April 13, 2010 08:33 AM EDT by Elizabeth MacDonald
What do taxpayers now own in the Federal Reserve's Maiden Lane vehicles, launched to bail out Bear Stearns and American International Group (AIG)?
Recent disclosures from the Federal Reserve show the Maiden Lane vehicles are a portrait in miniature of the berserk behavior during the bubble years.
U.S. taxpayers are effectively now hoteliers, strip-mall operators, airport and commercial property managers, and hedge fund investors owning derivative bets on subprime bonds, and even protection on municipal bonds from states battered by the housing crisis in case of default. And to manage these assets, the Federal Reserve is even launching hedges on the direction of interest rates that the central bank itself sets.
In the asset mix are long bets on subprime, no-doc or jumbo mortgages as well as home equity loans from failed bank lenders that have either gone bust or have been taken over, including Countrywide Financial, Washington Mutual, New Century Financial and Thornburg Mortgage.
The Federal Reserve has hired asset manager BlackRock (BLK) to oversee these assets. In its multi-billion, multi-year contract, BlackRock has launched interest rate hedges on these Maiden Lane assets to protect the Fed's holdings. But "the government controls rates; not sure why they need to hedge," says a top market official.
And questions remain as to whether the Fed is hedging its massive $1.25 trillion in mortgage securitizations it has picked up to help revive the mortgage market.
(For the extended list of what is in the Maiden Lane vehicles, see the bottom of this column.)
Digging through the 161 pages of Fed footnotes, we found taxpayers own long bets on struggling or overextended hotel chains here and overseas, including the Extended Stay chain, now in Chapter 11 bankruptcy, Hampton Inns, as well as Hilton Worldwide hotels here and around the world, including in Malaysia, Russia and Singapore.
Taxpayers now own underwater loan assets from overseas hoteliers including Hotel Corp. of Europe and Middle East Hotels.
Also in the mix are bets on shopping centers like Plantation Shopping Center and Cherry Hill Towne Center.
U.S. taxpayers also own assets backed by the Miami Airport and a portfolio of Chicago office buildings, including the Civic Opera Building.
And taxpayers own derivative bets that bonds from struggling California, Florida and Nevada will go bad.
Also in the mix are credit default swaps, insurance bets that debt from troubled bond insurers MBIA Corp. (MBI), Ambac Financial Group (ABK), and Financial Security Assurance will go south.
The swaps put the Fed in the awkward position of owning bets that these states and companies will default on their debts.
And picked up in these bailouts are interest rate swaps from AIG, directional bets on rates that the Fed itself sets. The insurer owns massive amounts of these bets on rates, $560 billion in notional value, bets that comprise more than half the 14,400 derivatives positions still on AIG's books.
The Maiden Lane vehicles also hold bonds from Fannie Mae (FNM), Freddie Mac (FRE) and Ginnie Mae "” effectively showing the Fed has strayed deeper across the line from setting monetary policy into helping the government with its fiscal stewardship.
The Maiden lane vehicles "” parked off the Fed's balance sheet, despite the regulatory crackdown on bank off-balance sheet vehicles "” are the Fed's flyer that there will be an across-the-board revival in these bubble-era assets that have declined in value since the vehicles were launched, to $64.5 billion, versus an initial $71.1 billion.
In interviews, Wall Street analysts now poring through the fresh disclosures say they fear the Fed's Maiden Lane maneuver is essentially a faith-based initiative that these assets will regain value, even though questions remain whether any of these assets can be deemed predatory securitizations that are really worth nothing at all.
Fed chairman Ben Bernanke had testified in April 2008 to Congress about the Bear Stearns' assets the central bank had picked up a month earlier: "I can say that the assets are entirely investment grade, they are entirely current and performing," though FOX Business Network has found bonds that were either junk or veering toward junk at the time of his statement.
At the time of Mr. Bernanke's testimony, former Fed chairman Paul Volcker had publicly attacked the central bank's bail out of Bear Stearns as an overreach.
"The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded central banking principles and practices," Mr. Volcker had said at the time about the Fed's Bear rescue in a speech to the Economic Club of New York. (For the video of his speech, click here).
The New York Federal Reserve had launched the first Maiden Lane vehicle to take on the worst of the lot in assets in order to assist JPMorgan Chase's (JPM) takeover of Bear Stearns; it later launched two more Maiden Lane vehicles to assist AIG.
Treasury Secretary Timothy Geithner, who ran the New York Federal Reserve, which oversees the Maiden Lane vehicles, had told Congress that the cash assets in the Fed's Bear bailout consisted of "investment grade securities," disclosing information that showed these assets could veer toward junk ("i.e. securities rated BBB- or higher by at least one of the three principal credit rating agencies and no lower than that by the others").
The Federal Reserve did not return repeated calls for comment.
The Fed is betting that its hired gun overseeing these assets, BlackRock, under its guidance, will properly price-tag and sell these assets for taxpayers.
BlackRock reportedly stands to earn tens of millions on its multi-year contract as asset manager of the Maiden Lane vehicles.
Not disclosed is how exactly BlackRock values these assets, whether and how losses are being papered over in the Maiden Lane vehicles, whether it is simply tossing a fresh coat of paint on the assets, and how the Federal Reserve's extraordinary intervention into the markets to defrost the market's iced over financial plumbing will impact the value of these assets.
"Based on what I see, the Fed will have tough questions to answer on its management of the" these assets in light of these new disclosures, says David Zervos, global fixed-income strategist at Jefferies & Co. in New York.
Here's an extended list of bond and derivative assets picked up in the Federal Reserve's rescue of Bear Stearns and AIG:
Hotels
Doubletree
Embassy Suites
Extended Stay
GrandStay Residential Suites
Hampton Inn & Suites
Hilton Hotels: Chicago, Hawaii, New Jersey, New York City, Phoenix, San Fran, Canada, Malaysia, Puerto Rico, Russia, Singapore
Hotel Corp. of Europe
Middle East Hotels
Orchard Hotels: Baton Rouge, Colorado Springs, Fort Worth, Houston, Tampa, Tuscon, Westbury, Colorado Springs
Radisson Hotel
Sanibel Inn
South Seas Resorts
Commercial Property
Tishman Speyer loans backed by a $1.7 billion portfolio of Chicago office buildings, including the Civic Opera Building
Miami Airport
Shopping Malls
Cherry Hill Towne Center
Plantation Shopping Center
Crossroads Mall, Okla. City
Bonds built on subprime, no income or jumbo mortgages, or home equity loans
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