The Federal Reserve released its 2008 annual financial statements on Thursday. As broadly noted, and highlighted by the Fed itself, the statements revealed new information about the balance sheets and P&Ls of the consolidated special vehicles created to take on the distressed assets of Bear Stearns and AIG – known as the Maiden Lane LLCs.
The biggest revelation was, as Bloomberg observed, the Fed had suffered unrealised losses of $9.6bn come December 31st on $74bn worth of assets from those institutions.
The statements also provide measures of the quality and value of the assets, and details like geography and type in reference to mortgages securities. Properties in California and Florida, for example, accounted for 45 per cent of outstanding principal of the residential mortgages.
Over at ZeroHedge, “Tyler Durden” notes that declines in the value of commercial mortgage loans held in the Fed’s Bear Stearns bailout vehicle were 28 per cent. The value of residential mortgage loans, meanwhile, held fell 38 per cent.
The statements also reveal that some 40 per cent of the Fed’s Maiden-Lane assets are classified as ‘level 3‘, meaning they are considered too illiquid to be accounted for at fair value, and valuations of which are instead determined by the Fed’s own models. The remaining parts were classified Level 2, with valuations based on prices for similar instruments in active markets.
Zero Hedge concludes this may or may not be helpful in determining the scale of losses at toxic-asset bearing institutions like Citigroup; after all if the bank’s assets are comparable, the losses should be too. As he explains:
It is curious if these are comparable loans to the ones that Citi still has provisioned at 95 cents on the dollar on its balance sheet. Of course an incremental 23% loss provision on Citi’s massive CRE book would immediately destroy any excess/Tier 1/tangible/”what have you” capital the bank pretends to have. But then again this is merely and apples to apples comparison. As every sane person knows nothing rational in this market/country at this point makes any sense.
Of course as Bloomberg highlights the above are unrealized losses that only become real if the principal isn’t returned:
The $9.6 billion in losses are unrealized because they represent the difference between the fair value of the security under accounting rules and the amount outstanding. The losses become real if the principal isn’t returned.
As the Fed itself explains:
Although the fair value of security holdings can be substantially greater than or less than the recorded value at any point in time, these unrealized gains or losses have no effect on the ability of the Reserve Banks, as central bank, to meet their financial obligations and responsibilities and do not represent a risk to the Reserve Banks, their shareholders, or the public. The fair value is presented solely for informational purposes.
Which is very nice of them.
Overall, per this Dow Jones story:
the Fed suffered a $3.1 billion net loss on its Bears Stearns-related bailout, and a $257 million loss on its AIG efforts. But it made $1.7 billion in net income on its commercial paper-related lending. Altogether, the special lending programs cost the Fed $1.7 billion in net income.
Earnings from the Fed’s other operations (mainly gains from interest and sales of securities) meanwhile were more than sufficient to offset those losses — in total, the Fed delivering comprehensive earnings of $35.5 bn in 2008.
Out of those $31.7bn was transferred back to the Treasury – $2.9bn less than in 2007.