Father Fed's Maiden Daughter Losses It

We all remember (fondly) the collapse of Bear Stearns and the role played by the Federal Reserve in facilitating a bailout by J.P. Morgan. Terms of that deal included the Fed taking on a $30 billion portfolio of risky mortgage related stuff that J.P. Morgan was unwilling to swallow on the way to taking all of Bear Stearns in its mouth.

Well the Bear is no more; the Fed set up a company called Maiden Lane and loaned it $28.8 billion to handle the theoretically hard to value assets. J.P. Morgan agreed to lick off the first $1.15 billion or so of losses, but that's as slutty as Morgan was willing to get. The value of Maiden's assets now stand at $28.9 billion, and the money owed the Fed remains at $28.8 billion.

The current value represents a $1.1 billion drop in Fund assets, according to Bloomberg.

On the surface that number does not seem too bad. Then again, most things on their surface look entirely adequate until you stop assuming surface represents substance.

Given all the hard to value assets floating about, with banks pulling new loses out of there no no spots every quarter, an average bloke is left to wonder exactly how the Fed arrives at so specific (and reassuring) a value.

The Fed is valuing the portfolio in accordance with accounting guidelines that call for an estimate based on sales in an ``orderly market,'' rather than a hypothetical forced liquidation. The value doesn't necessarily reflect what the securities would fetch if Maiden Lane tried to sell today.

(Bloomberg)

Ah... oh... that's how they did the math. It's an estimate based on a theoretical world where everything is orderly. But we know from the mere existence of Maiden Lane, there is no such thing as an orderly market. It does not yet exist or these assets managed by Blackrock Inc. could have been disposed of already.

So essentially the numbers quoted are a moving target and could be quite Candyland in their value.

All of this is meaningless for us though right? We are losing 600 Starbucks stores and have more pressing things to worry about. We stand in line at the grocery looking at the high prices; in the produce aisle we wonder if we should eat the tomato or not, and the risk of salmonella poisoning (the source of which remains unresolved) makes those red little orbs extra sexy. We have life and death taste issues to worry about and can't be bothered by what Bernanke is up to.

And yet it's important. If the Fed is both losing money on the portfolio, and further, is valuing it in somewhat fictive fashion, we can hardly expect the financial institutions holding gobs of this stuff to see their asset values firming. If your bank does not really know the value of what it has, or has to guess by assigning ever decreasing values, you can be sure banker Potter won't be lending to us.