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August 2010 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 about the range of programs and tools that have been implemented in response to the financial crisis and to ensure appropriate accountability to the Congress and the public. The Federal Reserve’s statutory mandate in conducting monetary policy is to foster maximum employment and stable prices. Financial stability is a critical prerequisite for achieving sustainable economic growth and price stability, and the Federal Reserve implemented a number of credit and liquidity programs to support the liquidity of financial institutions and to foster improved conditions in financial markets in response to the extraordinary strains that began to emerge in the summer of 2007. Note: Financial information in this report has not been audited. Financial data are audited annually and are available at www.federalreserve.gov/monetarypolicy/bst_fedfinancials.htm. This report provides detailed information on the policy tools that were implemented to address the financial crisis. In addition, it contains financial reporting for the second quarter of 2010. In fulfillment of Section 129 of the Emergency Economic Stabilization Act of 2008, additional information on the status of certain credit facilities implemented in response to the financial crisis is included as Appendix A of this report. Information related to the Federal Reserve’s temporary liquidity programs and facilities that have closed or expired is included in Appendix B of this report. For prior editions of this report and other resources, please visit the Board’s public website at www.federalreserve.gov/monetarypolicy/ clbsreports.htm. Contents Overview...............................................................................................................................................1 Recent Developments .............................................................................................................................1 System Open Market Account (SOMA) ...............................................................................................4 Domestic SOMA Portfolio ......................................................................................................................4 Liquidity Arrangements with Foreign Central Banks....................................................................................6 Lending Facilities to Support Overall Market Liquidity .....................................................................8 Lending to Depository Institutions............................................................................................................8 Term Asset-Backed Securities Loan Facility (TALF)..................................................................................10 Lending in Support of Specific Institutions ........................................................................................14 Quarterly Developments ........................................................................................................................14 Bear Stearns and Maiden Lane LLC .......................................................................................................14 American International Group (AIG) .......................................................................................................15 Maiden Lane II LLC ............................................................................................................................18 Maiden Lane III LLC ...........................................................................................................................19 Federal Reserve Banks’ Financial Tables ...........................................................................................22 Quarterly Developments ........................................................................................................................22 Combined Statement of Income and Comprehensive Income.......................................................................22 SOMA Financial Summary ....................................................................................................................22 Loan Programs Financial Summary.........................................................................................................24 Consolidated Variable Interest Entities (VIEs) Financial Summary ...............................................................26 Appendix A .........................................................................................................................................27 Additional Information Provided Pursuant to Section 129 of the Emergency Economic Stabilization Act of 2008 ...........................................................................................................................................27 Appendix B .........................................................................................................................................29 Information about Closed and Expired Credit and Liquidity Facilities and Programs.......................................29 Tables and Figures Overview...............................................................................................................................................1 Table 1. Assets, Liabilities, and Capital of the Federal Reserve System .........................................................1 Figure 1. Credit and Liquidity Programs and the Federal Reserve’s Balance Sheet...........................................2 System Open Market Account (SOMA) ...............................................................................................4 Table 2. Domestic SOMA Securities Holdings ...........................................................................................5 Table 3. Amounts Outstanding under Dollar Liquidity Swaps ......................................................................7 Lending Facilities to Support Overall Market Liquidity .....................................................................8 Table 4. Discount Window Credit Outstanding to Depository Institutions ......................................................8 Table 5. Concentration of Discount Window Credit Outstanding to Depository Institutions ...............................9 Table 6. Lendable Value of Collateral Pledged by Borrowing Depository Institutions ......................................9 Table 7. Lendable Value of Securities Pledged by Depository Institutions by Rating ........................................9 Table 8. Discount Window Credit Outstanding to Borrowing Depository Institutions— Percent of Collateral Used ................................................................................................................10 Table 