The Federal Reserve Bank of New York on Thursday confirmed the estimated fair value of assets that were formerly held by Bear Stearns at about $29bn, about $1bn less than they were worth when the investment bank was sold to JPMorgan in March.
The Fed said the portfolio, of collateralised residential and commercial mortgage securities, is currently valued at $28.8bn. Many in the market had expected a larger decline in the portfolio given renewed weakness in mortgage securities during the second quarter.
The Fed marked the securities in the portfolio to current market prices. Analysts said that when the Fed assumed the assets back in March, they were cheaply valued, which would explain why the portfolio remains relatively unchanged.
Last month, Timothy Geithner, president of the New York Fed said: “Although we assumed some risk in this transaction, that risk is modest in comparison to the risk of very substantial damage to the financial system and the economy as a whole that would have accompanied default of Bear Stearns.” The Fed will update the valuation of the Bear portfolio quarterly.
The disclosure of the portfolio’s value was accompanied by the Fed’s weekly announcement of borrowing at its discount window, a $4.4bn drop in daily average borrowing by primary dealers to $1.7bn.
When the Fed arranged the fire sale of Bear Stearns in March, it initially agreed to extend a loan backed by $30bn of assets held by the investment bank in order to secure a sale to JPMorgan.
Those assets were placed in a holding company and last week the Fed said its loan amount had been adjusted to $28.82bn after JPMorgan agreed to assume the first $1.15bn of risk associated with Bear’s assets.
The assets are being managed by BlackRock Financial Management on the Fed’s behalf. The Fed sought to prevent a bankruptcy of Bear Stearns because it threatened to spark a systemic financial crisis. Financial institutions were exposed to Bear via derivatives and other market relationships. A bankruptcy filing could have triggered a chain of payment failures across markets.
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