The Federal Reserve has gotten a first-hand look at the kind of havoc residential and commercial real estate loans can wreak on a balance sheet in today’s market. It can now
fully appreciate – that’s empathize, not sympathize, mind you – the woes that lenders and mortgage investors have been facing since the downturn.
That’s because the Fed’s New York bank now finds itself in the very same boat, after two monolithic financial bailouts in 2008 – Bear Stearns and American International Group (AIG) – saddled the federal institution’s books with a heap of souring loans.
Last week, the Federal Reserve Bank of New York released details of the three portfolios it inherited from the two Wall Street giants. The records include 131 pages of holdings the Fed acquired from Bear Stearns in order to sweeten the deal for JPMorgan Chase to take over the failing behemoth, and 30 pages listing assets picked up from AIG as part of the federal government’s attempt to clean up the “too-big-to-fail” insurer.
As the Wall Street Journal described it, the documents show a complex hodgepodge of souring commercial property loans, securities backed by U.S. subprime loans, credit insurance written on troubled bond and mortgage insurers, loans tied to struggling hotels in Georgia and California, and credit-default swaps on bonds issued by the states of Nevada, California, and Florida.
Analysis by the research firm SNL Financial puts the total fair market value of the three different portfolios at $65 billion as of December 31 – that’s about equal to the fair value of assets held by the nation’s sixth largest bank, PNC Financial Services.
The Journal quoted David Zervos, a global fixed-income strategist at Jefferies & Co., as saying in a research note regarding the Fed’s acquired holdings, “To say this portfolio is a pile of junk is being unkind to junk.”
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