9. TALF: Number of Borrowers and Loans Outstanding ...................................................................10 Table 10. TALF Collateral by Underlying Loan Type ................................................................................11 Table 11. TALF Collateral by Rating ......................................................................................................11 Table 12A. Issuers of Non-CMBS that Collateralize Outstanding TALF Loans .............................................12 Table 12B. Issuers of Newly Issued CMBS that Collateralize Outstanding TALF Loans .................................12 Table 12C. Issuers of Legacy CMBS that Collateralize Outstanding TALF Loans .........................................12 Lending in Support of Specific Institutions ........................................................................................14 Table 13. Fair Value Asset Coverage ......................................................................................................14 Table 14. Maiden Lane LLC Outstanding Principal Balance of Loans .........................................................14 Table 15. Maiden Lane LLC Summary of Portfolio Composition, Cash and Cash Equivalents, and Other Assets and Liabilities .........................................................................................................14 Table 16. Maiden Lane LLC Securities Distribution by Sector and Rating ...................................................15 Figure 2. Maiden Lane LLC Securities Distribution as of June 30, 2010.......................................................15 Table 17A. AIG Revolving Credit Facility ..............................................................................................15 Table 17B. Preferred Interests in AIA Aurora LLC and ALICO Holdings LLC .............................................16 Figure 3. AIG Revolving Credit .............................................................................................................17 Table 18. Maiden Lane II LLC Outstanding Principal Balance of Senior Loan and Fixed Deferred Purchase Price .................................................................................................................................18 Table 19. Maiden Lane II LLC Summary of RMBS Portfolio Composition, Cash and Cash Equivalents, and Other Assets and Liabilities .........................................................................................................18 Table 20. Maiden Lane II LLC Securities Distribution by Sector and Rating ................................................19 Figure 4. Maiden Lane II LLC Securities Distribution as of June 30, 2010 ...................................................19 Table 21. Maiden Lane III LLC Outstanding Principal Balance of Senior Loan and Equity Contribution ..........19 Table 22. Maiden Lane III LLC Summary of Portfolio Composition, Cash and Cash Equivalents, and Other Assets and Liabilities ...............................................................................................................19 Table 23. Maiden Lane III LLC Securities Distribution by Sector, Vintage, and Rating ..................................20 Figure 5. Maiden Lane III LLC Securities Distribution as of June 30, 2010 ..................................................20 Federal Reserve Banks’ Financial Tables ...........................................................................................22 Table 24. Federal Reserve Banks’ Combined Statement of Income and Comprehensive Income ......................23 Table 25. SOMA Financial Summary .....................................................................................................24 Table 26. Loan Programs Financial Summary ..........................................................................................25 Table 27. Consolidated Variable Interest Entities Financial Summary ..........................................................25 1 Overview Recent Developments • On August 18, 2010, the Federal Reserve Bank of New York (FRBNY) published a list of money market funds that are now eligible to participate as counterparties to reverse repurchase transactions with the Federal Reserve. Each listed fund submitted an application and meets the criteria published by the FRBNY on March 8, 2010. Inclusion on the list does not constitute a public endorsement by the FRBNY of any listed counterparty and should not substitute for prudent counterparty risk management and due diligence. The list is available on the FRBNY’s website at www.newyorkfed.org/markets/ expanded_counterparties.html. Table 1. Assets, Liabilities, and Capital of the Federal Reserve System Billions of dollars Item Current July 28, 2010 Change from June 30, 2010 Change from July 29, 2009 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected assets Securities held outright . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. Treasury securities1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal agency debt securities1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed securities2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Memo: Overnight securities lending3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Memo: Net commitments to purchase mortgage-backed securities4 . . . . . 2,329 −5 326 2,054 777 159 1,117 6 3 −6 +* −6 −1 −8 −13 709 81 53 574 −3 −132 Lending to depository institutions5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * −1 −36 Central bank liquidity swaps6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 +* −87 Lending through other credit facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net portfolio holdings of Commercial Paper Funding Facility LLC7 . . . . Term Asset-Backed Securities Loan Facility8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 * 41 −1 0 −1 −57 −67 11 Net portfolio holdings of TALF LLC9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 +* 1 Support for specific institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit extended to American International Group, Inc., net10 . . . . . . . . . . . Net portfolio holdings of Maiden Lane LLC11 . . . . . . . . . . . . . . . . . . . . . . . . . . Net portfolio holdings of Maiden Lane II LLC11 . . . . . . . . . . . . . . . . . . . . . . . . Net portfolio holdings of Maiden Lane III LLC11 . . . . . . . . . . . . . . . . . . . . . . . Preferred interests in AIA Aurora LLC and ALICO Holdings LLC8 . . . . . 