Reply #13: Quelle Surprise! The Fed is Reporting Losses on Its Bear Stearns and AIG SPVs

[ozymandius]

Readers may recall that during the heat of bailout battle, the Federal Reserve got into the fancy finance business, relying on the sort of deal structuring sometimes used to try to turn toxic odd pork scraps into barely-digestible sausage, the procedure used for pigs so dead that merely putting lipstick on them just won't do.

The items in question are Maiden Lane, the vehicle used to backstop JP Morgan's purchase Bear Stearns, and two sons of Maiden Lane created for dodgy AIG exposures. The bank was permitted to move some particularly fragrant collateral from Bear over to the Fed for a loan of $30 billion. The arrangement got reworked on the fly, and in the end, the Fed loan was reduced to roughly $29 billion as JP Morgan agreed to assume $1.15 billion of risk. The assets were placed in a holding company to be managed by BlackRock.

Maiden Lane II and III were spawned in the course of the AIG rescue. I've seen much less commentary on those deals, perhaps because commentators find the whole AIG mess so complicated and upsetting it's hard to know where best to direct one's ire.

This was so unseemly that even Paul Volcker, who has made a point of not commenting on Fed actions, felt compelled to voice disapproval of the Bear-related subsidy to JP Morgan. Willem Buiter, who has repeatedly pointed out that the three card monte operation being run by the Fed and Treasury are anti-democratic and possibly illegal, tells us that even by Fed's own, no doubt rosy, calculations. all three SPVs are under water.

http://www.nakedcapitalism.com/2009/07/quelle-surprise-fed-is-reporting-losses.html

---

This is a most excellent post. Somehow, in a gallows humor way, this is the toxic shit that Bernanke, Geithner and Summers desire to repackage as "misunderstood" assets and offer to pension funds as investment grade securities.