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August 2009 Federal Reserve System Monthly Report on Credit and Liquidity Programs and the Balance Sheet Board of Governors of the Federal Reserve System Purpose The Federal Reserve prepares this monthly report as part of its efforts to enhance transparency in connection with its various programs to foster market liquidity and financial stability and to ensure appropriate accountability to the Congress and the public concerning policy actions taken to address the financial crisis. The report provides detailed information on the new policy tools that have been implemented since the summer of 2007. The Federal Reserve considers transparency about the goals, conduct, and stance of monetary policy to be fundamental to the effectiveness of monetary policy. The Federal Reserve Act sets forth Note: Financial information in this report has not been audited. Audited financial data are prepared annually and are available at www.federalreserve.gov/monetarypolicy/bst_fedfinancials.htm. the goals of monetary policy, specifically “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Since the summer of 2007, the Federal Reserve has undertaken a number of important steps aimed at providing liquidity to important financial markets and institutions to support overall financial stability. Financial stability is a critical prerequisite for achieving sustainable economic growth, and all of the Federal Reserve’s actions during the crisis have been directed toward achieving its statutory monetary policy objectives. For prior editions of this report along with other resources, please visit the Board’s public website at www.federalreserve.gov/monetarypolicy/ bst_reportsresources.htm. Contents Overview...............................................................................................................................................1 Recent Developments .............................................................................................................................1 System Open Market Account Holdings and Liquidity Arrangements with Foreign Central Banks .....4 System Open Market Account (SOMA) Portfolio........................................................................................4 Liquidity Swaps ....................................................................................................................................5 Lending Facilities to Support Overall Market Liquidity .....................................................................7 Lending to Depository Institutions............................................................................................................7 Lending to Primary Dealers.....................................................................................................................9 Commercial Paper Funding Facility (CPFF) .............................................................................................11 Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) ...............................11 Term Asset-Backed Securities Loan Facility (TALF)..................................................................................12 Lending in Support of Specific Institutions ........................................................................................16 Recent Developments ...........................................................................................................................16 Bear Stearns and Maiden Lane LLC .......................................................................................................16 American International Group (AIG) .......................................................................................................16 Maiden Lane II LLC ............................................................................................................................19 Maiden Lane III LLC ...........................................................................................................................20 Citigroup ............................................................................................................................................20 Bank of America..................................................................................................................................20 Federal Reserve System Financial Tables...........................................................................................21 Recent Developments ...........................................................................................................................21 Combined Statement of Income and Comprehensive Income.......................................................................21 SOMA Financial Summary ....................................................................................................................21 Loan Programs ....................................................................................................................................23 Consolidated Variable Interest Entities (VIEs)...........................................................................................24 Tables and Figures Overview...............................................................................................................................................1 Table 1. Selected Assets, Liabilities, and Capital Accounts of the Federal Reserve System ...............................1 Figure 1. Credit and Liquidity Programs and the Federal Reserve’s Balance Sheet...........................................2 System Open Market Account Holdings and Liquidity Arrangements with Foreign Central Banks .....4 Table 2. System Open Market Account (SOMA) Holdings ..........................................................................4 Table 3. Amounts Outstanding under Dollar Liquidity Swaps .......................................................................5 Lending Facilities to Support Overall Market Liquidity .....................................................................7 Table Table Table Table Table Table Table Table 4. Discount Window Credit Outstanding to Depository Institutions ......................................................7 5. Discount Window Credit Outstanding to Depository Institutions—Concentration at Largest Borrowers ...7 6. Lendable Value of Collateral Pledged by Borrowing Depository Institutions ......................................8 7. Lendable Value of Securities Pledged by Depository Institutions by Rating ........................................8 8. Discount Window Credit Outstanding to Depository Institutions—Percent of Collateral Used ...............9 9. Credit Outstanding to Primary Dealers .........................................................................................9 10. Concentration of Borrowing at the PDCF and TSLF .....................................................................9 11. PDCF Collateral .....................................................................................................................9 Table 12. PDCF Collateral by Rating .....................................................................................................10 Table 13. TSLF Collateral ....................................................................................................................10 Table 14. TSLF Collateral by Rating ......................................................................................................10 Table 15. CPFF Concentration of Largest Issuers .....................................................................................11 Table 16. CPFF Commercial Paper Holdings by Type ...............................................................................11 Table 17. CPFF Commercial Paper Holdings by Rating ............................................................................11 Table 18. AMLF Number of Borrowers and Amount Outstanding ...............................................................12 Table 19. AMLF Collateral by Rating ....................................................................................................12 Table 20. TALF Number of Borrowers and Loans Outstanding ..................................................................13 Table 21. TALF Collateral by Underlying Credit Exposure ........................................................................14 Table 22. TALF Collateral by Rating .....................................................................................................14 Table 23A. Issuers of Non-CMBS that Collateralize Outstanding TALF Loans .............................................14 Table 23B. Issuers of CMBS that Collateralize Outstanding TALF Loans ....................................................14 Lending in Support of Specific Institutions ........................................................................................16 Table 24. Fair Value Asset Coverage ......................................................................................................16 Table 25. Maiden Lane LLC Outstanding Principal Balance of Loans .........................................................16 Table 26. AIG Revolving Credit Facility..................................................................................................17 Figure 2. AIG Revolving Credit .............................................................................................................19 Table 27. Maiden Lane II LLC Outstanding Principal Balance of Senior Loan and Fixed Deferred Purchase Price .................................................................................................................................19 Table 28. Maiden Lane III LLC Outstanding Principal Balance of Senior Loan and Equity Contribution ..........20 Federal Reserve System Financial Tables...........................................................................................21 Table 29. Federal Reserve Banks Unaudited Combined Statement of Income and Comprehensive Income .........22 Table 30. SOMA Financial Summary .....................................................................................................23 Table 31. Interest Income—Loan Programs .............................................................................................23 Table 32. Assets and Liabilities of Consolidated Variable Interest Entities ....................................................24 1 Overview Recent Developments • Continued improvements in financial market conditions have been accompanied by further declines in credit extended through many of the Federal Reserve’s liquidity programs. • The Federal Reserve has continued to purchase large volumes of Treasury, agency, and agency-guaranteed mortgage-backed securities (MBS) under its largescale asset purchase programs. As part of these programs, the Federal Reserve is in the process of buying $300 billion of Treasury securities. On August 12, the Federal Open Market Committee announced that in order to promote a smooth transition in markets as these purchases of Treasury securities are completed, it has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. • The quarterly revaluations of the portfolio holdings of Maiden Lane LLC, Maiden Lane II LLC, and Maiden Lane III LLC as of June 30, 2009, resulted in a net increase in fair value of $1.5 billion. • Cash flows generated from the Maiden Lane II and Maiden Lane III portfolios are used to pay down the loans from the Federal Reserve Bank of New York (FRBNY). In the second quarter of 2009, those repayments totaled about $2.6 billion. • Consistent with U.S. generally accepted accounting principles (GAAP), as of July 29, 2009, the reported Table 1. Selected Assets, Liabilities, and Capital Accounts of the Federal Reserve System ($ billions) Item Current July 29, 2009 Change from June 24, 2009 Change from July 30, 2008 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected assets: Securities held outright . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. Treasury securities1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Agency securities1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Agency-guaranteed mortgage-backed securities2 . . . . . . . . . . . . . . . . . . . . . . . . Memo: TSLF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Memo: Overnight securities lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Memo: Net commitments to purchase MBS3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lending to depository and other financial institutions . . . . . . . . . . . . . . . . . . . . . . Primary, secondary, and seasonal credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TAF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PDCF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AMLF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign central bank liquidity swaps4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lending through other credit facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net portfolio holdings of CPFF LLC5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TALF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Support for specific institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit extended to AIG6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net portfolio holdings of Maiden Lane, Maiden Lane II, and Maiden Lane III LLCs7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected liabilities: Federal reserve notes in circulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits of depository institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. Treasury, general account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. Treasury, supplementary financing account . . . . . . . . . . . . . . . . . . . . . . . . . . . Other deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,003 −25 +1,083 1,345 696 106 543 3 9 135 275 36 238 0 1 88 98 67 30 104 42 +128 +43 +9 +76 −4 −5 +19 −73 −13 −45 0 −14 −31 −51 −57 +5 −1 −1 +866 +217 +106 +543 −120 −3 +135 +108 +19 +88 0 +1 +26 +98 +67 +30 +75 +42 62 1,954 * −26 +33 +1,074 871 747 58 200 1 50 +4 +2 −21 0 −4 +2 +75 +718 +54 +200 +1 +10 Note: Unaudited. Securities loans under the TSLF and the overnight facility are off-balance-sheet transactions. These loans are shown here as a memo item to indicate the portion of securities held outright that have been lent through this program. Components may not sum to total because of rounding. * Increase of less than $500 million. 