118 23 29 16 24 26 +* −2 1 +* 1 0 14 −19 3 1 3 26 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected liabilities Federal Reserve notes in circulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Term deposits held by depository institutions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other deposits held by depository institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. Treasury, general account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. Treasury, supplementary financing account . . . . . . . . . . . . . . . . . . . . . . . . . . . Other deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,271 −7 317 903 4 1,051 30 200 * −1 3 79 −58 −* −28 32 4 304 −28 +* −1 Total capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 2 8 Unaudited. Components may not sum to totals because of rounding. * Less than $500 million. 1. Face value. 2. Guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Current face value, which is the remaining principal balance of the underlying mortgages. Does not include unsettled transactions. 3. Securities loans under 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. 4. Current face value. Includes commitments associated with outright purchases, dollar rolls, and coupon swaps. 5. Total of primary, secondary, and seasonal credit. 6. 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. 7. Includes about $1 million in other investments as of July 28, 2010. 8. Book value. 9. As of July 28, 2010, TALF LLC had purchased no assets from the FRBNY. 10. Excludes credit extended to Maiden Lane II and III LLCs. 11. Fair value, reflecting values as of June 30, 2010. 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 August 2010 • On August 10, 2010, the Federal Open Market Committee (FOMC) announced that the Federal Reserve will maintain the level of securities holdings in the System Open Market Account (SOMA) portfolio by reinvesting principal payments from agency debt and agency mortgage-backed securities (MBS) in longerterm Treasury securities. As of August 4, 2010, outright holdings of domestic securities in the SOMA portfolio totaled roughly $2 trillion. The FRBNY has published a tentative schedule for Treasury security purchases on the FRBNY website at www. newyorkfed.org/markets/tot_operation_schedule. html. • On August 3, 2010, the FRBNY announced that it would conduct a series of small-scale, real-value reverse repurchase transactions with primary dealers using all eligible collateral types, including, for the first time, agency MBS from the SOMA portfolio. The first transaction, using agency MBS as collateral, took place on August 4, 2010. The FRBNY has been conducting similar small-scale reverse repurchase transactions with primary dealers using U.S. Treasury and agency debt securities since late 2009. The purpose of these transactions is to refine the operational aspects of triparty reverse repurchase agreements to ensure that this tool will be ready if the FOMC decides it should be used. Like the earlier operational readiness exercises, this work is a matter of prudent advance planning by the Federal Reserve. It does not represent any change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future. • On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “DoddFrank Act”) was signed into law.1 The Dodd-Frank Act modifies the Federal Reserve’s authority to provide emergency liquidity to nondepository institutions under Section 13(3) of the Federal Reserve Act in light of other amendments that provide the U.S. government with new authority to resolve failing, 1. The full text of the Dodd-Frank Act is available at www.gpo.gov/fdsys/pkg/BILLS-111hr4173ENR/pdf/BILLS111hr4173ENR.pdf. 3 systemically important nonbank financial institutions in an orderly manner. In addition, the Dodd-Frank Act includes changes that are designed to promote transparency while protecting monetary policy independence and the efficacy of the Federal Reserve’s liquidity programs and open market operations (OMOs). For example: — Going forward, any emergency lending programs and facilities authorized by the Federal Reserve under Section 13(3) of the Federal Reserve Act must have broad-based eligibility, and must be approved by the Secretary of the Treasury. — The Federal Reserve must disclose certain information, by December 1, 2010, about entities that received loans or other financial assistance under a Section 13(3) credit facility between December 1, 2007, and July 21, 2010.2 Disclosure is also required for persons or entities that participated in the agency MBS purchase program, used foreign currency liquidity swap lines, or borrowed through the Term Auction Facility (TAF) during that time frame. — The Dodd-Frank Act also establishes a framework for the delayed disclosure of information on entities that, after July 21, 2010, received a loan from the discount window under Section 10B of the Federal Reserve Act or from a Section 13(3) facility, or participated in OMO transactions. Generally, this framework requires the Federal Reserve to publicly disclose certain information about these discount window borrowers and OMO counterparties approximately two years after the relevant loan or transaction; information about borrowers under future Section 13(3) facilities will be disclosed one year after the authorization for the facility is terminated. — The Federal Reserve plans to implement these new disclosure requirements in a timely and effective manner. 2. These facilities include the Primary Dealer Credit Facility, the Term Securities Lending Facility, the Commercial Paper Funding Facility, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Term Asset-Backed Securities Loan Facility, Maiden Lane LLC, Maiden Lane II LLC, and Maiden Lane III LLC. 4 Credit and Liquidity Programs and the Balance Sheet System Open Market Account (SOMA) Domestic SOMA Portfolio Recent Developments • On August 18, 2010, the Federal Reserve Bank of New York (FRBNY) published a list of money market funds that are now eligible to participate as counterparties to reverse repurchase transactions with the Federal Reserve. Each listed fund submitted an application and meets the criteria published by the FRBNY on March 8, 2010. Inclusion on the list does not constitute a public endorsement by the FRBNY of any listed counterparty and should not substitute for prudent counterparty risk management and due diligence. The list is available on the FRBNY’s website at www.newyorkfed.org/markets/ expanded_counterparties.html • On August 10, 2010, the Federal Open Market Committee (FOMC) announced that the Federal Reserve will maintain the level of domestic securities holdings in the SOMA portfolio by reinvesting principal payments from agency debt and agency mortgagebacked securities (MBS) in longer-term Treasury securities. As of August 4, 2010, outright holdings of securities in the SOMA portfolio totaled roughly $2 trillion. The FRBNY has published a tentative schedule for Treasury security purchases at www. newyorkfed.org/markets/tot_operation_schedule.html. • On August 3, 2010, the FRBNY announced that it would conduct a series of small-scale, real-value reverse repurchase transactions with primary dealers using all eligible collateral types, including, for the first time, agency MBS from the SOMA portfolio. The first transaction, using agency MBS as collateral, took place on August 4, 2010. The FRBNY has been conducting similar small-scale reverse repurchase transactions with primary dealers using U.S. Treasury and agency debt securities since late 2009. The purpose of these transactions is to refine the operational aspects of triparty reverse repurchase agreements to ensure that this tool will be ready if the FOMC decides it should be used. Like the earlier operational readiness exercises, this work is a matter of prudent advance planning by the Federal Reserve. It does not represent any change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future. • The SOMA portfolio contracted slightly in July 2010, reflecting maturities of federal agency debt securities and principal repayments on holdings of MBS, which outpaced settlements of previously executed purchases. 