Bear Stearns portfolio value a litmus test for bonds

Discussion in 'Wall St. News' started by Chuck Krug, Jul 3, 2008.

  1. NEXT UP-Bear Stearns portfolio value a litmus test for bonds
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    powered by SphereBy John Parry

    NEW YORK, July 2 (Reuters) - The reason JPMorgan Chase & Co didn't want $30 billion of toxic mortgage assets on its books after it took over Bear Stearns may be made clear on Thursday.

    The Federal Reserve Bank of New York will report how much those assets are now worth, and many analysts expect it to show a drop in value over the three months the Fed has held the bonds and other securities.

    In March, in a highly unusual move, the Fed provided the financing for JPMorgan (JPM.N: Quote, Profile, Research, Stock Buzz) to acquire Bear Stearns in order to prevent Bear from going bankrupt and potentially dragging down the entire financial system. Part of that deal was that the Fed would hold the Bear assets.

    The value the Fed now places on Bear's portfolio will be one benchmark for how mortgage-backed assets have performed since March, said William Sullivan, chief economist at JVB Financial Group in Boca Raton, Florida.

    "The purpose of this evaluation is what it may mean for other investment banks that have similar collateral. It raises the question of whether these other institutions have marked their portfolios to the current market level," Sullivan said.

    If the portfolio's value were to drop to below about $24 billion, that could indicate mortgage-backed securities have fared even worse in the second quarter than markets have already reflected, analysts said.

    Such a poor showing could weigh on shares of banks -- many of which still hold huge portfolios of hard to value mortgage bonds -- and possibly spur safe-haven buying in the U.S. Treasury market.

    On Thursday at 4.30 p.m., along with the H.4.1. release on custody holdings and discount window borrowing, the Fed plans to release its decision on the fair value of that portfolio as of June 26. Given the decline of many sectors of U.S. mortgage-backed securities since then, most analysts expect the $30 billion total to fall.

    "It gives an idea on the distressed (assets) in the portfolio. It will tell us how much the Fed bailed out Bear Stearns and helped out JPMorgan," said Jeff Given, portfolio manager at MFC Global Investment Management in Boston. "It will give a threshold on the bailout," he added.

    "If that portfolio declined more than 20 percent I would imagine that would be pretty negative for (those sectors of fixed income). It would show the Fed has been bailing out bad investments," said Given.

    A red flag for markets would be a drop of the portfolio below $25 billion, said Sullivan, while below about $27 or $28 billion "would seem to suggest that a lot of collateral on the balance sheets of financial services companies is still subject to appreciable write downs," he added.

    The Fed has said the portfolio contains collateralized mortgage obligations, most of which are backed by government-sponsored enterprises such as Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz). It also holds other asset-backed securities -- a sector that includes subprime mortgage bonds -- adjustable-rate mortgages, commercial mortgage-backed securities, and collateralized bond obligations.

    Markets for many of these investments have deteriorated further as the outlook for U.S. housing has worsened and investors see banks and hedge funds continuing to unload risky assets from balance sheets.

    Regarding non-agency mortgage securities, on average "AAA" rated are between flat in value to down 5 percent since mid-March. Below "AAA" ones are down anywhere between 10 percent and 30 percent. The worst ones "you receive a few years worth of coupons but not your principal back," said Given.

    Amitabh Arora, managing director, interest rate strategies with Lehman Brothers, New York estimates that overall, U.S. mortgage security prices, already down about 25 percent in the first quarter, have lost another 5 percent since.

    "I doubt whether the Fed will use mark-to-market valuation procedures," in assessing the Bear Stearns portfolio's value, Arora added in an email note to Reuters.

    "If it shows (the Bear portfolio) has substantially lost value over past 3 months, I think that would lead other investment banks to make similar adjustments," Sullivan said.

    Bear Stearns itself gave a $30 billion mark-to-market value for the portfolio as of March 14, when it was the fifth-biggest U.S. investment bank. JPMorgan Chase & Co. (JPM.N: Quote, Profile, Research, Stock Buzz) agreed to acquire Bear on March 16 with the Fed's approval.

    But exactly how that number was decided remains unclear.

    "Who knows how they priced the $30 billion in the first place," said Ray Stone, economist with Stone & McCarthy Research Associates, in Princeton, New Jersey.

    "It might have been that the $30 billion was a fire sale price and was marked down severely at that point in time," Stone added.

