Sunday, April 25, 2010
The Fed's Bad Loans
"The Federal Reserve Bank of New York [FRBNY] doesn't have to look far to understand the woes of banks and investors that hold loans and securities underpinned by real estate. It can look at its own books. ... In an unexpected twist, the takeover of the Bear assets effectively leaves the [FRNBY] as holder of credit-default swaps on bonds issued by the states of Nevada, California and Florida, That protection rises in value when the bonds decrease in value. ... Fair values are based on observable market proces, data points that can underpin as asset, and cash flow. ... Maiden Lane II's holdings include oddly named securities like a $29 million piece of New Century Home Equity Loan Trust 2005-3, which was stuffed with subprime loans originated by failed mortgage lender New Century Mortgage Corp. ... Among the residential mortgage loans and securities, about half were secured by homes in California and Florida. ... As a result, the Maiden Lane fund inherited about $4 billion of Bear's old Hilton debt. Blackstone is close to finalizing a deal to reduce its $20 billion loan by about 20%, according to people familiar with the matter", Carrick Mollencamp, Lingling Wei & Serena Ng at the WSJ, 2 April 2010, link:
The Fed is no better at buying subprime assets than anyone else. It exists to be "worse". Others had to lose on these assets had the Fed not bailed them out. Why unexpected? To whom?