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 Federal Open Market Committee (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 granted under 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 SOMA, the Federal Reserve’s portfolio. Permanent OMOs traditionally have been 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. More recently, the expansion of SOMA securities holdings has been driven by large-scale asset purchase programs (LSAPs). Temporary OMOs typically are 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; under a reverse repo, the Trading Desk sells a security under an agreement to repurchase that security in the future. A repo is the economic equivalent of a collateralized loan; conversely, a reverse repo is the economic equivalent of collateralized borrowing. In both types of transactions, the difference between the purchase and sale prices reflects the interest on the loan or borrowing. The composition of the SOMA is presented in table 2. Each OMO affects the Federal Reserve’s balance sheet; the size and nature of the effect depend on the 5 August 2010 Table 2. Domestic SOMA Securities Holdings Large-Scale Asset Purchase Programs (LSAPs) Billions of dollars, as of July 28, 2010 Security type Total par value U.S. Treasury bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. Treasury notes and bonds, nominal . . . . . . . . . . . . . . U.S. Treasury notes and bonds, inflation-indexed1 . . . . . Federal agency debt securities2 . . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed securities3 . . . . . . . . . . . . . . . . . . . . . . . . . . . Total SOMA securities holdings . . . . . . . . . . . . . . . . . . . . . 18 712 47 159 1,117 2,054 Note: Unaudited. Components may not sum to total because of rounding. Does not include investments denominated in foreign currencies or unsettled transactions. 1. Includes inflation compensation. 2. Direct obligations of Fannie Mae, Freddie Mac, and the 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. 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” (www.federalreserve.gov/ releases/h41). The release separately reports securities held outright, repos, and reverse repos. In addition, the Federal Reserve has long operated an overnight securities lending facility as a vehicle to address market pressures for specific Treasury securities. Since July 9, 2009, this facility has also lent housing-related government-sponsored enterprise (GSE) debt securities that are particularly sought after. Amounts outstanding under this facility are reported in table 1A of the H.4.1 statistical release. The FRBNY’s traditional counterparties for OMOs are the primary dealers with which the FRBNY trades U.S. government and select other securities. In early 2010, the FRBNY revised its policy regarding the administration of its relationships with primary dealers in order to provide greater transparency about the significant business standards expected of primary dealers and to offer clearer guidance on the process to become a primary dealer. The revised policy offers a more structured presentation of the business standards expected of a primary dealer; a more formal application process for prospective primary dealers; an increase in the minimum net capital requirement, from $50 million to $150 million; a seasoning requirement of one year of relevant operations before a prospective dealer may submit an application; and a clear notice of actions the FRBNY may take against a noncompliant primary dealer. Since late 2009, the FRBNY has taken steps to expand the types of counterparties for some OMOs to include entities other than primary dealers. Details on the counterparty expansion effort are presented below. In November 2008, the Federal Reserve announced that it would buy direct obligations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, and MBS guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. The goal of these debt purchases was to reduce the cost and increase the availability of credit for the purchase of houses. In March 2009, the FOMC authorized purchases of up to $1.25 trillion of agency MBS and up to $200 billion of agency direct obligations. Subsequently, in November 2009, the FOMC announced that agency debt purchases would be about $175 billion. This amount, while somewhat less than the previously announced maximum of $200 billion, was consistent with the path of purchases and reflected the limited availability of agency debt. The Federal Reserve also determined that supporting the MBS “dollar roll” market promoted the goals of the MBS purchase program. Dollar roll transactions consist of a purchase or sale of “to be announced” (TBA) MBS combined with an agreement to sell or purchase TBA MBS on a specified future date. Because of principal and interest payments and occasional delays in the settlement of transactions, the Federal Reserve also holds some cash and short-term investments associated with the MBS purchase program. In March 2009, the FOMC announced that it would also purchase up to $300 billion of longer-term Treasury securities to help improve conditions in private credit markets. The Federal Reserve has purchased a range of securities across the maturity spectrum, including Treasury Inflation-Protected Securities (TIPS). The bulk of purchases have been in intermediate maturities. In August 2009, the FOMC announced that it would gradually slow the pace of these transactions in order to promote a smooth transition in markets as purchases of these Treasury securities were completed. As anticipated, the purchases were completed by the end of October 2009. The FRBNY announced in August 2009 that it would streamline the set of external investment managers for the agency-guaranteed MBS purchase program, reducing the number of investment managers from four to two. As of March 2, 2010, the FRBNY began to use its own staff on select days to transact directly in the secondary market for agency MBS as part of the FOMC’s LSAPs, consistent with the announcement of November 2009. These changes were not performancerelated: the FRBNY had anticipated that it would adjust its use of external investment managers as it gained more experience with the program. 