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Doesn’t look like a funding operation.

Looks like JPM sold the Bear Stearns securities to the Fed and retained a first loss piece:

Text in JP Morgan’s 10Q:

“Concurrent with the closing of the merger, the Federal Reserve Bank of New York (the “FRBNY”) will take control, through a limited liability company (“LLC”) formed for this purpose, of a portfolio of $30 billion in assets of Bear Stearns, based on the value of the portfolio as of March 14, 2008. The assets of the LLC will be funded by a $29 billion, 10-year term loan from the FRBNY, and a $1 billion, 10-year note from JPMorgan Chase. The JPMorgan Chase note will be subordinated to the FRBNY loan and will bear the first $1 billion of any losses of the portfolio. Any remaining assets in the portfolio after repayment of the FRBNY loan, the JPMorgan Chase note and the expense of the LLC, will be for the account of the FRBNY.”


4 Responses

  1. Doesn’t make a lot of sense why JPM would loan the FRBNY $1 billion for 10 years unless the Bear Stearns dissolution was a bailout of JPM.

  2. JPM isn’t loaning the FRBNY $1bn, they’re buying what is essentially the equity piece of a 2 tranche CDO (with none of the benefits of a normal equity piece as all the residual value goes to the Fed). Given that in some way the Fed had to back up these assets longer term for the deal to work, this is a fairly inventive method. Would love to see the collateral, the marks on the collateral, and get some idea as to who is managing the pool.

  3. ” (with none of the benefits of a normal equity piece as all the residual value goes to the Fed).”

    Sounds like a nonrecourse loan to me as they don’t share upside.

  4. Look at it this way:

    JPM sold the secs to the fed and guaranteed the fed against loss for a max of 1 billion.

    why, because they didn’t want them at then current prices.

    why did the fed buy them on those terms? to get the deal done.

    non recourse financing is a loan where the borrower still owns the collateral, makes money if it goes up, but if the value of the collateral goes down the borrower can let the lender have the collateral and no longer owes any of the original loan balance.

    originally this was described by all as a non recourse loan from the fed.

    apparently not.

    apparently it was an outright sale to the fed, with jpm agreeing to take the first billion of losses if there were any losses.

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