Taxpayers are all but certain to take a hit on the securities the Federal Reserve accepted as part of JPMorgan Chase’s takeover of Bear Stearns, according to a report by a hedge fund that is an investor in JPMorgan.
The reports comes as the Fed said last week said it valued the bundle of assets it accepted as collateral for the $28.8 billion loan at $28.9 billion as of June 26.
That’s a drop of 3.7 percent from earlier this year.
JPMorgan is on the hook for just the first $1.15 billion of value below the loan amount – with the taxpayers having to make good for any additional deterioration in value of the collateral.
“We expect that the loss will exceed the $1 billion exposure for JPM,” the hedge fund said in the report, a copy of which has been seen by The Post on the basis of not identifying the name of the fund.
There has been limited information provided regarding the composition of the portfolio assets. JPMorgan has stated that they are subject to a confidentiality agreement with the Fed that prevents them from providing more details.
But the merger filings state that the portfolio consists of investment grade securities (largely mortgage related), residential and commercial mortgage loans classified as performing and related hedges.
A New York Fed spokesman told The Post that “investment grade” could be as low as BBB.
A JPMorgan presentation to investors, seen by The Post, stated that Bear Stearns had $33 billion of mortgage exposure – $16 billion in collateralized mortgage-backed securities, $15 billion in prime and Alt-A mortgages and $2 billion in subprime mortgages.
The Fed also said lending to securities dealers fell to zero for the first time since it began extending the credit in March, when Bear Stearns was taken over in a deal that was brokered by Washington officials.
The fact that no lending had recently occurred means that Wall Street is using the Fed only as an emergency backstop rather than as a continuing source of funding, Brian Stack, a senior economist at Macroeconomic Advisers LLC, told Bloomberg.
The Federal announced the collateral valuations will be updated on a quarterly basis, which is available to the public on its Web site.
But given that the Fed isn’t shining much of a flashlight on what’s inside the bundle of assets it holds, what the market really wants to know is whether JPMorgan will be forced to write-off its $1.15 billion exposure when it announces its next-quarterly results.