1. Face value. 2. Current face value, which is the remaining principal balance of the underlying mortgages. Does not include unsettled transactions. 3. Current face value. These generally settle within 180 days and include commitments associated with outright transactions as well as dollar rolls. 4. Dollar value of the foreign currency held under these agreements valued at the exchange rate to be used when the foreign currency is returned to the foreign central bank. 5. Book value of net portfolio holdings, includes commercial paper holdings, net, and about $4 billion in other investments. 6. Excludes credit extended to Maiden Lane II and III LLCs. 7. Fair value, reflecting values as of June 30, 2009. Fair value reflects an estimate of the price that would be received upon selling an asset if the transaction were to be conducted in an orderly market on the measurement date. Fair values are updated quarterly. 2 Credit and Liquidity Programs and the Balance Sheet Figure 1. Credit and Liquidity Programs and the Federal Reserve’s Balance Sheet 3 August 2009 value of the AIG revolving credit extension has been reduced by a $1.3 billion adjustment for loan restructuring. This adjustment is related to the most recent loan modification, announced on March 2, 2009, which eliminated the existing floor on the interest rate. This restructuring adjustment is intended to recognize the economic effect of the reduced interest rate. • On August 17, the Federal Reserve Board and U.S. Treasury Department announced the extension of the Term Asset-Backed Securities Loan Facility (TALF) through March 31, 2010, for newly issued ABS and legacy CMBS, and through June 30, 2010, for newly issued CMBS. They also announced that they do not anticipate any further additions to the types of collateral that will be eligible for the facility. • On August 19, the Federal Reserve announced changes to the lending margins on discount window collateral that will take effect on October 19. The Federal Reserve periodically reviews its collateral valuation practices, and the new collateral margins reflect the results of a broad-based review of methodology and data sources that began before the current financial crisis. For more information on the upcoming changes to collateral margins, see the Discount Window and Payments System Risk public website at www.frbdiscountwindow.org. • As part of the Federal Reserve’s ongoing efforts to enhance transparency, the Federal Reserve Bank of New York has made available agreements with certain vendors that are related to its financial stability and liquidity activities (see www.newyorkfed.org/ aboutthefed/vendor_information.html). 4 Credit and Liquidity Programs and the Balance Sheet System Open Market Account Holdings and Liquidity Arrangements with Foreign Central Banks System Open Market Account (SOMA) Portfolio Recent Developments • The SOMA portfolio has continued to expand in recent weeks, reflecting Federal Reserve purchases of securities under the large-scale asset purchase programs (LSAPs) announced by the Federal Open Market Committee (FOMC). As part of these programs, the Federal Reserve is in the process of buying $300 billion of Treasury securities. On August 12, the Federal Open Market Committee announced that in order to promote a smooth transition in markets as these purchases of Treasury securities are completed, it has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. • As of July 29, the Federal Reserve had about $220 billion in Treasury securities, $105 billion in agency debt, and $543 billion in MBS as part of the FOMC’s LSAPs. The settled transactions to date have increased the size of the SOMA portfolio to $1,339 billion, nearly three times the level prevailing in August 2008. • So far, about 80 percent of the Treasuries purchased have been nominal Treasury securities in the 2- to 10-year maturity range, and about 14 percent have been in maturities greater than 10 years. The remainder of the purchases has been in Treasury InflationProtected Securities (TIPS) and nominal securities maturing in less than two years. • As of July 29, approximately 82 percent of SOMA MBS settled holdings are in 4 and 4.5 percent coupon securities. • On August 17, the Federal Reserve Bank of New York announced that it has streamlined the set of external investment managers for the agencyguaranteed mortgage-backed securities purchase program, reducing the number of investment managers from four to two. These changes are not performance related. The FRBNY had anticipated that it would make adjustments to its use of external investment managers as it gained more experience with the program. Background Open market operations (OMOs)—the purchase and sale of securities in the open market by a central bank—are a key tool used by the Federal Reserve in the implementation of monetary policy. Historically, the Federal Reserve has used OMOs to adjust the supply of reserve balances so as to keep the federal funds rate around the target federal funds rate established by the FOMC. OMOs are conducted by the Trading Desk at the Federal Reserve Bank of New York (FRBNY), which acts as agent for the FOMC. The range of securities that the Federal Reserve is authorized to purchase and sell is relatively limited. The authority to conduct OMOs is found in section 14 of the Federal Reserve Act. OMOs can be divided into two types: permanent and temporary. Permanent OMOs are outright purchases or sales of securities for the System Open Market Account (SOMA), the Federal Reserve’s portfolio. Permanent OMOs are generally used to accommodate the longer-term factors driving the expansion of the Federal Reserve’s balance sheet, principally the trend growth of currency in circulation. The composition of the SOMA is shown in Table 2. Temporary OMOs are typically used to address reserve needs that are deemed to be transitory in nature. These operations are either repurchase agreements (repos) or reverse repurchase agreements (reverse repos). Under a repo, the Trading Desk buys a security under an agreement to resell that security in the future. A repo is the economic equivaTable 2. System Open Market Account (SOMA) Holdings As of July 29, 2009 Security type Total par value ($ billions) U.S. Treasury bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. Treasury notes and bonds . . . . . . . . . . . . . . . . . . . . . . . . Treasury Inflation-Protected Securities1 . . . . . . . . . . . . . . . Agency securities2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Agency-guaranteed mortgage-backed securities3 . . . . . . Total SOMA holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 628 44 106 543 1,339 Note: Unaudited. 1. Does not reflect inflation compensation of about $5 billion. 2. Direct obligations of Fannie Mae, Freddie Mac, and Federal Home Loan Banks. 3. Guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Current face value of the securities, which is the remaining principal balance of the underlying mortgages. Does not include unsettled transactions. 5 August 2009 lent of a collateralized loan, in which the difference between the purchase and sale prices reflects the interest on the loan. Each OMO affects the Federal Reserve’s balance sheet; the size and nature of the effect depend on the specifics of the operation. The Federal Reserve publishes its balance sheet each week in the H.4.1 statistical release, “Factors Affecting Reserve Balances of Depository Institutions and Consolidated Statement of Condition of Reserve Banks.” The release separately reports securities held outright, repos, and reverse repos (www.federalreserve.gov/releases/h41). The Federal Reserve’s approach to the implementation of monetary policy has evolved considerably since 2007, and particularly so since late 2008. The FOMC has established a near-zero target range for the federal funds rate, implying that the very large volume of reserve balances provided through the various liquidity facilities is consistent with the FOMC’s funds rate objectives. In addition, open market operations have provided increasing amounts of reserve balances. To help reduce the cost and increase the availability of credit for the purchase of houses, on November 25, 2008, the Federal Reserve announced that it would buy direct obligations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks and mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. The Federal Reserve determined that supporting the MBS “dollar roll” market promotes the goals of the MBS purchase program. Dollar roll transactions, which consist of a purchase of securities combined with an agreement to sell securities in the future, provide short-term financing to the MBS market. Because of principal and interest payments and occasional delays in the settlement of transactions, the Federal Reserve also has some cash associated with the mortgage-backed securities purchase program. The FOMC has authorized purchases of up to $1.25 trillion of agency MBS and up to $200 billion of agency direct obligations by the end of this year. The Federal Reserve’s outright holdings of mortgage-backed securities are reported weekly in tables 1, 3, 9, and 10 of the H.4.1 statistical release. In March 2009, the FOMC announced that it would also purchase up to $300 billion of longer-term Treasury securities over the next six months to help improve conditions in private credit markets. The Federal Reserve has purchased a range of securities across the maturity spectrum, including TIPS. The bulk of purchases have been in intermediate maturities. The Federal Reserve conducts purchases through regular auctions, with the auction results posted to the FRBNY website at www.newyorkfed.org/markets/ openmarket.html. Liquidity Swaps Recent Developments • Use of the Federal Reserve’s foreign central bank dollar liquidity swaps has continued to decline, consistent with a general improvement of conditions in short-term funding markets. • As shown in Table 3, as of July 29, total dollar liquidity extended to foreign central banks had dropped to $88 billion. Background Because of the global character of bank funding markets, the Federal Reserve has worked with other central banks in providing liquidity to financial markets and institutions. As part of these efforts, the FRBNY has entered into agreements to establish temporary reciprocal currency arrangements (central bank liquidity swap lines) with a number of foreign central banks. Two types of temporary swap lines have been established—dollar liquidity lines and foreign-currency liquidity lines. The FRBNY operates swap lines under the authority in section 14 of the Federal Reserve Act and in compliance with authorizations, policies, and procedures established by the FOMC. Dollar Liquidity Swaps On December 12, 2007, the FOMC announced that it had authorized dollar liquidity swap lines with the European Central Bank and the Swiss National Bank to provide liquidity in U.S. dollars to overseas markets. Subsequently, the FOMC authorized dollar liquidity Table 3. Amounts Outstanding under Dollar Liquidity Swaps Central bank Amount ($ billions) 7/29/2009 Amount ($ billions) 12/31/2008 Bank of Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . Banco de Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . European Central Bank . . . . . . . . . . . . . . . . . . . . Swiss National Bank . . . . . . . . . . . . . . . . . . . . . . . Bank of Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank of England . . . . . . . . . . . . . . . . . . . . . . . . . . . Danmarks Nationalbank . . . . . . . . . . . . . . . . . . . Reserve Bank of Australia . . . . . . . . . . . . . . . . . Sveriges Riksbank . . . . . . . . . . . . . . . . . . . . . . . . . Norges Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve Bank of New Zealand . . . . . . . . . . . . Bank of Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Banco Central do Brasil . . . . . . . . . . . . . . . . . . . Monetary Authority of Singapore . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 3 51 * 9 1 3 0 12 1 0 8 0 0 88 0 0 291 25 123 33 15 23 25 8 0 10 0 0 554 Note: Unaudited. Components may not sum to totals because of rounding. * Less than $500 million. 