June 15th, 2012
Econintersect: The Federal Reserve Bank of New York has announced that the final payments have been made to retire all three Maiden Lane account loans which supported the purchase of assets during the financial crisis. Although assets still remain in the accounts the loans from the New York Fed have been repaid in full with interest as of 14 June 2012. There were three Maiden Lane accounts formed to manage assets associated with Bear Stearns and AIG (NYSE:AIG) when those two firms collapsed. Assets still remain in two of the accounts.
JP Morgan Chase (NYSE:JPM) still has loans to be repaid from one of the funds (ML LLC, aka ML I). These were subordinate to the New York Fed and can now receive loan repayments from future asset sales, which are made through Black Rock Solutions acting as an agent for the New York Fed. The other fund with assets remaining, ML III LLC, will likewise have these assets sold as market conditions warrant, with part of the proceeds going to the New York Fed. The New York Fed will also receive the residual net profits from ML I after JP Morgan Chase has loans and interest repaid.
JP Morgan has loans involved for Maiden Lane because they were the recipient of the “corpse” of Bear Stearns in an arranged buyout-merger and managed the wind down of the dissolution of that firm. (See The New York Times, 17 March 2008).
The third fund, ML II LLC, has been completely retired as of 28 February 2012. The final accounting for that fund produced a $2.8 billion profit for the New York Fed. All Federal Reserve Bank profits are paid to the U.S. Treasury.
The graph below is what is currently displayed at the New York Fed website and does not display the transaction that closed the loans .
Click on graph for larger image.
The balance sheet summary for the three funds is shown in the following table from the New York Fed (this week's transactions not included).
Click on table for larger image.
Econintersect estimates that the repayment of principal and interest to JP Morgan will require between $1.6 billion and $2.4 billion from ML I, depending on how much of the remaining ten-year term is used. Thus the Fed (and therefore the taxpayer) could see as little as $1 billion profit (plus or minus) or as much as $2 billion when this fund is closed.
ML III could produce a return to the taxpayer as high as $6 billion when the fund is retired, according to Econintersect estimates. This should happen in less than two years if the historic rate of asset sales is maintained. At that time repayment of a $5 billion equity interest and accrued interest to AIG should leave a residual amount around $6 billion. This would provide a return on the $24 billion Fed loan of 25% plus nominal interest over a period of five years.
Econintersect makes the following rough estimates of the returns to the taxpayer that are likely when the entire Maiden Lane adventure is over:
ML I: 0.8% to 1.3% per year
ML II: 3.9% per year (This is a firm estimate, account has been closed.)
ML III: 4.6% per year
The above estimates were made using the current market valuations provided by the New York Fed.
(Editor’s note: I should do so well on money I put into a “bank.”)
The full press release by the New York Fed:
NEW YORK – The Federal Reserve Bank of New York today announced that its loans to Maiden Lane LLC (ML LLC) and Maiden Lane III LLC (ML III LLC) have been fully repaid with interest. The original amounts of these loans were $28.82 billion and $24.3 billion respectively. Maiden Lane II LLC repaid all of its obligations earlier this year.
William C. Dudley, president of the New York Fed, said, “This is a major milestone for the Bank and for the public. The successful repayment of the New York Fed’s loans to ML LLC and ML III LLC marks the retirement of the last remaining debts owed to the Bank that stemmed from the crisis-era interventions with Bear Stearns and AIG. The Maiden Lane entities were established to protect the U.S. economy at a time of great economic stress, and I am pleased we were able to accomplish that policy objective and be fully repaid.”
The New York Fed, through BlackRock Solutions, will continue to sell the remaining assets from the ML LLC and ML III LLC portfolios as market conditions warrant and if the sales represent good value for the public. There is no fixed timeframe for these sales. In accordance with the LLCs’ agreements, proceeds from future sales in ML LLC will be used to retire the subordinated loan extended by JPMorgan Chase & Co., after which the New York Fed will receive all residual profits, and proceeds from future sales in ML III LLC will be used to repay the equity contribution extended by AIG, after which the New York Fed will receive two-thirds of residual profits.
The New York Fed will continue to provide information regarding any subsequent sales as part of its regular disclosures, including lists of any holdings sold by ML LLC and ML III LLC within the previous month and quarterly updates on total proceeds from sales. The repayments will be reflected in the June 21, 2012 publication of the H.4.1. For more information, visit Maiden Lane Transactions.
- Maiden Lane Transactions (Federal Reserve Bank of New York, 15 June 2012)
- Fed Closes Maiden Lane II; Treasury Profits (GEI News, 29 February 2012)
- JP Morgan Pays $2 a Share for Bear Stearns (Andrew Ross Sorkin, The New York Times, 17 March 2008)