6 In September 2009, the Federal Reserve began to purchase on-the-run agency securities—the most recently issued securities—in order to mitigate market dislocations and promote overall market functioning. Prior to this change, purchases were focused on offthe-run agency securities. On September 23, 2009, the FOMC announced its intention to gradually slow the pace of its purchases of agency-guaranteed MBS and agency debt. In implementing this directive, the Trading Desk of the FRBNY announced that it would scale back the average weekly purchase amounts of agency MBS and reduce the size and frequency of agency debt purchases. As anticipated by the FOMC, these transactions were completed by the end of the first quarter of 2010. The Federal Reserve’s outright holdings of MBS are reported weekly in tables 1, 3, 10, and 11 of the H.4.1 statistical release. In addition, detailed data on all settled agency MBS holdings are published weekly on the FRBNY website at www.newyorkfed.org/ markets/soma/sysopen_accholdings.html. Credit and Liquidity Programs and the Balance Sheet FRBNY and its money market mutual fund counterparties may undertake reverse repos. Publication of the MRA is part of the Federal Reserve’s larger effort to prepare for the potential need to conduct large-scale reverse repos with an expanded set of counterparties in addition to the existing set of primary dealer counterparties. This work is a matter of prudent advance planning by the Federal Reserve. It does not represent any change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future. Liquidity Arrangements with Foreign Central Banks Recent Developments • Amounts outstanding under the dollar liquidity swap arrangements were little changed in July, with only one small new draw. As presented in table 3, the total amount of liquidity provided under these lines was $1.2 billion as of July 28, 2010. Reverse Repurchase Agreements (Reverse Repos) Background In December 2009, the FRBNY conducted a set of small-scale, real-value, triparty reverse repos with primary dealers. Reverse repos are a tool that could be used to support a reduction in monetary accommodation at the appropriate time. These transactions were conducted to ensure operational readiness at the Federal Reserve, the major clearing banks, and the primary dealers, and had no material impact on the availability of reserves or on market rates. On March 8, 2010, the FRBNY announced the beginning of a program to expand its counterparties for conducting reverse repos. This expansion is intended to enhance the capacity of such operations to drain reserves beyond what could likely be conducted through primary dealers. The additional counterparties will not be eligible to participate in transactions conducted by the FRBNY other than reverse repos. Over time, the FRBNY expects that it will modify the counterparty criteria to include a broader set of counterparties and anticipates that it will publish criteria for additional types of firms and for expanded eligibility within previously identified types of firms. In this context, the FRBNY published the Reverse Repurchase Transaction (RRP) Eligibility Criteria for Money Funds for the first set of expanded counterparties, domestic money market mutual funds. On April 30, 2010, the FRBNY published the Reverse Repurchase Program Form Master Repurchase Agreement for Money Funds (MRA), which sets out the legal terms and conditions under which the Because of the global character of bank funding markets, the Federal Reserve has at times coordinated with other central banks to provide liquidity. During the financial crisis, the Federal Reserve entered into agreements to establish temporary reciprocal currency arrangements (central bank liquidity swap lines) with a number of foreign central banks (FCBs). Two types of temporary swap lines were established: dollar liquidity lines and foreign currency liquidity lines. These temporary arrangements expired on February 1, 2010. However, in May 2010, temporary dollar liquidity swap lines were re-established with certain FCBs in order to address the re-emergence of strains in global U.S. dollar short-term funding markets. The FRBNY operates the swap lines under the authority granted under 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 swap lines between the Federal Reserve and each of the following FCBs: the Reserve Bank of Australia, the 7 August 2010 Table 3. Amounts Outstanding under Dollar Liquidity Swaps As of July 28, 2010 Central bank Bank of Canada . . . . . . . . Bank of England . . . . . . . Bank of Japan . . . . . . . . . Bank of Japan . . . . . . . . . . Bank of Japan . . . . . . . . . . European Central Bank . Swiss National Bank . . . Total . . . . . . . . . . . . . . . . . . . Amount Settlement ($ billions) date 0.0 0.0 0.2 * * 1.0 0.0 1.2 — — 5/20/2010 6/17/2010 7/15/2010 5/20/2010 — — Term Interest rate — — 84-day 84-day 84-day 84-day — — — — 1.24% 1.23% 1.21% 1.24% — — Note: Unaudited. Components may not sum to totals because of rounding. *Less than $50 million. 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. These temporary dollar liquidity swap arrangements expired on February 1, 2010. In May 2010, the FOMC re-authorized dollar liquidity swap lines with the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank through January 2011. Swaps under these lines consist of two transactions. When an 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 then 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 at the same exchange rate used in the initial transaction; as a result, 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 compensates the FRBNY at a market-based interest rate. 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 is obligated to return the dollars to the 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 in these transactions is recorded as an asset on the Federal Reserve’s balance sheet. In tables 1, 10, and 11 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 maturity distribution of the outstanding dollar liquidity swaps. Detailed information about drawings on the swap lines by the participating FCBs is presented on the FRBNY’s website at www.newyorkfed.org/markets/fxswap. 