6 swap lines with additional central banks. The FOMC has authorized through February 1, 2010, arrangements between the Federal Reserve and each of the following central banks: the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Canada, the Bank of Japan, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, Norges Bank, the Monetary Authority of Singapore, Sveriges Riksbank, and the Swiss National Bank. Swaps under these lines consist of two transactions. When a foreign central bank (FCB) draws on its swap line with the FRBNY, the FCB sells a specified amount of its currency to the FRBNY in exchange for dollars at the prevailing market exchange rate. The FRBNY holds the foreign currency in an account at the FCB. The dollars that the FRBNY provides are deposited in an account that the FCB maintains at the FRBNY. At the same time, the FRBNY and the FCB enter into a binding agreement for a second transaction that obligates the FCB to buy back its currency on a specified future date at the same exchange rate. The second transaction unwinds the first. Because the swap transaction will be unwound at the same exchange rate used in the initial transaction, the recorded value of the foreign currency amounts is not affected by changes in the market exchange rate. At the conclusion of the second transaction, the FCB pays interest at a marketbased rate to the FRBNY. When the FCB lends the dollars it obtained by drawing on its swap line to institutions in its jurisdiction, the dollars are transferred from the FCB account at the FRBNY to the account of the bank that the borrowing institution uses to clear its dollar transactions. The FCB remains obligated to return the dollars to the Credit and Liquidity Programs and the Balance Sheet FRBNY under the terms of the agreement, and the FRBNY is not a counterparty to the loan extended by the FCB. The FCB bears the credit risk associated with the loans it makes to institutions in its jurisdiction. The foreign currency that the Federal Reserve acquires is an asset on the Federal Reserve’s balance sheet. In tables 1, 9, and 10 of the weekly H.4.1 statistical release, the dollar value of amounts that the foreign central banks have drawn but not yet repaid is reported in the line entitled “Central bank liquidity swaps.” Dollar liquidity swaps have maturities ranging from overnight to three months. Table 2 of the H.4.1 statistical release reports the remaining amount of outstanding dollar liquidity swaps. Foreign-Currency Liquidity Swap Lines On April 6, 2009, the FOMC announced foreigncurrency liquidity swap lines with the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank. These lines are designed to provide the Federal Reserve with the capacity to offer liquidity to U.S. institutions in foreign currency should a need arise. These lines mirror the existing dollar liquidity swap lines, which provide FCBs with the capacity to offer U.S. dollar liquidity to financial institutions in their jurisdictions. If drawn upon, the foreign-currency swap lines would support operations by the Federal Reserve to address financial strains by providing liquidity to U.S. institutions in amounts of up to £30 billion (sterling), €80 billion (euro), ¥10 trillion (yen), and CHF 40 billion (Swiss francs). The FOMC has authorized these liquidity swap lines through February 1, 2010. So far, the Federal Reserve has not drawn on these swap lines. 7 August 2009 Lending Facilities to Support Overall Market Liquidity Lending to Depository Institutions Table 5. Discount Window Credit Outstanding to Depository Institutions—Concentration at Largest Borrowers Recent Developments For four weeks ending July 29, 2009 • Credit provided to depository institutions through the discount window and the Term Auction Facility (TAF) has continued to decline, primarily reflecting reductions in loans outstanding under the TAF. • Recent TAF auctions have been undersubscribed and, as a result, the auction rate has been equal to the minimum bid rate of 25 basis points for some time. • The August TAF auctions have been reduced in size to $100 billion from $125 billion in July. The Federal Reserve anticipates that TAF auction sizes will gradually be reduced further if market conditions continue to improve in coming months. • As indicated in Table 6, total collateral pledged by depository institutions with discount window loans outstanding on July 29 was $658 billion, well over twice the amount of credit outstanding. • On August 19, the Federal Reserve announced changes to the lending margins on discount window collateral that will take effect on October 19. The Federal Reserve periodically reviews its collateral valuation practices, and the new collateral margins reflect the results of a broad-based review of methodology and data sources that began before the current financial crisis. For more information on the upcoming changes to collateral margins, see the Discount Window and Payments System Risk public website www.frbdiscountwindow.org. Table 4. Discount Window Credit Outstanding to Depository Institutions Daily average borrowing for each class of borrower over four weeks ending July 29, 2009 Type and size of borrower Commercial banks3 Assets: more than $50 billion . . . . . . . . . . . Assets: $5 billion to $50 billion . . . . . . . . . Assets: $250 million to $5 billion . . . . . . . Assets: less than $250 million . . . . . . . . . . . Thrift institutions and credit unions . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average number of borrowers1 Average borrowing ($ billions)2 22 53 145 105 46 371 133 130 17 1 8 290 Note: Includes primary, secondary, seasonal, and Term Auction Facility credit. Size categories based on total domestic assets as of March 31, 2009. Components may not sum to totals because of rounding. 1. Average daily number of depository institutions with credit outstanding. Over this period, a total of 534 institutions borrowed. 2. Average daily borrowing by all depositories in each category. 3. Includes branches and agencies of foreign banks. Ranking Rank by amount of borrowing Top five . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Next five . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of borrowers Daily average borrowing ($ billions) 5 5 361 371 94 45 150 290 Note: Amount of primary, secondary, seasonal, and TAF credit extended to the top five and next five borrowers on each day, as ranked by daily average borrowing. Components may not sum to totals because of rounding. Background The discount window helps to relieve liquidity strains for individual depository institutions and for the banking system as a whole by providing a source of funding in time of need. Much of the statutory framework that governs lending to depository institutions is contained in section 10B of the Federal Reserve Act, as amended. The general policies that govern discount window lending are set forth in the Board’s Regulation A. Depository institutions have, since 2003, had access to three types of discount window credit—primary credit, secondary credit, and seasonal credit. Primary credit is available to depository institutions in generally sound financial condition with few administrative requirements. Secondary credit may be provided to depository institutions that do not qualify for primary credit, subject to review by the lending Reserve Bank. Seasonal credit provides short-term funds to smaller depository institutions that experience regular seasonal swings in loans and deposits. In December 2007, the Federal Reserve introduced the TAF, which provides credit through an auction mechanism to depository institutions in generally sound financial condition. All regular discount window loans and TAF loans must be fully collateralized to the satisfaction of the lending Reserve Bank, with an appropriate “haircut” applied to the value of the collateral. In extending credit to depository institutions, the Federal Reserve closely monitors the financial condition of borrowers. Monitoring the financial condition of depository institutions is a four-step process designed to minimize the risk of loss to the Federal Reserve posed by weak or failing depository institutions. The first step is monitoring, on an ongoing basis, the safety and soundness of all depository institutions 8 that access or may access the discount window and the payment services provided by the Federal Reserve. The second step is identifying institutions whose condition, characteristics, or affiliation would present higher-thanacceptable risk to the Federal Reserve in the absence of controls on their access to Federal Reserve lending facilities and other Federal Reserve services. The third step is communicating—to staff within the Federal Reserve System and to other supervisory agencies, if and when necessary—relevant information about those institutions identified as posing higher risk. The fourth step is implementing appropriate measures to mitigate the risks posed by such entities. At the heart of the condition monitoring process is an internal rating system that provides a framework for identifying institutions that may pose undue risks to the Federal Reserve. The rating system relies mostly on information from each institution’s primary supervisor, including CAMELS ratings,1 to identify potentially problematic institutions and classify them according to the severity of the risk they pose to the Federal Reserve. Having identified institutions that pose a higher risk, the Federal Reserve then puts in place a standard set of risk controls that become increasingly stringent as the risk posed by an institution grows; individual Reserve Banks may implement additional risk controls to further mitigate risk if they deem it necessary. Collateral All extensions of credit by the Federal Reserve must be secured to the satisfaction of the lending Reserve Bank by “acceptable collateral.” Assets accepted as collateral are assigned a lendable value deemed appropriate by the Reserve Bank; lendable value is determined as the market price of the asset less a haircut. When a market price is not available, a haircut may be applied to the outstanding balance or a valuation based on an asset’s cash flow. Haircuts reflect credit risk and, for traded assets, the historical volatility of the asset’s price and the liquidity of the market in which the asset is traded; the Federal Reserve’s haircuts are generally in line with typical market practice. The Federal Reserve applies larger haircuts, and thus assigns lower lendable values, to assets for which no market price is available relative to comparable assets for which a market price is available. A borrower may be required to pledge additional collateral if its financial condition weakens. Collateral is pledged under the terms and 1. CAMELS is a rating system employed by banking regulators to assess the soundness of depository institutions. CAMELS is an acronym that stands for Capital, Assets, Management, Earnings, Liquidity, and Sensitivity. Credit and Liquidity Programs and the Balance Sheet Table 6. Lendable Value of Collateral Pledged by Borrowing Depository Institutions As of July 29, 2009 Type of collateral Lendable value ($ billions) Loans Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities U.S. Treasury/agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Municipal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate market instruments . . . . . . . . . . . . . . . . . . . . . . . MBS/Collateralized Mortgage Obligations (CMO): Agency-guaranteed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MBS/CMO: Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International (sovereign, agency, municipal, and corporate) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 31 66 38 7 29 39 52 33 156 57 658 Note: Collateral pledged by borrowers of primary, secondary, seasonal, and TAF credit as of the date shown. Total primary, secondary, seasonal, and TAF credit on this date was $274 billion. The lendable value of collateral pledged by all depository institutions, including those without any outstanding loans, was $1,565 billion. Lendable value is value after application of appropriate haircuts. Components may not sum to total because of rounding. conditions specified in the Federal Reserve Banks’ standard lending agreement, Operating Circular No. 10. (www.frbservices.org/files/regulations/pdf/ operating_circular_10.pdf). Discount window loans and extensions of credit through the TAF are made with recourse to the borrower beyond the pledged collateral. Nonetheless, collateral plays an important role in mitigating the credit risk associated with these extensions of credit. The Federal Reserve generally accepts as collateral for discount window loans and TAF credit any assets that meet regulatory standards for sound asset quality. This category of assets includes most performing loans and Table 7. Lendable Value of Securities Pledged by Depository Institutions by Rating As of July 29, 2009 Type of security and rating U.S. Treasury, agency, and agency-guaranteed securities Other securities AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aa/AA1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Baa/BBB3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment-grade4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lendable value ($ billions) 139 205 46 66 31 104 591 Note: Lendable value for all institutions that have pledged collateral, including those that were not borrowing on the date shown. Lendable value is value after application of appropriate haircuts. Components may not sum to total because of rounding. 1. Includes short-term securities with A-1+ rating or MIG 1 or SP-1+ municipal bond rating. 2. Includes short-term securities with A-1 rating or SP-1 municipal bond rating. 3. Includes short-term securities with A-2, P-2, A-3, or P-3 rating. 4. Determined based on credit review by Reserve Bank. 9 August 2009 Table 8. Discount Window Credit Outstanding to Depository Institutions—Percent of Collateral Used Table 10. Concentration of Borrowing at the PDCF and TSLF As of July 29, 2009 As of July 29, 2009 Percent of collateral used Number of borrowers Total borrowing ($ billions) Over 0 and under 25 . . . . . . . . . . . . . . . . . . . . . . . 25 to 50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 to 75 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 to 90 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Over 90 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 98 97 45 16 360 29 71 100 68 6 274 Note: Components may not sum to total because of rounding. most investment-grade securities, although for some types of securities (including commercial mortgagebacked securities, collateralized debt obligations, collateralized loan obligations, and certain non-dollardenominated foreign securities) only AAA-rated securities are accepted. Institutions may not pledge as collateral any instruments that they or their affiliates have issued. Additional collateral is required for discount window and TAF loans with remaining maturity of more than 28 days—for these loans, borrowing only up to 75 percent of available collateral is permitted. To ensure that they can borrow from the Federal Reserve should the need arise, many depository institutions that do not have an outstanding discount window or TAF loan nevertheless routinely pledge collateral. As shown in Table 8, most depository institutions that borrow from the Federal Reserve maintain collateral well in excess of their current borrowing levels. Lending to Primary Dealers Recent Developments • Borrowing at the Term Securities Lending Facility (TSLF) has fallen to a very low level as a result of further improvement in the conditions in money markets. There has been no borrowing at the Primary Dealer Credit Facility (PDCF) since mid-May. • On July 9, the Federal Reserve began offering Fannie Mae, Freddie Mac, and Federal Home Loan Banks securities held in the SOMA portfolio for loan in the overnight securities lending program. Table 9. Credit Outstanding to Primary Dealers As of July 29, 2009 Number of borrowers Borrowing under Primary Dealer Credit Facility (PDCF) ($ billions) Borrowing under Term Securities Lending Facility (TSLF) ($ billions) * 0 3 Note: Borrowing figures represent total amounts of PDCF and TSLF credit extended on July 29, 2009. The total reported for the TSLF represents the par value of securities lent. * Three or fewer borrowers. Rank by amount of borrowing Top five . