Washington: After months of litigation and political scrutiny, the Federal Reserve on Wednesday ended a policy of secrecy over its Bear Stearns Co's bailout.
In an announcement in a week of congressional recess and religious holidays, the central bank released details of securities bought to aid Bear Stearns' takeover by JPMorgan Chase & Co. Bloomberg News sued the Fed for that information.
The Fed's vehicle, known as Maiden Lane LLC, has securities backed by mortgages from lenders including Washington Mutual Inc. and Countrywide Financial Corp, loans that were made with limited borrower documentation. More than $1 billion (Dh3.67 billion) of them are backed by "jumbo" mortgages written by Thornburg Mortgage Inc, which now carry the lowest investment-grade rating. Jumbo loans were larger than government-sponsored mortgage buyers such as Fannie Mae could finance — $417,000 at the time.
"The Fed absorbed that risk on its balance sheet and is now seen to be holding problematic, legacy assets," said Vincent Reinhart, a resident scholar at the American Enterprise Institute in Washington who was the central bank's monetary- affairs director from 2001 to 2007. "There is both an impairment to its balance sheet and its reputation."
The Bear Stearns deal marked a turning point in the financial crisis for the Fed. By putting taxpayers at risk in financing the rescue, the central bank was engaging in fiscal policy, normally the domain of Congress and the US Treasury, said Marvin Goodfriend, a former Richmond Fed policy adviser.
The Bear Stearns assets include bets against the credit of bond insurers such as MBIA Inc., Financial Security Assurance Holdings Ltd. and a unit of Ambac Financial Group, putting the Fed in the position of wagering companies will stop paying their debts.