    (Reporting by John Parry, Richard Leong and Al Yoon; Editing by Chizu Nomiyama)

    © Thomson Reuters 2008 All rights reserved
  2. mokwit


    They will just apply the same BS valuations as the I-Banks. The Fed did not cut rates 325BP to boost the I-Banks balance sheets only to then turn around and sabotage this by posting the true worth of BSC portfiolio. More likely they will revalue it UP as this helps their masters.
  3. using the latest state of the art market modelling quant based valuation system that i have purchased directly from the fed and major us investment banks i came up with

  4. mokwit


    Should be 100% of par. Check your inputs again.
  5. this sounds like a bury some bad news day.

    if non farm came out very weak which is kind of expected they might throw out this crap valuation as well hoping no one sees it.
  6. Daal


    its will be funny to see the headlines reading 'fed announces $4b writedown, says it has plenty of capital'
  7. I know it's from last thursday, but for those who missed it due to the long weekend etc...
    Fed Cuts Bear Stearns Assets Estimate to $28.9 Billion

    By Scott Lanman

    July 3 (Bloomberg) -- The Federal Reserve said the portfolio of Bear Stearns Cos. assets it accepted as part of the firm's takeover by JPMorgan Chase & Co. is now worth $28.9 billion, down from the $30 billion estimated in March.

    The central bank cut the ``fair value'' of the assets by 3.7 percent as of June 26, the Fed said today in Washington. The Fed loaned $28.8 billion last week to a company it formed to purchase the investments, which as of mid-March included debt backed by mortgages and other items JPMorgan deemed too risky to take on.

    The Fed gave the fair-value estimate of Maiden Lane LLC's holdings as part of its weekly report on its balance sheet today. The central bank will provide quarterly updates on the portfolio's value. Maiden Lane is being counted on the balance sheet of the New York Fed, and was named after a Manhattan street that borders the bank.

    JPMorgan is absorbing the first $1.15 billion of any losses realized on the holdings. The Fed said today that its loan outstanding remains at $28.8 billion, showing that Maiden Lane has yet to start paying off the debt.

    Separately in today's report, the Fed said direct loans to securities firms slid in the past week while discount-window borrowing by commercial banks rose.

    Wall Street Loans

    The Fed's loans to Wall Street bond dealers dropped by $4.4 billion to a daily average of $1.7 billion in the week ended July 2. The balance of credit outstanding to securities firms declined to zero as of yesterday.

    Funds provided through the so-called discount window for commercial banks rose by $159 million to a daily average of $14.9 billion.

    Fed holdings of U.S. Treasury securities increased $65 million for a daily average of $478.8 billion. The central bank had about $740 billion of Treasuries at the start of 2008.

    The central bank hired BlackRock Inc. to manage and sell the holdings of the former Bear Stearns, which was absorbed by JPMorgan in May. Bear Stearns valued the assets on March 14 at ``approximately $30 billion,'' New York Fed President Timothy Geithner said April 3.

    The Fed is valuing the portfolio in accordance with accounting guidelines that call for an estimate based on sales in an ``orderly market,'' rather than a hypothetical forced liquidation. The value doesn't necessarily reflect what the securities would fetch if Maiden Lane tried to sell today.

    Delaware corporate records show Maiden Lane was incorporated there on April 29.

    Great Depression

    When the Fed agreed to the Bear Stearns transaction on March 16, policy makers also opened lending to other securities firms. That facility, and a $13 billion temporary loan to Bear Stearns after it warned it faced bankruptcy, constituted the first Fed credit to nonbanks since the Great Depression.

    The Fed's loan carries the rate charged to commercial banks at the discount window, currently 2.25 percent.

    The debt in March included commercial mortgage-backed securities, home loans and collateralized bond obligations, the central bank said in April. None of the securities were rated lower than BBB- by any of the three largest credit-rating companies, the New York Fed said April 3. Debt rated below BBB- has non-investment grade, or junk, status.

    The central bank has declined to provide details on the securities and isn't planning to disclose changes in the makeup of the portfolio. The asset mix may change to include securities that weren't in the original pool.

    Bernanke Prediction

    Fed Chairman Ben S. Bernanke said April 3 that the Fed has ``reasonable comfort that if we can sell these assets over a period of time that we will recover principal and interest for the American taxpayer.''

    The Fed also reported that the M2 money supply rose by $3.6 billion in the week ended June 23. That left M2 growing at an annual rate of 6.4 percent for the past 52 weeks, above the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.

    The Fed reports two measures of the money supply each week. M1 includes all currency held by consumers and companies for spending, money held in checking accounts and travelers checks. M2, the more widely followed, adds savings and private holdings in money market mutual funds.

    During the latest reporting week, M1 fell by $2.1 billion. Over the past 52 weeks, M1 declined 0.3 percent. The Fed no longer publishes figures for M3.

    To contact the reporter on this story: Scott Lanman in Washington at