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Next five . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of borrowers Daily average borrowing ($ billions) * NA NA * 3 NA NA 3 NA - Not applicable. * Three or fewer borrowers. Background On March 16, 2008, the Federal Reserve announced the creation of the PDCF, which is an overnight loan facility that provides funding to primary dealers and helps foster improved conditions in financial markets more generally. The Federal Reserve Board has authorized the extension of credit from the PDCF through February 1, 2010. While there is currently no borrowing under the PDCF, the Board believes that it is appropriate to continue to provide the PDCF as a backstop facility in the near term while financial market conditions remain somewhat fragile. PDCF credit is fully secured by collateral with appropriate haircuts—that is, the value of the collateral exceeds the value of the loan extended. Initially, eligible collateral was restricted to investment-grade securities. On September 14, 2008, the eligible set of collateral was broadened to closely match the types of instruments that can be pledged in the tri-party repurchase agreement systems of the two major clearing banks. On September 21 and November 23, 2008, the Federal Reserve Board authorized the extension of credit to a set of other securities dealers on terms very similar to the PDCF. Credit extended under either program is reported weekly in table 1 of the H.4.1 statistical release as “Primary dealer and other broker-dealer Table 11. PDCF Collateral As of July 29, 2009 Type of collateral Securities U.S. Treasury/agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Municipal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate market instruments . . . . . . . . . . . . . . . . . . . . . . . MBS/CMO: agency-guaranteed . . . . . . . . . . . . . . . . . . . . . MBS/CMO: other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International (sovereign, agency, and corporate) . . . . Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lendable value ($ billions) 0 0 0 0 0 0 0 0 0 0 0 Note: Collateral pledged by borrowers of PDCF and related credit to primary dealers as of the date shown. Credit on that date totaled $0 billion. Lendable value is value after application of appropriate haircuts. 10 Credit and Liquidity Programs and the Balance Sheet Table 12. PDCF Collateral by Rating Table 13. TSLF Collateral As of July 29, 2009 As of July 29, 2009 Type of collateral U.S. Treasury/agency securities . . . . . . . . . . . . . . . . . . . . . . . Other securities Aaa/AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aa/AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A ................................................... Baa/BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ba/BB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B/B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Caa/CCC or below . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrated securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lendable value ($ billions) 0 0 0 0 0 0 0 0 0 0 0 Note: Collateral pledged by borrowers of PDCF and related credit to primary dealers as of the date shown. Credit on that date totaled $0 billion. Lendable value is value after application of appropriate haircuts. Type of collateral Securities U.S. Treasury/agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Municipal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MBS/CMO: agency-guaranteed . . . . . . . . . . . . . . . . . . . . . MBS/CMO: other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lendable value ($ billions) 0 0 * 1 * 2 3 Note: Collateral pledged by borrowers of TSLF as of the date shown. Borrowing on the date shown was $3 billion. Lendable value is value after application of appropriate haircuts. Components may not sum to total because of rounding. * Less than $500 million. Collateral credit” and is included in “Other loans” in tables 9 and 10 of the H.4.1 release. On March 11, 2008, the Federal Reserve announced the creation of the TSLF. Under the TSLF, the FRBNY lends Treasury securities to primary dealers for 28 days against eligible collateral in two types of auctions. For so-called “Schedule 1” auctions, the eligible collateral consists of Treasury securities, agency securities, and agency-guaranteed mortgage-backed securities. For “Schedule 2” auctions, the eligible collateral includes Schedule 1 collateral plus highly rated private securities. In mid-2008, the Federal Reserve introduced the Term Securities Lending Facility Options Program (TOP), which offers options to primary dealers to draw upon short-term, fixed-rate TSLF loans from the SOMA portfolio in exchange for program-eligible collateral. The TOP is intended to enhance the effectiveness of TSLF by offering added liquidity over periods of heightened collateral market pressures, such as quarter-end dates. The Federal Reserve Board has authorized the extension of credit from the TSLF through February 1, 2010. TSLF Schedule 1 and TOP auctions, however, were suspended effective July 2009 in light of considerably lower use of the facility. The TSLF supports the liquidity of primary dealers and fosters improved conditions in financial markets more generally. Securities lent through these programs are reported weekly in table 1A of the H.4.1 statistical release. In addition to the TSLF and TOP, the Federal Reserve has long operated an overnight securities lending facility as a vehicle to address market pressures for specific Treasury and (since July 9, 2009) housingrelated government-sponsored enterprise (GSE) securities that are particularly sought after. Amounts outstanding under that program are, generally, fairly modest, and are also reported in table 1A of the H.4.1 statistical release. Eligible collateral for loans extended through the PDCF includes all assets eligible for tri-party repurchase agreement arrangements through the major clearing banks as of September 12, 2008. The amount of PDCF credit extended to any dealer may not exceed the lendable value of eligible collateral that the dealer has provided to the FRBNY. The collateral is valued by the clearing banks; values are based on prices reported by a number of private-sector pricing services widely used by market participants. Loans extended under the PDCF are made with recourse beyond the collateral provided by the primary dealer entity itself. Transactions under the TSLF involve lending securities rather than cash; a dealer borrows Treasury securities from the Federal Reserve and provides another security as collateral. Eligible collateral is determined by the Federal Reserve. Currently, two schedules of collateral are defined. Schedule 1 collateral is Treasury, agency, and agency-guaranteed mortgage-backed securities. Schedule 2 collateral is investment-grade corporate, municipal, mortgage-backed, and asset-backed securities, as well as Schedule 1 collateral. Haircuts on posted collateral are determined by the FRBNY using methods consistent with current market practices. Table 14. TSLF Collateral by Rating As of July 29, 2009 Type of collateral U.S. Treasury, agency, and agency-guaranteed securities Other securities Aaa/AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aa/AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A/A-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Baa/BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lendable value ($ billions) 1 * 2 * * 3 Note: Collateral pledged by TSLF borrowers on the date shown. Borrowing on that date was $3 billion. Lendable value is value after application of appropriate haircuts. TSLF collateral must be investment-grade. Components may not sum to total because of rounding. * Less than $500 million. 11 August 2009 Breakdowns of TSLF collateral by asset type and credit rating are shown in Tables 13 and 14, respectively. Commercial Paper Funding Facility (CPFF) Recent Developments • The amount of commercial paper held in the CPFF has recently declined considerably, most notably in the last week of July when a significant amount of paper in the CPFF matured and less than half was reissued into the facility.2 Improvements in market conditions have allowed some borrowers to obtain financing from private investors in the commercial paper market or from other sources. Background The CPFF is a facility, authorized under section 13(3) of the Federal Reserve Act, that supports liquidity in the commercial paper markets. The CPFF provides a liquidity backstop to U.S. issuers of commercial paper through a specially created limited-liability company (LLC) called the CPFF LLC. This LLC purchases three-month unsecured and asset-backed commercial paper directly from eligible issuers. The FRBNY provides financing to the LLC, and the FRBNY’s loan to the LLC is secured by all of the assets of the LLC, including those purchased with the cumulated upfront fees paid by the issuers. Breakdowns of commercial paper held in the CPFF LLC, by type and credit rating, are shown in Tables 16 and 17, respectively. The CPFF was announced on October 7, 2008 and purchases of commercial paper began on October 27. This program is administered by the FRBNY, and the assets and liabilities of the LLC are consolidated onto the balance sheet of the FRBNY. The net assets of the 2. The CPFF purchased a large amount of commercial paper when it began operation in late October 2008. As a result, a significant portion of the paper in the CPFF matures at the end of succeeding three-month intervals, including in late July 2009. Table 16. CPFF Commercial Paper Holdings by Type As of July 29, 2009 Type of commercial paper Value ($ billions) Unsecured commercial paper Issued by financial firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issued by nonfinancial firms . . . . . . . . . . . . . . . . . . . . . . . . Asset-backed commercial paper . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 * 46 63 Note: Components may not sum to total because of rounding; does not include $4 billion in accumulated earnings invested in other liquid assets. * Less than $500 million. Table 17. CPFF Commercial Paper Holdings by Rating As of July 29, 2009 Type of collateral Value ($ billions) Commercial paper with rating1 A-1/P-1/F-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Split-rated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Downgraded after purchase . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 3 * 63 Note: Components may not sum to total because of rounding; does not include $4 billion of other investments. 1. The CPFF purchases only U.S. dollar-denominated commercial paper (including asset-backed commercial paper (ABCP)) that is rated at least A-1/P-1/F-1 by Moody’s, S&P, or Fitch and, if rated by more than one of these rating organizations, is rated at least A-1/P-1/F-1 by two or more. “Split-rated” is acceptable commercial paper that has received an A-1/P-1/F-1 rating from two rating organizations and a lower rating from a third rating organization. Some pledged commercial paper was downgraded below split-rated after purchase; the facility holds such paper to maturity. * Less than $500 million. LLC are shown in tables 1, 9, and 10 of the weekly H.4.1 statistical release, and primary accounts of the LLC are presented in table 7 of the H.4.1. The Federal Reserve Board has authorized the extension of credit from the CPFF through February 1, 2010. Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) Recent Developments • The amount of credit outstanding under the AMLF has continued to decline in concert with the overall improvement in funding markets. Background Table 15. CPFF Concentration of Largest Issuers For four weeks ending July 29, 2009 Rank Rank by amount of commercial paper Top five issuers . . . . . . . . . . . . . . . . . . . . . . . . . Next five issuers . . . . . . . . . . . . . . . . . . . . . . . . Other issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of borrowers Daily average borrowing ($ billions) 5 5 31 41 43 23 35 102 Note: Amount of commercial paper held in the CPFF that was issued by the top five and the next five issuers on each day. Components may not sum to totals because of rounding. The AMLF is a lending facility that finances the purchases of high-quality asset-backed commercial paper from money market mutual funds (MMMFs) by U.S. depository institutions and bank holding companies. The program is intended to assist money funds that hold such paper in meeting the demands for redemptions by investors and to foster liquidity in the assetbacked commercial paper (ABCP) market and money markets more generally. The loans extended through 12 Credit and Liquidity Programs and the Balance Sheet Table 18. AMLF Number of Borrowers and Amount Outstanding Table 19. AMLF Collateral by Rating As of July 29, 2009 Daily average for four weeks ending July 29, 2009 Lending program Asset-Backed Commercial Paper Lending Facility (AMLF) . . . . . . . . . . . . . . . . . . . . . . . . Number of institutions Borrowing ($ billions) * 6 * Three or fewer borrowers. the AMLF are non-recourse loans; as a result, the Federal Reserve has rights to only the collateral securing the loan if the borrower elects not to repay. To help ensure that the AMLF is used for its intended purpose of providing a temporary liquidity backstop to MMMFs, the Federal Reserve has established a redemption threshold for use of the facility. Under this requirement, a MMMF must experience material outflows—defined as at least 5 percent of net assets in a single day or at least 10 percent of net assets within the prior five business days—before ABCP that it sells would be eligible collateral for AMLF loans to depository institutions and bank holding companies. Any eligible ABCP purchased from a MMMF that has experienced redemptions at these thresholds could be pledged to AMLF at any time within the five business days following the date that the threshold level of redemptions was reached. The initiation of the AMLF, announced on September 19, 2008, relied on authority under section 13(3) of the Federal Reserve Act. It is administered by the Federal Reserve Bank of Boston, which is authorized to make AMLF loans to eligible borrowers in all 12 Federal Reserve Districts. Lending through the AMLF is presented in table 1 of the weekly H.4.1 statistical release and is included in “Other loans” in tables 9 and 10 of the H.4.1. The Federal Reserve Board has authorized extension of credit through the AMLF through February 1, 2010. Collateral Collateral eligible for the AMLF is limited to ABCP that • was purchased by the borrower on or after September 19, 2008, from a registered investment company that holds itself out as a MMMF and has experienced recent material outflows; • was purchased by the borrower at the mutual fund’s acquisition cost as adjusted for amortization of premium or accretion of discount on the ABCP through the date of its purchase by the borrower; • was not rated lower than A-1, P-1, or F-1 at the time it was pledged to the Federal Reserve Bank of Bos- Type of collateral Value ($ billions) Asset-backed commercial paper with rating A-1/P-1/F-1 and not on watch for downgrade . . . . . . A-1/P-1/F-1 but on watch for downgrade1 . . . . . . . . . . Below A-1/P-1/F-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0 0 1 Note: Components may not sum to total because of rounding. 1. The AMLF accepts only U.S.-dollar denominated asset-backed commercial paper (ABCP) that is not rated lower than A-1, P-1, or F-1 by Moody’s, S&P, or Fitch, and (effective April 22, 2009) is not on watch for downgrade. Collateral that is on watch for downgrade or is rated below rated A-1/P-1/F-1 is ABCP that has deteriorated after it was pledged. ton (this would exclude paper that is rated A-1/P-1/ F-1 but is on watch for downgrade by any major rating agency); • was issued by an entity organized under the laws of the United States or a political subdivision thereof under a program that was in existence on September 18, 2008; and • has a stated maturity that does not exceed 120 days if the borrower is a bank, or 270 days if the borrower is a non-bank. The qualifying ABCP must be transferred to the Federal Reserve Bank of Boston’s restricted account at the Depository Trust Company before an advance, collateralized by that ABCP, will be approved. The collateral is valued at the amortized cost (as defined in the Letter of Agreement) of the eligible ABCP pledged to secure an advance. Advances made under the facility are made without recourse, provided the requirements in the Letter of Agreement are met. A breakdown of AMLF collateral by credit rating is shown in Table 19. Term Asset-Backed Securities Loan Facility (TALF) Recent Developments • On August 17, the Federal Reserve Board and U.S. Treasury Department announced the extension of the Term Asset-Backed Securities Loan Facility (TALF) through March 31, 2010, for newly issued ABS and legacy CMBS, and through June 30, 2010, for newly issued CMBS. They also announced that they do not anticipate any further additions to the types of collateral that will be eligible for the facility. • TALF subscriptions in July supported primary issuance of nine non-CMBS ABS deals worth a total of about $12 billion, of which approximately $5 billion was financed through the TALF. In addition, $636 million in TALF loans were extended against legacy CMBS collateral. 13 August 2009 Table 20. TALF Number of Borrowers and Loans Outstanding As of July 29, 2009 Lending program Term Asset-Backed Securities Loan Facility (TALF) . . . . . . . . . . . . . . . . . . . . . . . . . Non-CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of borrowers Borrowing ($ billions) 106 101 15 30 30 1 Note: Number of borrowers may not sum to total because borrowers may overlap. Dollars may not sum to total because of rounding. • The August 6 non-CMBS TALF operation financed about $7 billion in loan requests, supporting primary issuance of 12 ABS deals worth a total of about $9 billion. Background On November 25, 2008, the Federal Reserve announced the creation of the TALF under the authority of section 13(3) of the Federal Reserve Act. The TALF is a funding facility under which the FRBNY extends credit with a term of up to five years to holders of eligible ABS. The TALF is intended to assist financial markets in accommodating the credit needs of consumers and businesses of all sizes by facilitating the issuance of ABS collateralized by a variety of consumer and business loans; it is also intended to improve the market conditions for ABS more generally. The Federal Reserve Board initially authorized TALF loans through December 31, 2009, but subsequently authorized an extension of credit through the TALF until March 31, 2010, for loans against newly issued ABS and legacy CMBS, and until June 30, 2010, for newly issued CMBS. Eligible collateral initially included U.S. dollardenominated ABS that (1) are backed by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA) and (2) have a credit rating in the highest investment-grade rating category from two or more approved rating agencies and do not have a credit rating below the highest investment-grade rating category from a major rating agency. The loans provided through the TALF are nonrecourse loans, the Federal Reserve has rights to only the collateral securing the loan in the event that the borrower elects not to repay. Borrowers commit their own risk capital in the form of haircuts against the collateral, which serve as the borrower’s equity in the transaction and act as a buffer to absorb any decline in the collateral’s value in the event the loan is not repaid. The U.S. Treasury is providing protection against losses of up to $20 billion to the FRBNY using funds authorized under the Troubled Assets Relief Program (TARP) of the Emergency Economic Stabilization Act of 2008. On February 10, 2009, the Federal Reserve Board announced that it would consider expanding the size of the TALF to as much as $1 trillion and potentially broaden the eligible collateral to encompass other types of newly issued AAA-rated asset-backed securities, such as ABS backed by commercial mortgages or private-label (non-agency) ABS backed by residential mortgages. Any expansion of the TALF would be supported by the Treasury’s providing additional funds from the TARP. On March 19, the Federal Reserve Board announced that starting in April, the set of eligible collateral for TALF loans was being expanded to include ABS backed by loans or leases related to business equipment, leases of vehicle fleets, floorplan loans, and mortgage servicing advances. On March 23, the Federal Reserve and the Treasury announced that they were planning on expanding the list of eligible collateral for TALF loans to include previously issued securities—so-called “legacy securities”—as a complement to the Treasury’s PublicPrivate Investment Program. On May 1, the Federal Reserve announced that starting in June 2009, newly issued commercial mortgagebacked securities (CMBS) and securities backed by insurance premium finance loans would be eligible collateral under the TALF. The Federal Reserve also authorized TALF loans with maturities of five years, available for the June funding, to finance purchases of CMBS, ABS backed by student loans, and ABS backed by loans guaranteed by the Small Business Administration. The Federal Reserve indicated that up to $100 billion of TALF loans could have five-year maturities and that some of the interest on collateral financed with a five-year loan may be diverted toward an accelerated repayment of the loan, especially in the fourth and fifth years. On May 19, the Federal Reserve announced that starting in July 2009, certain high-quality CMBS issued before January 1, 2009 (legacy CMBS) would become eligible collateral under the TALF. The Federal Reserve indicated that eligible newly issued and legacy CMBS must have at least two AAA ratings from a list of approved ratings agencies—DBRS, Fitch, Moody’s Investors Service, Realpoint, or Standard & Poor’s— and must not have a rating below AAA from any of these rating agencies. More broadly, the Federal Reserve announced that it was formalizing procedures for determining the set of rating agencies whose rat- 14 Credit and Liquidity Programs and the Balance Sheet Table 21. TALF Collateral by Underlying Credit Exposure Table 23A. Issuers of Non-CMBS that Collateralize Outstanding TALF Loans As of July 29, 2009 As of July 29, 2009 Type of collateral Value ($ billions) Asset-backed securities by underlying loan type Auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Newly Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premium finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Floorplan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Servicing advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Small business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Student loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1 0 1 17 1 * 0 1 * 4 33 Note: Components may not sum to total because of rounding. Data represent the face value of collateral. * Less than $500 million. ings would be accepted for various types of eligible collateral in the Federal Reserve’s credit programs. On August 17, the Federal Reserve Board and Treasury Department announced the extension of the TALF through March 31, 2010, for loans against newly issued ABS and legacy CMBS, and through June 30, 2010, for loans against newly issued CMBS collateral. They also announced that they do not anticipate any further additions to the types of collateral that will be eligible for the facility. Collateral and Risk Management Under the TALF, the FRBNY lends on a non-recourse basis to holders of certain asset-backed securities (ABS) backed by consumer, business, and commercial mortgage loans. Eligible collateral for the TALF includes U.S. dollar-denominated ABS that (1) have a long-term credit rating in the highest investment-grade rating category (for example, AAA) from two or more rating agencies and (2) do not have a long-term credit rating below the highest investment-grade rating category from a single rating agency. Eligible smallbusiness-loan ABS also include U.S. dollardenominated cash ABS for which all of the underlying credit exposures are fully guaranteed as to principal and interest by the full faith and credit of the U.S. government. All or substantially all of the credit exposures underlying eligible ABS must be exposures to U.S.-domiciled obligors or with respect to real propTable 22. TALF Collateral by Rating As of July 29, 2009 Type of collateral Value ($ billions) Asset-backed securities with rating AAA/Aaa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 33 Note: Components may not sum to total because of rounding. Issuers AH Mortgage Advance Trust 2009-ADV1 American Express Credit Account Master Trust AmeriCredit Automobile Receivables Trust 2009-1 Bank of America Auto Trust 2009-1 BMW Vehicle Lease Trust 2009-1 Cabela’s Credit Card Master Note Trust CarMax Auto Owner Trust 2009-1 CarMax Auto Owner Trust 2009-A Chase Issuance Trust Chesapeake Funding LLC Chrysler Financial Auto Securitization Trust 2009-A CIT Equipment Collateral 2009-VT1 Citibank Credit Card Issuance Trust Citibank Omni Master Trust CNH Equipment Trust 2009-B Discover Card Master Trust I First National Master Note Trust Ford Credit Auto Lease Trust 2009-A Ford Credit Auto Owner Trust 2009-A Ford Credit Auto Owner Trust 2009-B Ford Credit Auto Owner Trust 2009-C GE Capital Credit Card Master Note Trust Harley-Davidson Motorcycle Trust 2009-1 Harley-Davidson Motorcycle Trust 2009-2 Honda Auto Receivables 2009-2 Owner Trust Honda Auto Receivables 2009-3 Owner Trust Huntington Auto Trust 2009-1 John Deere Owner Trust 2009 MMCA Auto Owner Trust 2009-A Nissan Auto Lease Trust 2009-A Nissan Auto Receivables 2009-A Owner Trust PFS Financing Corp. SLM Private Education Loan Trust 2009-B SLM Private Education Loan Trust 2009-C Small Business Administration Participation Certificates Volkswagen Auto Lease Trust 2009-A World Financial Network Credit Card Master Note Trust World Omni Auto Receivables Trust 2009-A Table 23B. Issuers of CMBS that Collateralize Outstanding TALF Loans As of July 29, 2009 Issuers Banc of America Commercial Mortgage Inc Banc of America Commercial Mortgage Trust 2007-3 Bear Stearns Commercial Mortgage Securities Trust 2007-PWR15 Bear Stearns Commercial Mortgage Securities Trust 2007-PWR16 CD 2007-CD4 Commercial Mortgage Trust COMM 2006-7 Mortgage Trust Commercial Mortgage Loan Trust 2008-LS1 Commercial Mortgage Trust 2007-GG9 Commercial Mortgage Trust 2004-GG1 Credit Suisse Commercial Mortgage Trust Series 2007-C5 CSFB Commercial Mortgage Trust 2005-C1 CSFB Commercial Mortgage Trust 2005-C2 GMAC Commercial Mortgage Securities, Inc. Series 2006-C1 Trust GS Mortgage Securities Corporation II GS Mortgage Securities Trust 2006-GG6 J.P. Morgan Chase Commercial Mortgage Securities Trust 2006-CIBC16 J.P. Morgan Chase Commercial Mortgage Securities Trust 2006-CIBC17 J.P. Morgan Chase Commercial Mortgage Securities Trust 2007-LDP11 J.P. Morgan Chase Commercial Mortgage Securities Corp. LB-UBS Commercial Mortgage Trust 2005-C3 LB-UBS Commercial Mortgage Trust 2007-C2 Merrill Lynch Mortgage Trust 2004-KEY2 Merrill Lynch Mortgage Trust 2005-CKI1 Merrill Lynch Countrywide Commercial Mortgage Morgan Stanley Capital I Wachovia Bank Commercial Mortgage Trust August 2009 erty located in the United States or its territories. The underlying credit exposures of eligible ABS must be student loans, auto loans, credit card loans, loans or leases relating to business equipment, leases of vehicle fleets, floorplan loans, mortgage servicing advances, insurance premium finance loans, commercial mortgages, and loans guaranteed by the SBA. Except for ABS for which the underlying credit exposures are SBA-guaranteed loans, eligible newly issued ABS must be issued on or after January 1, 2009. Eligible legacy CMBS must be issued before January 1, 2009, must be senior in payment priority to all other interests in the underlying pool of commercial mortgages, and must meet certain other criteria designed to protect the Federal Reserve and the Treasury from credit risk. In 15 almost all cases, eligible collateral for a particular borrower must not be backed by loans originated or securitized by the borrower or by an affiliate of the borrower. The FRBNY’s loan is secured by the ABS collateral, with the FRBNY lending an amount equal to the market value of the ABS less a haircut. The Federal Reserve has set initial haircuts for each type of eligible collateral to reflect an assessment of the riskiness and maturity of the various types of eligible ABS. In addition, the U.S. Treasury Department—under the TARP—will provide $20 billion of credit protection to the FRBNY in connection with the TALF. Breakdowns of TALF collateral by underlying credit exposure and credit rating are shown in Tables 21 and 22, respectively. 