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Step forward the New York Fed.

Bank of America’s Jeffrey Rosenberg notes that the central bank has taken on a whole new role in assuming a $30bn portfolio of assets as part of the JPMorgan deal with Bear Stearns. “The extraordinary measures, while reassuring financial markets today, attest to the depths of the credit crunch and its constricting impact on the economy,” he writes.

Its loan to facilitate the deal is nothing of the sort:

The New York Fed will take, through a limited liability company formed for this purpose, control of a portfolio of assets valued at $30 billion as of March 14, 2008.

In other words, a SIV. Those assets, adds the statement, will be managed by BlackRock, so as to “minimize disruption to financial markets and maximise recovery value.”

Steven Waldman at Interfluidity runs through the details. The cited interest rates are largely irrelevant, he concludes. The economic effect of the arrangement is that the Fed is buying up MBS and other assets at the “value of the portfolio as marked to market by Bear Stearns on March 14, 2008.” His concern is what exactly is going into the fund:

Will this new “limited liability company” have contingent liabilities to any parties other than the Fed, J.P. Morgan, and BlackRock for ordinary management fees? Will its portfolio consist of any positions that would make the fund a counterparty, potentially with obligations to pay, not merely rights to receive, future cash?

Over the course of the credit squall, SIV sponsors found their reputational and de facto obligations to their vehicles went beyond their legal commitments. Waldman would like assurances that the Fed hasn’t just been made a derivatives counterparty of last resort.

Rosenberg writes that the transfer of these assets has removed the liquidity and mark to market triggers which would put pressure on a private balance sheet.

The guidelines for the management of those assets suggest that the Fed will not be an immediate seller. So the Fed will wait it out, in the hope that the recovery value for those assets will come out above the purchase price. A federally backed super-SIV, if you will.

Related links
Statement on Financing Arrangement of JPMorgan Chase’s Acquisition of Bear Stearns
Summary of Terms and Conditions Regarding the JPMorgan Chase Facility