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 were 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 mirrored the existing dollar liquidity swap lines, which provided FCBs with the capacity to offer U.S. dollar liquidity to financial institutions in their jurisdictions. These foreign-currency swap lines provided the Federal Reserve with the ability to address financial strains by providing foreign currency-denominated 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 Federal Reserve did not draw on these swap lines, and they expired on February 1, 2010. 8 Credit and Liquidity Programs and the Balance Sheet Lending Facilities to Support Overall Market Liquidity Lending to Depository Institutions Background Recent Developments 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 times 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 Federal Reserve 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. On August 17, 2007, in order to promote orderly market functioning, the Federal Reserve narrowed the spread between the primary credit rate (generally referred to as the discount rate) and the Federal Open Market Committee’s (FOMC’s) target federal funds rate to 50 basis points and began to allow the provision of primary credit for terms as long as 30 days. On March 16, 2008, the Federal Reserve further narrowed the spread between the primary credit rate and the target federal funds rate to 25 basis points, and increased the maximum maturity of primary credit loans to 90 days. • On August 6, 2010, the Federal Reserve announced changes to its practices for disclosure of discount window lending information in accordance with the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). For discount window loans extended on or after July 21, 2010, the Federal Reserve will publicly disclose certain information, approximately two years after a discount window loan is extended to a depository institution. The disclosure will include the name and identifying details of the depository institution, the amount borrowed, the interest rate paid, and information identifying the types and amount of collateral pledged. More detail on these changes is reported on the Federal Reserve’s Discount Window website at www.frbdiscountwindow.org/index.cfm. • Credit provided to depository institutions through the discount window has continued to decline. As presented in table 6, the lendable value of collateral pledged by depository institutions with discount window loans outstanding on July 28, 2010, was $1 billion; discount window credit outstanding on that date amounted to $0.1 billion. Table 4. Discount Window Credit Outstanding to Depository Institutions Daily average borrowing for each class of borrower over four weeks ending July 28, 2010 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 * * 4 34 1 39 ** ** ** ** ** ** Note: Unaudited. Includes primary, secondary, and seasonal credit. Size categories based on total domestic assets from Call Report data as of March 31, 2010. Components may not sum to totals because of rounding. * Fewer than one borrower. ** Less than $500 million. 1. Average daily number of depository institutions with credit outstanding. Over this period, a total of 167 institutions borrowed. 2. Average daily borrowing by all depositories in each category. 3. Includes branches and agencies of foreign banks. On November 17, 2009, in response to improved financial conditions, the Federal Reserve announced that the maximum maturity on primary credit loans would be reduced to 28 days effective January 14, 2010. On February 18, 2010, the Federal Reserve increased the spread between the primary credit rate and the top of the target range for the federal funds rate to 50 basis points, effective February 19, 2010. The Federal Reserve also announced that, effective March 18, 2010, the typical maximum maturity of primary credit loans would be shortened to overnight. These changes represented further normalization of the Federal Reserve’s lending facilities and did not signal any change in the outlook for the economy or for monetary policy. 9 August 2010 Table 5. Concentration of Discount Window Credit Outstanding to Depository Institutions Table 6. Lendable Value of Collateral Pledged by Borrowing Depository Institutions For four weeks ending July 28, 2010 Billions of dollars, as of July 28, 2010 Rank by amount of borrowing Number of borrowers Daily average borrowing ($ billions) Top five . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Next five . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5 29 39 * * * * Note: Unaudited. Amount of primary, secondary, and seasonal 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. * Less than $500 million. 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 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, to identify potentially problematic institutions and classify them according to the severity of the risk they pose to the Federal Reserve.3 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. 3. CAMELS (Capital, Assets, Management, Earnings, Liquidity, and Sensitivity) is a rating system employed by banking regulators to assess the soundness of depository institutions. Type of collateral Lendable value Loans Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities U.S. Treasury/agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Municipal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate market instruments . . . . . . . . . . . . . . . . . . . . . . . MBS/CMO: agency-guaranteed . . . . . . . . . . . . . . . . . . . . . MBS/CMO: other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International (sovereign, agency, municipal, and corporate) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * * * * * * * * * * * 1 Note: Unaudited. Collateral pledged by borrowers of primary, secondary, and seasonal credit as of the date shown. Total primary, secondary, and seasonal credit on this date was $107 million. The lendable value of collateral pledged by all depository institutions, including those without any outstanding loans, was $1,297 billion. Lendable value is value after application of appropriate haircuts. Components may not sum to total because of rounding. * Less than $500 million. Collateral All extensions of discount window 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 Table 7. Lendable Value of Securities Pledged by Depository Institutions by Rating Billions of dollars, as of July 28, 2010 Type of security and rating Lendable value U.S. Treasury, agency, and agency-guaranteed securities . Other securities AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aa/AA1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Baa/BBB3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment-grade4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175 172 28 67 16 40 497 Note: Unaudited. 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+ or F1+ rating or MIG 1 or SP-1+ municipal bond rating. 