16 Credit and Liquidity Programs and the Balance Sheet Lending in Support of Specific Institutions Recent Developments Table 25. Maiden Lane LLC Outstanding Principal Balance of Loans • As presented in Table 24, net income including changes in valuation for the quarter ended June 30, 2009, resulted in improvements to the fair value asset coverage of FRBNY loans to Maiden Lane and Maiden Lane III LLCs, while a net loss further reduced the coverage of the loan to Maiden Lane II LLC. ($ millions) • Cash flows generated from the Maiden Lane II and Maiden Lane III portfolios are used to pay down the loans from the FRBNY. As shown in Tables 27 and 28, in the second quarter of 2009 those repayments totaled about $2.6 billion. • Certain additional information on the portfolio composition of the Maiden Lane, Maiden Lane II, and Maiden Lane III LLCs, based on the June 30, 2009, revaluations, will be presented in the next monthly report. Principal balance at closing . . . . . . . . . . . . . . . . Most Recent Quarterly Activity Principal balance on 3/31/2009 (including accrued and capitalized interest) . . . . . . . . . . . . . . . . . . . . . . Accrued and capitalized interest 3/31/2009 to 6/30/2009 . . . . . . . . . . . . . . . . . . Repayment during the period from 3/31/2009 to 6/30/2009 . . . . . . . . . . . . . . . . . . Principal balance on 6/30/2009 . . . . . . . . . . . . FRBNY senior loan JPMC subordinate loan 28,820 1,150 29,123 1,202 36 15 0 29,159 0 1,217 Note: Unaudited. As part of the asset purchase agreement, JPMC made a loan to Maiden Lane LLC. For repayment purposes, this obligation is subordinated to the senior loan extended by the FRBNY. In the current financial crisis, the Federal Reserve has extended credit to certain specific institutions in order to avert disorderly failures that could result in severe dislocations and strains for the financial system as a whole and harm the U.S. economy. In certain other cases, the Federal Reserve has committed to extend credit, if necessary, to support important financial firms. Board authorized the FRBNY, under section 13(3) of the Federal Reserve Act, to extend credit to a Delaware limited liability company, Maiden Lane LLC, to fund the purchase of a portfolio of mortgage-related securities, residential and commercial mortgage loans, and associated hedges from Bear Stearns. In the second quarter of 2008, the FRBNY extended credit to Maiden Lane LLC. Details of the terms of the loan are published on the FRBNY website (www.newyorkfed.org/ markets/maidenlane.html). The assets of Maiden Lane LLC are presented weekly in tables 1, 9, and 10 of the H.4.1 statistical release. Additional details on the accounts of Maiden Lane LLC are presented in table 4 of the H.4.1. Bear Stearns and Maiden Lane LLC American International Group (AIG) In March 2008, the FRBNY and JPMorgan Chase & Co. (JPMC) entered into an arrangement related to financing provided by the FRBNY to facilitate the merger of JPMC and the Bear Stearns Companies Inc. In connection with the transaction, the Federal Reserve Recent Developments Background Table 24. Fair Value Asset Coverage ($ millions) Maiden Lane LLC . . . . . . . Maiden Lane II LLC . . . . . Maiden Lane III LLC . . . . Fair value asset coverage of FRBNY loan on 6/30/2009 Fair value asset coverage of FRBNY loan on 3/31/2009 (3,400) (2,371) (129) (3,771) (1,965) (3,435) Note: Unaudited. Fair value asset coverage is the amount by which the fair value of the net portfolio assets of each LLC (see Table 32) is greater or less than the outstanding balance of the loans extended by the FRBNY, including accrued interest. • Consistent with U.S. GAAP, as of July 29, 2009, the reported value of the AIG revolving credit extension has been reduced by a $1.3 billion adjustment for loan restructuring. This adjustment is related to the most recent loan modification, announced on March 2, 2009, which eliminated the existing floor on the interest rate. In accordance with GAAP, this restructuring adjustment is intended to recognize the economic effect of the reduced interest rate and will be recovered as the adjustment is amortized over the remaining term of the credit extension. The Federal Reserve expects that the credit extension, including interest and commitment fees under the modified terms, will be fully repaid. 17 August 2009 Table 26. AIG Revolving Credit Facility Borrower Borrowing ($ billions) Balance on June 24, 2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Principal drawdowns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Principal repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recapitalized interest & fees . . . . . . . . . . . . . . . . . . . . . . . . Restructuring allowance, net. . . . . . . . . . . . . . . . . . . . . . . . . Balance on July 29, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42.7 2.6 (2.4) 0.5 (1.3) 42.2 Note: Unaudited. Components may not sum to total because of rounding. • As shown in Table 26, the balance on the AIG revolving credit facility fell slightly during this reporting period, as a small net drawdown and quarterly recapitalization of interest was offset by the loan restructuring allowance. • AIG second quarter results: On August 7, 2009, AIG reported its first quarterly profit since the third quarter of 2007, as certain of its businesses stabilized and the company’s results reflected positive valuation changes. For the quarter ended June 30, 2009, AIG reported net income attributable to AIG of $1.8 billion, including net income attributable to AIG common shareholders of $311 million or $2.30 per diluted common share, compared with a net loss of $5.4 billion or $41.13 per diluted share in the second quarter of 2008. Second quarter 2009 adjusted net income was $2.0 billion, compared with an adjusted net loss of $1.3 billion in the second quarter 2008. In its second quarter 10-Q filing, AIG announced that it has extended its commitment to support American General Finance Corporation (AGF) and International Lease Finance Corporation (ILFC) through August 15, 2010. AIG disclosed that in addition to their cash flows from operations and proceeds from potential asset sales and securitizations, both companies will require support from AIG to meet their existing obligations. Also disclosed in the filing was management’s acknowledgement of the FRBNY and the U.S. Treasury’s commitment to the orderly restructuring of AIG and their commitment to continue to work with AIG to maintain its ability to meet its obligations as they come due. On July 31, 2009, Moody’s Investor Services downgraded AGF and ILFC (senior unsecured to Baa3 from Baa2, short term to Prime-3 from Prime-2) and placed the ratings on review for further possible downgrade. • Updates on asset divestitures: During the first six months of 2009 and through July 31, 2009, AIG entered into agreements to sell or complete the sale of operations and assets, excluding AIG Financial Products Corp. (AIGFP) assets, that had aggregate assets and liabilities with carrying values of $31.2 billion and $23.8 billion, respectively, at June 30, 2009, or the date of sale, or, in the case of Transat- lantic Holdings, Inc., deconsolidation. Aggregate net proceeds from these sales transactions, including proceeds applied to repay intercompany loan facilities, are expected to be approximately $8.0 billion. These transactions are expected to generate approximately $4.6 billion of aggregate net cash proceeds to repay outstanding borrowings and reduce the amount of the FRBNY revolving credit facility, after taking into account taxes, transaction expenses, and capital required to be retained for regulatory or ratings purposes. Gains and losses recorded in connection with the disposals of businesses include estimates that are subject to subsequent adjustment. Based on the transactions thus far, AIG does not believe that such adjustments will be material to future results of operations or cash flows. Noteworthy asset divestiture transactions since June 30, 2009, were as follows: — On July 1, 2009, AIG announced that it had closed the sale of 21st Century Insurance Group to Farmers Insurance Group, Inc., a subsidiary of Zurich Financial Services for $1.9 billion, consisting of $1.7 billion in cash and $200 million in face amount of subordinated, eurodenominated capital notes. AIG also announced that it had agreed to sell 100 percent of its ownership interest in Inversora Pichincha S.A. and Interdinco S.A., which comprise AIG’s consumer finance operations in Colombia, to Banco Pichincha, C.A. of Ecuador and other parties. Terms of the transaction were not disclosed. — On July 28, 2009, AIG announced that it had completed the sale of a majority of the U.S. life insurance premium finance business of AIG Credit Corp. and A.I. Credit Consumer Discount Company (A.I. Credit) to First Insurance Funding Corp. (FIFC), a subsidiary of Wintrust Financial Corporation of Lake Forest, Illinois, for approximately $679.5 million in cash. If certain conditions are met, FIFC will purchase certain specified additional life insurance premium finance assets for $61.2 million. — On July 29, 2009, AIG announced that it had entered into an agreement under which it will combine its consumer finance business in Poland, conducted through AIG Bank Polska S.A., into the Polish consumer finance business of Santander Consumer Finance S.A., which is conducted through Santander Consumer Bank, S.A. (SCB). In exchange, AIG will receive a 30 percent equity interest in SCB. At closing, all of the AIG intercompany debt facilities related to these entities will be repaid, and AIG will not be 18 Credit and Liquidity Programs and the Balance Sheet responsible for the future funding of the combined consumer finance businesses. • AIGFP is engaged in a multi-step process of unwinding its businesses and portfolios. In connection with that process, certain assets have been sold, or are under contract to be sold. The proceeds from these sales will be used to fund AIGFP’s winddown, and are not included in the asset divestiture amounts shown above. The FRBNY has waived the requirement under the FRBNY Credit Agreement that the proceeds of these specific pending sales be applied as a mandatory prepayment under the FRBNY Facility, which would result in a permanent reduction of the FRBNY’s commitment to lend to AIG. Instead, the FRBNY has given AIGFP permission to retain the proceeds of these completed sales, and has required that such proceeds received from certain future sales be used to voluntarily prepay the FRBNY Facility, with the amounts prepaid available for future reborrowing subject to the terms of the FRBNY Facility. • On July 15, 2009, AIG announced that it will accelerate steps to position American Life Insurance Company (ALICO) as an independent entity and seek an initial public offering and public listing in New York. Background • On July 27, 2009, AIG announced that it had formed a special-purpose vehicle (SPV) into which it intends to contribute the equity of AIU Holdings (AIU Holdings, Inc. and AIU Holdings LLC, collectively “AIU Holdings”), subject to receipt of applicable regulatory approvals. The SPV will consist of AIU Holdings’ Commercial Insurance, Foreign General Insurance, and Private Client Group businesses. The new company will operate under the brand name of Chartis. • Management updates: On March 2, 2009, the Federal Reserve and the Treasury announced an additional restructuring of the government’s assistance to AIG, designed to enhance the company’s capital and liquidity in order to facilitate the orderly completion of the company’s global divestiture program. Additional information on the restructuring is available at www.federalreserve.gov/ newsevents/press/other/20090302a.htm. On June 25, 2009, the FRBNY entered into agreements with AIG to carry out two transactions previously approved and announced on March 2, as part of the restructuring of the U.S. government’s assistance to AIG. Under these agreements, the FRBNY will receive preferred equity interests in two special-purpose vehicles to be formed to hold the outstanding common stock of American International Assurance Company Ltd. (AIA) and ALICO, two life insurance subsidiaries of AIG. In exchange, upon the closing of each transaction and the resulting issuance of preferred equity, the FRBNY will reduce the outstanding balance and amount available to AIG under the revolving credit facility. The closing of each transaction is expected to occur by the end of 2009, pending the completion of the necessary regulatory approval processes. These transactions, when consummated, will position both AIA and ALICO for future initial public offerings, depending on market conditions. Subject to certain — On August 4, 2009, AIG announced that its Board of Directors had elected Robert H. Benmosche President and Chief Executive Officer. Mr. Benmosche was also elected a member of the Board of Directors, and assumed his new roles on August 10, 2009, with the retirement of Chairman and Chief Executive Officer Edward M. Liddy. — On August 6, 2009, AIG announced that its Board of Directors had elected AIG Director Harvey Golub Non-Executive Chairman of the Board. Mr. Golub assumed his new role on August 10, 2009, succeeding retiring Chairman and CEO Edward M. Liddy. On September 16, 2008, the Federal Reserve announced that it would lend to AIG to provide the company with the time and flexibility to execute a value-maximizing strategic plan. Initially, the FRBNY extended an $85 billion line of credit to the company. The terms of the credit facility were disclosed on the Board’s website (www.federalreserve.gov/ monetarypolicy/bst_supportspecific.htm). Loans outstanding under this facility are presented weekly in table 1 of the H.4.1 statistical release and included in “Other loans” in table 9 of the H.4.1 release. On November 10, 2008, the Federal Reserve and the Treasury announced a restructuring of the government’s financial support to AIG. As part of this restructuring, two new limited liability companies (LLCs) were created, Maiden Lane II LLC and Maiden Lane III LLC. More detail on these two LLCs is reported in the remainder of this section. Additional information is included in tables 5 and 6 of the H.4.1 statistical release. (On October 8, 2008, the FRBNY was authorized to extend credit to certain AIG subsidiaries against a range of securities. This arrangement was discontinued after the establishment of the Maiden Lane II facility.) 