Wall Street Journal, April 2, 2008 article

Behind Bear Stearns Loan: Investment Grade Assets

The collateral backing the Federal Reserve’s $29 billion loan to support the fire sale of Bear Stearns consisted of investment-grade assets — and the central bank expects to get its money back, Fed Chairman Ben Bernanke said.

Asked about the quality of the collateral, Mr. Bernanke said at today’s hearing: “I can say that the assets are entirely investment grade, they are entirely current and performing.” The investment advisor hired by the Fed, BlackRock Inc., is “reasonably confident that we would be able to recover the full amount” if the assets are disposed of on a “measured” basis rather than immediately, Mr. Bernanke said.

The Treasury Department told the Senate Finance Committee in a recent letter that the assets are “primarily mortgage-backed securities and related hedge fund investments” but offered no other details.

The valuation of the Bear Stearns assets was done on March 14, the day the Fed extended an initial loan to Bear via J.P. Morgan Chase, and that valuation included “adjustments for the fact that those markets are quite illiquid,” Mr. Bernanke said. He added that he believed the collateral, which formed the basis for the ultimate $29 billion loan to support Bear’s sale to J.P. Morgan, had been “independently evaluated” by BlackRock. “We did what we could to assure ourselves that the collateral was worth what it was supposed to be worth,” he said.

The Federal Reserve Bank of New York hired BlackRock to oversee its new collection of assets using a new company created for this purpose. Mr. Bernanke said the Fed first engaged the firm under a “fee to be negotiated later” and said that a competitive bidding process “was simply not practical” given the time constraints of getting the deal done in a matter of days. He sought to defer questions until Thursday, when officials from the New York Fed (which handled the loan) and Treasury Department are scheduled to testify before Congress with him. –Sudeep Reddy

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