2. Includes short-term securities with A-1 or F1 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 a credit review by a Reserve Bank. 10 Credit and Liquidity Programs and the Balance Sheet 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 by depository institutions under the terms and 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 are generally 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 any assets that meet regulatory standards for sound asset quality. This category of assets includes most performing loans and 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. An institution may not pledge as collateral any instruments that the institution or its affiliates have issued. 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 loan nevertheless routinely pledge collateral. The Federal Reserve periodically reviews its collateral valuation practices. The most recent changes to the lending margins on discount window collateral took effect on October 19, 2009, and reflected the results of a broad-based review, which began before the financial crisis, of methodology and data sources. For more information on collateral margins, refer to the Discount Window and Payments System Risk public website, www.frbdiscountwindow.org. Table 8. Discount Window Credit Outstanding to Borrowing Depository Institutions—Percent of Collateral Used As of July 28, 2010 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 8 5 19 4 45 * * * * * * Note: Unaudited. Components may not sum to totals because of rounding. *Less than $500 million. As presented in table 8, depository institutions that borrow from the Federal Reserve generally maintain collateral in excess of their current borrowing levels. Term Asset-Backed Securities Loan Facility (TALF) Recent Developments • As previously announced, the TALF was closed for new loan extensions as of June 30, 2010. As of July 28, 2010, the number of borrowers and loans outstanding declined from their levels in June, primarily reflecting loan prepayments by borrowers. • Loans extended by the Federal Reserve Bank of New York (FRBNY) during the program will mature over the next several years, with all loans maturing no later than March 30, 2015. TALF LLC, formed to purchase and manage assets received by the FRBNY from TALF program loans, remains in operation, but as of July 28, 2010, TALF LLC had not purchased any assets from the FRBNY. Table 9. TALF: Number of Borrowers and Loans Outstanding As of July 28, 2010 Lending program Number of borrowers Borrowing ($ billions)1 Non-CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 70 128 32 9 41 Note: Unaudited. “Number of borrowers” may not sum to total because borrowers may be included in more than one category. “Borrowing” amounts may not sum to total because of rounding. 1. Book value. 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 was authorized to extend up to $200 billion of credit to holders of eligible asset-backed securities (ABS).4 The TALF was 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 was also intended to improve market conditions for ABS more generally. TALF loans backed by commercial mortgage-backed securities (CMBS) or by ABS backed by government guaranteed loans have maturities of up to five years; all other TALF loans have three-year maturities. Using funds 4. For additional information on the TALF, refer to www.federalreserve.gov/monetarypolicy/bst_lendingother.htm. 11 August 2010 authorized under the Troubled Assets Relief Program (TARP) of the Emergency Economic Stabilization Act of 2008, the U.S. Treasury committed to provide $20 billion in credit protection to the FRBNY in connection with the TALF to support the $200 billion of authorized lending value under the program. This commitment was reduced to $4.3 billion in July 2010 to reflect the fact that only $43 billion of TALF loans were outstanding when the program closed to new lending. Eligible collateral for TALF loans included U.S. dollar-denominated ABS backed by student loans, auto loans, credit card loans, equipment loans, floorplan loans, insurance premium finance loans, loans guaranteed by the Small Business Administration (SBA), residential mortgage servicing advances, or commercial mortgages. At the time a TALF loan was extended, all eligible collateral was required to have a credit rating in the highest investment-grade rating category from two or more eligible nationally recognized statistical rating organizations (NRSROs) and could not have a credit rating below the highest investment-grade rating category from an eligible NRSRO. Certain collateral also had to pass an internal risk assessment by the FRBNY. Additionally, all or substantially all of the credit exposures underlying eligible ABS were required to be exposures to U.S.-domiciled obligors or with respect to real property located in the United States or its territories. Except for ABS for which the underlying credit exposures are SBA-guaranteed loans, eligible newly issued ABS must have been issued on or after January 1, 2009. Eligible legacy CMBS must have been 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. Collateral would not be accepted from a particular borrower if the collateral Table 10. TALF Collateral by Underlying Loan Type Table 11. TALF Collateral by Rating Billions of dollars, as of July 28, 2010 Type of collateral Value Asset-backed securities with minimum rating of:1 AAA/Aaa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AA+/Aa+ to AA−/Aa− . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 * 46 Note: Unaudited. Components may not sum to total because of rounding. Data represent the face value of collateral. * Less than $500 million. 1. Eligible ABS collateral for the TALF was required to have a credit rating in the highest investment-grade rating category from at least two eligible NRSROs and could not have a credit rating below the highest investment-grade rating category from an eligible NRSRO. When pledged collateral is downgraded below the highest investment-grade rating, existing loans against the collateral remain outstanding. was backed by loans originated or securitized by that borrower or its affiliate except in very limited circumstances. The loans provided through the TALF were designed to be limited in recourse to the collateral, generally allowing borrowers the option of surrendering the collateral to the FRBNY in full satisfaction of the TALF loan. 