19 August 2009 Figure 2. AIG Revolving Credit Note: The above data illustrate the amounts shown on the H.4.1 as Credit extended to the American International Group, Inc., which includes amounts owed to the Federal Reserve Bank of New York under the loan facility, including loan principal, all capitalized interest and fees, and the amortized portion of the initial commitment fee. The data exclude commercial paper sold by AIG and its subsidiaries to the Commercial Paper Funding Facility as well as amounts borrowed prior to November 21 under a securities borrowing arrangement. conditions, proceeds from any public offerings of the companies must first be used to redeem the FRBNY’s preferred interests, until the preferred interests have been redeemed in full. The interest rate on the loan to AIG is the threemonth LIBOR rate plus 300 basis points. The lending under this facility is secured by a pledge of assets of AIG and its primary nonregulated subsidiaries, including all or a substantial portion of AIG’s ownership interest in its regulated U.S. and foreign subsidiaries. Furthermore, AIG’s obligations to the FRBNY are guaranteed by certain domestic, nonregulated subsidiaries of AIG with more than $50 million in assets. Figure 2 shows the amount of credit extended to AIG over time through the credit facility, including the principal, interest, and commitment fees along with the facility ceiling. Maiden Lane II LLC Under section 13(3) of the Federal Reserve Act, the Federal Reserve Board authorized the FRBNY to lend up to $22.5 billion to a newly formed Delaware limited liability company, Maiden Lane II LLC, to fund the purchase of residential mortgage-backed securities (RMBS) from the securities lending portfolio of several regulated U.S. insurance subsidiaries of AIG. On December 12, 2008, the FRBNY loaned about $19.5 billion to Maiden Lane II LLC. Details of the terms of the loan are published on the FRBNY website (www. newyorkfed.org/markets/maidenlane2.html). The assets of Maiden Lane II LLC are presented in tables 1, 9, and 10 of the weekly H.4.1 statistical release. Additional detail on the accounts of Maiden Lane II LLC is presented in table 5 of the H.4.1 release. Table 27. Maiden Lane II LLC Outstanding Principal Balance of Senior Loan and Fixed Deferred Purchase Price ($ millions) Principal balance at closing . . . . . . . . . . . . Most Recent Quarterly Activity Principal balance on 3/31/2009 (including accrued and capitalized interest) . . . . . . . . . . . . . . . . . . . Accrued and capitalized interest 3/31/2009 to 6/30/2009 . . . . . . . . . . . . . . Repayment during the period from 3/31/2009 to 6/30/2009 . . . . . . . . . . . . . . Principal balance on 6/30/2009 . . . . . . . . . FRBNY senior loan AIG fixed deferred purchase price 19,494 1,000 18,638 1,012 64 8 (990) 17,712 0 1,020 Note: Unaudited. As part of the asset purchase agreement, AIG subsidiaries were entitled to receive from Maiden Lane II a fixed deferred purchase price plus interest on the amount. This obligation is subordinated to the senior loan extended by the FRBNY, and it reduced the amount paid by Maiden Lane II for the assets by a corresponding amount. 20 Credit and Liquidity Programs and the Balance Sheet Maiden Lane III LLC Citigroup Under section 13(3) of the Federal Reserve Act, the Federal Reserve Board authorized the FRBNY to lend up to $30 billion to a newly formed Delaware limited liability company, Maiden Lane III LLC, to fund the purchase of certain asset backed collateralized debt obligations (ABS CDOs) from certain counterparties of AIG Financial Products Corp. (AIGFP) on which AIGFP had written credit default swaps and similar contracts. On November 25, 2008, the FRBNY loaned about $24.4 billion to Maiden Lane III LLC. Details of the terms of the loan are published on the FRBNY website (www.newyorkfed.org/markets/maidenlane3. html). On November 23, 2008, the Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) jointly announced that the U.S. government would provide support to Citigroup in an effort to support financial markets. The terms of the arrangement are provided on the Federal Reserve Board’s website (www.federalreserve.gov/monetarypolicy/ bst_supportspecific.htm). Because the FRBNY has not extended credit to Citigroup under this arrangement, the commitment is not reflected in the H.4.1 statistical release. The assets of Maiden Lane III LLC are presented in tables 1, 9, and 10 of the weekly H.4.1 statistical release. Additional detail on the accounts of Maiden Lane III LLC is presented in table 6 of the H.4.1 release. Table 28. Maiden Lane III LLC Outstanding Principal Balance of Senior Loan and Equity Contribution ($ millions) Principal balance at closing . . . . . . . . . . . . . . . . Most Recent Quarterly Activity Principal balance on 3/31/2009 (including accrued and capitalized interest) . . . . . . . . . . . . . . . . . . . . . . Accrued and capitalized interest 3/31/2009 to 6/30/2009 . . . . . . . . . . . . . . . . . . Repayment during the period from 3/31/2009 to 6/30/2009 . . . . . . . . . . . . . . . . . . Principal balance on 6/30/2009 . . . . . . . . . . . . FRBNY senior loan AIG equity contribution 24,339 5,000 24,168 5,065 82 43 (1,636) 22,614 0 5,108 Note: Unaudited. As part of the asset purchase agreement, AIG purchased a $5 billion equity contribution, which is subordinated to the senior loan extended by FRBNY. Bank of America On January 16, 2009, the Treasury, the Federal Reserve, and the FDIC jointly announced that the U.S. government would provide support to Bank of America to support financial market stability. The terms of the support are provided on the Federal Reserve Board’s website (www.federalreserve.gov/monetarypolicy/ bst_supportspecific.htm). On May 7, 2009, following the release of the results of the Supervisory Capital Assessment Program, Bank of America announced that it did not plan to move forward with a part of this planned support—specifically, a residual financing arrangement authorized for the company and the related guarantee protections that would be provided by the Treasury and the FDIC with respect to an identified pool of approximately $118 billion in assets. Because the Federal Reserve has not extended credit to Bank of America under this arrangement, the commitment is not reflected in the H.4.1 statistical release. 21 August 2009 Federal Reserve System Financial Tables Recent Developments • As noted in Table 30, the daily average balance of the Federal Reserve System Open Market Account (SOMA) holdings exceeded $1 trillion during the first half of 2009. Total earnings from the portfolio amounted to $16 billion during this period; most of the earnings are attributable to the holdings of U.S. government and agency-guaranteed mortgage-backed securities (MBS) and central bank liquidity swaps. • As noted in Table 31, net earnings from Federal Reserve loan programs over the first half of the year amounted to $874 million; interest earned on the TAF loans accounted for most of the total. • As previously noted, consistent with U.S. generally accepted accounting principles (GAAP), the reported value of the AIG revolving credit extension has been reduced by an adjustment for loan restructuring. This adjustment is intended to recognize the economic effect of the reduced interest rate, and it will be recovered as it is amortized over the remaining term of the credit extension. The net impact of this adjustment is $1.4 billion as of June 30, 2009.3 The Federal Reserve expects that the credit extension, including interest and commitment fees under the modified terms, will be fully repaid. Background The Federal Reserve Banks annually prepare financial statements reflecting balances (as of December 31) and income and expenses for the year then ended. The Federal Reserve Bank financial statements also include the accounts and results of operations of several limited liability companies (LLCs) that have been consolidated with the FRBNY (the “consolidated LLCs”). The Board of Governors, the Federal Reserve Banks, and the consolidated LLCs are all subject to several levels of audit and review. The Reserve Banks’ financial statements and those of the consolidated LLC entities are audited annually by a registered independent public accountant retained by the Board of Governors. To ensure auditor independence, the Board requires that the external auditor be independent in all matters relating to the audit. Specifically, the external auditor may not perform services for the Reserve 3. As noted elsewhere in this report, as of July 29, 2009, the adjustment had a net impact of $1.3 billion. Banks or others that would place it in a position of auditing its own work, making management decisions on behalf of the Reserve Banks, or in any other way impairing its audit independence. In addition, the Reserve Banks, including the consolidated LLCs, are subject to oversight by the Board. The Board of Governors’ financial statements are audited annually by an independent audit firm retained by the Board’s Office of Inspector General. The audit firm also provides a report on compliance and on internal control over financial reporting in accordance with government auditing standards. The Office of Inspector General also conducts audits, reviews, and investigations relating to the Board’s programs and operations as well as of Board functions delegated to the Reserve Banks. Audited annual financial statements for the Reserve Banks and Board of Governors are available at www. federalreserve.gov/monetarypolicy/bst_fedfinancials. htm. On a quarterly basis, the Federal Reserve prepares unaudited updates of tables presented in the annual report. Tables 30 through 32 present information for the SOMA portfolio, the Federal Reserve loan programs, and the variable interest entities—the CPFF and Maiden Lane, Maiden Lane II, and Maiden Lane III LLCs—for the first half of this year. Combined Statement of Income and Comprehensive Income Table 29 presents unaudited combined Reserve Bank income and expense information for the first half of the year. This table is being presented for the first time in this report, and it will be updated quarterly. SOMA Financial Summary Table 30 shows the Federal Reserve’s average daily balance of assets and liabilities in the SOMA portfolio for the period from January 1, 2009, through June 30, 2009, the related interest income and expense, and the realized and unrealized gains and losses for the first half of the year. U.S. government, federal agency, and government-sponsored enterprise (GSE) securities, as well as agency-guaranteed MBS making up the SOMA portfolio, are recorded at amortized cost on a settlement-date basis. Rather than using a fair value presentation, an amortized cost presentation more appropriately reflects the Reserve Banks’ purpose for 22 Credit and Liquidity Programs and the Balance Sheet Table 29. Federal Reserve Banks Unaudited Combined Statement of Income and Comprehensive Income ($ millions) January 1, 2009 − June 30, 2009 Interest income: Loans to depository institutions (see table 31) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other loans (see table 31) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . System Open Market Account (see table 30) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated variable interest entities (table 32): Investments held by consolidated variable interest entities: Maiden Lane, Maiden Lane II, and Maiden Lane III LLCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial Paper Funding Facility LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,144 3,668 26,251 Interest expense: System Open Market Account (see table 30) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depository institution deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated variable interest entities (see table 32) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 992 133 1,188 25,063 704 1,594 17,141 Non-interest income (loss): System Open Market Account—realized and unrealized losses, net (see table 30)1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments held by consolidated variable interest entities (losses), net (see table 32): Maiden Lane, Maiden Lane II, and Maiden Lane III LLCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial Paper Funding Facility LLC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loan restructuring (see table 31)2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income from services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reimbursable services to government agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-interest (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,762) 5 (1,424) 358 190 136 (6,355) Operating expenses: Salaries and other benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assessments by the Board of Governors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Professional fees related to consolidated variable interest entities (see table 32) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,294 135 93 446 65 289 2,322 Net income prior to distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,386 3 (858) Change in funded status of benefit plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income prior to distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180 16,566 Distribution of comprehensive income: Dividends paid to member banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Remaining amount to be distributed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 679 15,887 Memo: Distributions to U.S. Treasury (Interest on Federal Reserve notes)4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,586 1. Includes unrealized gains and losses from investments denominated in foreign currencies, which are revalued daily at market exchange rates. 