Mortgage Securities Back
Fed Loan to Bear Stearns
By GREG IP and GREG HITT
April 2, 2008; Page C2
The securities backing a $29 billion Federal Reserve
loan to Bear Stearns Cos. consist primarily of "mortgage-backed
securities and related hedge investments," the Treasury Department said.
The disclosure, in a letter to the Senate Finance
Committee staff, is the first official comment on the securities behind
the controversial loan, made March 16 to facilitate J.P. Morgan Chase
& Co.'s takeover of Bear. The Fed made the loan with the Treasury's
approval, fearing Bear would otherwise fail, causing a serious
disruption in financial markets.
Based on the makeup of Bear's balance sheet, outsiders
have surmised that the securities consisted of residential and
commercial mortgage-backed securities. The Fed has declined to provide
any underlying detail so far. It has retained money manager and adviser
BlackRock Inc. to manage an independent entity that will hold the
securities.
The Fed will lend $29 billion to the entity, and J.P.
Morgan will lend $1 billion. Under the deal's terms, the Fed will be
repaid first from proceeds of the sale or maturity of the securities,
and J.P. Morgan will be paid last, so it will bear the first $1 billion
of losses.
Because any profit or loss would affect the annual
surplus the Fed remits to the Treasury from interest on its $800 billion
portfolio of securities and loans, either ultimately would be borne by
taxpayers.
"Treasury is very supportive of this agreement, as well
as the merger agreement between J.P. Morgan and Bear Stearns," the
Treasury's assistant secretary for legislative affairs, Kevin Fromer,
said in a letter to Russ Sullivan and Kolan Davis, the Democratic and
Republican staff directors respectively for the Senate Finance
Committee. Senate Finance Committee Chairman Max Baucus (D., Mont.) and
ranking Republican Charles Grassley of Iowa are pressing for details of
the deal.
The committee's inquiry is one of several on Capitol
Hill. Fed chief Ben Bernanke is expected to be grilled on the Bear
Stearns rescue Wednesday by the congressional Joint Economic Committee,
which is led by Sen. Charles Schumer (D., N.Y.).
Write to Greg Ip at
greg.ip@wsj.com1
and Greg Hitt at
greg.hitt@wsj.com2
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