulling ways to increase disclosure of the type of information contained in Thursday's reports, including potential quarterly releases. (Reuters)