Rep. Waxman Demands Details on Bear Stearns Collateral
April 7th, 2008 by Chris KinnanCongress is finally stirring on the broad new risks the Federal Reserve is taking as it intervenes to prop up financial asset prices. Rep. Henry Waxman sent a letter today to the central bank asking some good questions about the Bear Stearns deal and how $30 billion in new federal government collateral will be managed. (JP Morgan eats the first billion in losses so the risk to taxpayers on the deal is up to $29 billion.)
I am writing to request that you provide the Committee on Oversight and Government Reform with information about the selection of BlackRock Financial Management, Inc., to manage billions in assets that now appear to belong to the federal taxpayer.
According to your testimony before the Senate Banking Committee last week, BlackRock and its affiliates will serve the Federal Reserve as the “Asset Manager” responsible for managing the “portfolio supporting the $29 billion loan to be extended by the Federal Reserve in connection with the proposed acquisition of Bear Stearns by JP Morgan Chase.” This portfolio, which will be held in a limited liability company, is composed “largely of mortgage related assets” valued by Bear Steams at a market value of $30 billion on March 14,2008.
Only limited details are known about the Federal Reserve’s understandings with BlackRock. It appears, however, that BlackRock is now directly responsible for managing a $30 billion portfolio on behalf of the American taxpayer. If BlackRock does its job well, the taxpayers will be made whole or even experience a gain. If BlackRock is not successful, the taxpayers stand to lose billions of dollars. In effect, it appears that BlackRock is serving as a govemment contractor providing complex financial services to the Federal Reserve.
One question involves the award of this potentially lucrative position to BlackRock without competition.
Of course, BlackRock isn’t really the problem here, it is the erratic, secretive, and unprecedented actions by the Federal Reserve that have created this mess.
April 8th, 2008 at 1:47 am
How about the mess of the housing industry that the former Fed chairman Greenspan made by pushing ARMs so hard in the first place? The Fed has a lot to answer for sure on the current housing crisis.
April 8th, 2008 at 7:54 am
Greenspan never “pushed” ARMs but, in hindsight, some argue that he keep interest rates too low too long and that encouraged people to take ARMs (which carry interest rate risk but look less risky in a low interest rate environment).
Either way, it is important to note that the current problem is not really an ARM problem, as interest rates remain low….the borrowers in default at the moment either understated their income (common with no-doc loans), lost their jobs (too common in the midwest), were cheated by their lenders or brokers, or were betting aggressively that prices would rise before their ARMs reset.
April 9th, 2008 at 4:51 pm
ACtually, Greenspan himself said that ARMs were a good thing and thought they could help people who could otherwise not afford it to buy homes. He himself has said he was wrong about them, and has never disputed praising ARMs. I suppose we could argue about whether he “pushed” them or not, but he did sing their praises at a critical time. Having the Fed Chair tell America that ARMs could help them and were good ideas certainly has an impact, though, wouldn’t you say?
April 9th, 2008 at 8:24 pm
Exactly…
April 10th, 2008 at 12:10 pm
The facts! They burn!