Tuesday, March 25, 2008

The Fed's Fine Print

The Federal Reserve Bank of New York in a statement on March 24 explained its role in JPMorgan's acquisition of Bear Stearns. It will take control of a portfolio of Bear Stearns' assets in the form of illiquid mortgage-related securities as of March 14. (According to an unnamed analyist, the securities are not collateralized subprime mortgages. ) The portfolio will be held by a special purpose limited liability company formed for this purpose. Blackrock Financial Management Inc. will manage the portfolio under guidelines established by the NYFed to minimize disruption to financial markets and maximize recovery value.

JPMorgan has provided $1 billion in financing in the form of a subordinated note at the primary credit rate plus 475 points (currently 7.25%) of any losses associated with the portfolio. ( It also guarantees Bear Stearns' existing debt to the NYFed). The LLC pledges the portfolio as security for $29 billion in ten year renewable term financing from the NYFed at current prime (2.5%). The NYFed secured loan is without recourse to JPMorgan. Any realized gains on the portfolio will accrue to the NYFed . Losses after the first $1 billion (which JPMorgan will bear under its subordinated note) will be the NYFed's. The NYFed's action is pursuant to its authority under section 13(3) of the Federal Reserve Act.

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