2. In accordance with GAAP, as of June 30, 2009, the AIG revolving credit extension was reduced by a $1.4 billion adjustment for loan restructuring. The adjustment is related to the loan modification, announced on March 2, 2009, which eliminated the existing floor on the interest rate. The restructuring adjustment will be recovered as it is amortized over the remaining term of the credit extension—for example, as noted elsewhere in this report, the unamortized value of this adjustment was valued at $1.3 billion as of July 29. 3. Represents the recognition of benefit plan deferred actuarial gains and losses and prior service costs. 4. The Board of Governors requires each Reserve Bank to distribute any remaining net earnings to the U.S. Treasury as interest on Federal Reserve notes, after providing for the payment of dividends and reservation of an amount necessary to equate surplus with capital paid-in. These distributions are made weekly based on estimated net earnings for the preceding week. The amount of each Bank’s weekly distribution to the U.S. Treasury would be affected by significant losses and increases in capital paid-in at a Reserve Bank, which would require that the Reserve Bank retains net earnings until the surplus is equal to the capital paid-in. The distributions to the U.S. Treasury are reported on an accrual basis; actual payments to the U.S. Treasury during the period from January 1, 2009, through June 30, 2009, were $10,161 million. holding these securities given the Federal Reserve’s unique responsibility to conduct monetary policy. Although the fair value of security holdings can be substantially greater than or less than the recorded value at any point in time, these unrealized gains or losses have no effect on the ability of the Reserve Banks to meet their financial obligations and responsibilities. As of June 30, 2009, the fair value of the U.S. government, federal agency, and GSE securities held in the SOMA, excluding accrued interest, was $816 bil- lion, the fair value of the mortgage-backed securities was $463 billion, and the fair value of investments denominated in foreign currencies was $25 billion, as determined by reference to quoted prices for identical securities. Purchases and sales of U.S. government securities are conducted by the FRBNY under authorization and direction from the Federal Open Market Committee (FOMC). The securities are bought from or sold to securities dealers and foreign and international 23 August 2009 Table 30. SOMA Financial Summary ($ millions) January 1, 2009 − June 30, 2009 Average daily balance1 Interest income/ Realized gains (expense) (losses) Unrealized gains (losses) Net earnings SOMA Assets U.S. government securities2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal agency and government-sponsored enterprise securities2 . . Mortgage-backed securities3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments denominated in foreign currencies4 . . . . . . . . . . . . . . . . . . Central bank liquidity swaps5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 526,953 54,050 233,501 24,243 308,020 7,735 1,154,502 9,504 614 4,968 162 1,880 13 17,141 (352) (352) (506) (506) 9,504 614 4,616 (344) 1,880 13 16,283 SOMA Liabilities Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,701 1,083,801 63 17,078 (352) (506) 63 16,220 Note: Unaudited. Components may not sum to total because of rounding. 1. Based on holdings at opening of business. 2. Face value. 3. Current face value of the securities, which is the remaining principal balance of the underlying mortgages. 4. Includes accrued interest. Investments denominated in foreign currencies are revalued daily at market exchange rates. 5. Dollar value of foreign currency held under these agreements valued at the exchange rate to be used when the foreign currency is returned to the foreign central bank. This exchange rate equals the market exchange rate used when the foreign currency was acquired from the foreign central bank. accounts maintained at the New York Reserve Bank at market prices. The Federal Reserve is also authorized by the FOMC to acquire U.S. government securities under agreements with dealers to repurchase the securities (securities purchased under agreements to resell) and securities sold under agreements to repurchase. tions in mortgage-backed securities are recorded on settlement dates, which can extend several months into the future. The SOMA holds foreign currency deposits and foreign government debt instruments denominated in foreign currencies with foreign central banks and the Bank for International Settlements. Central bank liquidity swaps are the foreign currencies that the Federal Reserve acquires and records as an asset (excluding accrued interest) on the Federal Reserve’s balance sheet. On January 5, 2009, the Federal Reserve began purchasing mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Transac- Table 31 summarizes the average daily loan balances and interest income of the Federal Reserve for the first half of 2009. The most significant loan balance is the TAF, which was established at the end of 2007. As noted earlier in this report, during 2008 the Federal Reserve established several lending facilities under authority of section 13(3) of the Federal Reserve Act. These included the AMLF, the PDCF, and credit extended to AIG. Amounts funded by the Reserve Banks under all these programs are recorded as loans Loan Programs Table 31. Interest Income—Loan Programs ($ millions) January 1, 2009 − June 30, 2009 Loan Programs Average daily balance1 Primary, secondary, and seasonal credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Term Auction Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total loans to depository institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Primary Dealer Credit Facility (PDCF) and other broker-dealer credit . . . Credit extended to American International Group, Inc. (AIG), net . . . . . . . Term Asset-Backed Securities Loan Facility (TALF) . . . . . . . . . . . . . . . . . . . . . Total loans to others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total loan programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total loan programs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,157 415,079 469,236 134 570 704 14,370 15,335 42,250 6,874 78,829 548,065 548,065 70 37 1,427 60 1,594 2,298 2,298 Interest income2 Provision for loan restructuring (1,424) (1,424) (1,424) (1,424) Net earnings 134 570 704 70 37 3 60 170 874 874 Note: Unaudited. Components may not sum to total because of rounding. 1. Based on holdings at opening of business. Average daily balance includes outstanding principal and capitalized interest net of unamortized deferred commitment fees and allowance for loan restructuring, and excludes undrawn amounts and credit extended to consolidated LLCs. 2. Interest income includes the amortization of the deferred commitment fees. 24 Credit and Liquidity Programs and the Balance Sheet Table 32. Assets and Liabilities of Consolidated Variable Interest Entities As of June 30, 2009 Total Maiden Lane VIEs Consolidated LLCs ($ millions) CPFF ML ML II ML III Fair value of portfolio and assets of the consolidated LLCs Assets and liabilities of the consolidated LLCs and the net position of senior and subordinated interest holders Net portfolio assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities of consolidated LLCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net portfolio assets available . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,147 (154) 114,993 29,390 (3,631) 25,759 15,343 (2) 15,341 22,489 (4) 22,485 67,222 (3,637) 63,585 Loans extended to the consolidated LLCs by FRBNY1 . . . . . . . . . . . . . . . . . . . . 110,810 29,159 17,712 22,614 69,485 Other beneficial interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 110,810 1,217 30,376 1,020 18,732 5,108 27,722 7,345 76,830 Cumulative change in net assets since the inception of the programs Allocation of the change in net assets to interest holders Allocated to FRBNY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allocated to other beneficial interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative change in net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,183 0 4,183 (3,400) (1,217) (4,617) (2,371) (1,020) (3,391) (129) (5,108) (5,237) (5,900) (7,345) (13,245) 3,668 (546) 0 5 (22) 3,105 0 3,105 930 (72) (30) (832) (22) (26) (30) 4 592 (132) (17) (2,496) (6) (2,059) (17) (2,042) 1,622 (169) (86) (4,391) (15) (3,039) (2,910) (129) 3,144 (373) (133) (7,719) (43) (5,124) (2,957) (2,167) 546 3,651 72 76 132 (1,910) 1,2 Current period income of the consolidated LLCs Summary of consolidated VIE net income for the current year through June 30, 2009, including a reconciliation of total consolidated VIE net income to the consolidated VIE net income recorded by FRBNY Portfolio interest income3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense on loans extended by FRBNY4 . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense—other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio holdings gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) of consolidated LLCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Net income (loss) allocated to other beneficial interests . . . . . . . . . . . . . Net income (loss) allocated to FRBNY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Add: Interest expense on loans extended by FRBNY, eliminated in consolidation4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) recorded by FRBNY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 40 373 (1,794) Note: Unaudited. Components may not sum to total because of rounding. 1. Includes accrued interest. 2. The other beneficial interest holder related to Maiden Lane LLC is JPMC, and for Maiden Lane II and Maiden Lane III LLCs it is AIG. 3. Interest income is recorded when earned, and it includes amortization of premiums, accretion of discounts, and paydown gains and losses. 4. Interest expense recorded by each VIE on the loans extended by the FRBNY is eliminated when the VIEs are consolidated in the FRBNY’s financial statements and, as a result, the consolidated VIEs’ net income (loss) recorded by the FRBNY is increased by this amount. by the Reserve Banks. Net earnings from these loan programs was $874 million during the first half of 2009. All loans must be fully collateralized to the satisfaction of the lending Reserve Bank, with an appropriate haircut applied to the collateral. At June 30, 2009, no loans were impaired, and an allowance for loan losses was not required. Consolidated Variable Interest Entities (VIEs) Table 32 summarizes the assets and liabilities of various consolidated VIEs previously discussed in this report. It also summarizes the net position of senior and subordinated interest holders and the allocation of the change in net assets to interest holders. The FRBNY is the sole beneficiary of the CPFF LLC and the primary beneficiary of the Maiden Lane LLCs. CPFF holdings are recorded at book value, which includes amortized cost and related fees. Maiden Lane, Maiden Lane II, and Maiden Lane III holdings are recorded at fair value, which reflects an estimate of the price that would be received upon selling an asset if the transaction were to be conducted in an orderly market on the measurement date. Consistent with generally accepted accounting principles, the assets and liabilities of these LLCs have been consolidated with the assets and liabilities of the FRBNY. As a consequence of the consolidation, the extensions of credit from the FRBNY to the LLCs are eliminated. “Net portfolio assets available” represent the net assets available to beneficiaries of the consolidated VIEs and for repayment of loans extended by the FRBNY. “Net income (loss) allocated to FRBNY” represents the allocation of the change in net assets and liabilities of the consolidated VIEs available for repayment of the loans extended by the FRBNY and other beneficiaries of the consolidated VIEs. The differences between the fair value of the net assets available and the face value of the loans (including accrued interest) are indicative of gains or losses that would have been incurred by the beneficiaries if the assets had been fully liquidated at prices equal to the fair value as of June 30, 2009.
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