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 haircut is a buffer which protects the FRBNY against a decline in the collateral’s value. The Federal Reserve 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. Breakdowns of TALF collateral by underlying loan type and credit rating are shown in tables 10 and 11, respectively. Consistent with previous announcements, the Federal Reserve closed the TALF for new loan extensions against newly issued CMBS on June 30, 2010, and for new loans against all other types of collateral on March 31, 2010. TALF loans extended by the FRBNY during this program will mature no later than March 30, 2015. TALF LLC Billions of dollars, as of July 28, 2010 Type of collateral Value By underlying loan type Auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial mortgages: Newly issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Floorplan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premium finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Servicing advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Small business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Student loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 11 0 11 15 * 4 2 1 1 9 46 Note: Unaudited. Components may not sum to total because of rounding. Data represent the face value of collateral. *Less than $500 million. TALF LLC, a limited liability company, was formed to purchase and manage any ABS that might be surrendered by a TALF borrower or otherwise claimed by the FRBNY in connection with its enforcement rights to the TALF collateral. In certain limited circumstances, TALF LLC may also purchase TALF program loans from the FRBNY. TALF LLC has committed to purchase, for a fee, all such assets at a price equal to the TALF loan, plus accrued but unpaid interest. Purchases of these securities are funded first through the fees received by TALF LLC and any interest TALF LLC has earned on its investments. In the event that such funding proves insufficient, the U.S. Treasury’s 12 Credit and Liquidity Programs and the Balance Sheet Table 12A. Issuers of Non-CMBS that Collateralize Outstanding TALF Loans Table 12C. Issuers of Legacy CMBS that Collateralize Outstanding TALF Loans As of July 28, 2010 As of July 28, 2010 Issuers AH Mortgage Advance Trust 2009-ADV2 AH Mortgage Advance Trust 2009-ADV3 Ally Master Owner Trust American Express Credit Account Master Trust AmeriCredit Automobile Receivables Trust 2009-1 ARI Fleet Lease Trust 2010-A Bank of America Auto Trust 2009-1 BMW Floorplan Master Owner Trust 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 CIT Equipment Collateral 2010-VT1 Citibank Credit Card Issuance Trust Citibank Omni Master Trust CitiFinancial Auto Issuance Trust 2009-1 CNH Equipment Trust 2009-B CNH Wholesale Master Note Trust Discover Card Execution Note Trust FIFC Premium Funding LLC 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 Floorplan Master Owner Trust A GE Capital Credit Card Master Note Trust GE Dealer Floorplan Master Note Trust Great America Leasing Receivables Funding, L.L.C. Harley-Davidson Motorcycle Trust 2009-2 Honda Auto Receivables 2009-2 Owner Trust John Deere Owner Trust 2009 Marlin Leasing Receivables XII LLC MMAF Equipment Finance LLC 2009-A MMCA Auto Owner Trust 2009-A Navistar Financial Dealer Note Master Owner Trust Nissan Auto Lease Trust 2009-A OCWEN Servicer Advance Receivables Funding Company II LTD. PFS Financing Corp. SLC Private Student Loan Trust 2009-A SLC Private Student Loan Trust 2010-B SLM Private Education Loan Trust 2009-B SLM Private Education Loan Trust 2009-C SLM Private Education Loan Trust 2009-CT SLM Private Education Loan Trust 2009-D SLM Private Education Loan Trust 2010-A U.S. Small Business Administration Volkswagen Auto Lease Trust 2009-A WHEELS SPV, LLC World Financial Network Credit Card Master Note Trust World Omni Auto Receivables Trust 2009-A World Omni Master Owner Trust Table 12B. Issuers of Newly Issued CMBS that Collateralize Outstanding TALF Loans As of July 28, 2010 Issuers1 1. There are no outstanding TALF loans collateralized with newly issued CMBS. Issuers Banc of America Commercial Mortgage Inc. Series 2004-2 Banc of America Commercial Mortgage Inc. Series 2005-1 Banc of America Commercial Mortgage Inc. Series 2005-3 Banc of America Commercial Mortgage Inc. Series 2005-5 Banc of America Commercial Mortgage Inc. Series 2005-6 Banc of America Commercial Mortgage Trust 2006-1 Banc of America Commercial Mortgage Trust 2006-2 Banc of America Commercial Mortgage Trust 2006-4 Banc of America Commercial Mortgage Trust 2006-5 Banc of America Commercial Mortgage Trust 2006-6 Banc of America Commercial Mortgage Trust 2007-1 Banc of America Commercial Mortgage Trust 2007-2 Banc of America Commercial Mortgage Trust 2007-3 Banc of America Commercial Mortgage Trust 2007-4 Banc of America Commercial Mortgage Trust 2007-5 Bear Stearns Commercial Mortgage Securities Trust 2004-PWR4 Bear Stearns Commercial Mortgage Securities Trust 2004-TOP16 Bear Stearns Commercial Mortgage Securities Trust 2005-PWR7 Bear Stearns Commercial Mortgage Securities Trust 2005-PWR8 Bear Stearns Commercial Mortgage Securities Trust 2005-PWR9 Bear Stearns Commercial Mortgage Securities Trust 2005-PWR10 Bear Stearns Commercial Mortgage Securities Trust 2005-TOP18 Bear Stearns Commercial Mortgage Securities Trust 2005-TOP20 Bear Stearns Commercial Mortgage Securities Trust 2006-PWR11 Bear Stearns Commercial Mortgage Securities Trust 2006-PWR12 Bear Stearns Commercial Mortgage Securities Trust 2006-PWR13 Bear Stearns Commercial Mortgage Securities Trust 2006-PWR14 Bear Stearns Commercial Mortgage Securities Trust 2006-TOP22 Bear Stearns Commercial Mortgage Securities Trust 2006-TOP24 Bear Stearns Commercial Mortgage Securities Trust 2007-PWR15 Bear Stearns Commercial Mortgage Securities Trust 2007-PWR16 Bear Stearns Commercial Mortgage Securities Trust 2007-PWR17 Bear Stearns Commercial Mortgage Securities Trust 2007-PWR18 Bear Stearns Commercial Mortgage Securities Trust 2007-TOP26 CD 2005-CD1 Commercial Mortgage Trust CD 2006-CD2 Mortgage Trust CD 2006-CD3 Mortgage Trust CD 2007-CD4 Commercial Mortgage Trust CD 2007-CD5 Mortgage Trust Citigroup Commercial Mortgage Trust 2004-C1 Citigroup Commercial Mortgage Trust 2006-C4 Citigroup Commercial Mortgage Trust 2008-C7 COBALT CMBS Commercial Mortgage Trust 2006-C1 COBALT CMBS Commercial Mortgage Trust 2007-C3 COMM 2004-LNB2 Mortgage Trust COMM 2005-C6 Mortgage Trust COMM 2005-LP5 Mortgage Trust COMM 2006-C7 Mortgage Trust COMM 2006-C8 Mortgage Trust Commercial Mortgage Loan Trust 2008-LS1 Commercial Mortgage Trust 2004-GG1 Commercial Mortgage Trust 2005-GG3 Commercial Mortgage Trust 2005-GG5 Commercial Mortgage Trust 2006-GG7 Commercial Mortgage Trust 2007-GG9 Credit Suisse Commercial Mortgage Trust Series 2006-C1 Credit Suisse Commercial Mortgage Trust Series 2006-C2 Credit Suisse Commercial Mortgage Trust Series 2006-C3 Credit Suisse Commercial Mortgage Trust Series 2006-C4 Credit Suisse Commercial Mortgage Trust Series 2006-C5 Credit Suisse Commercial Mortgage Trust Series 2007-C1 Credit Suisse Commercial Mortgage Trust Series 2007-C2 Credit Suisse Commercial Mortgage Trust Series 2007-C3 Credit Suisse Commercial Mortgage Trust Series 2007-C4 Credit Suisse Commercial Mortgage Trust Series 2007-C5 CSFB Commercial Mortgage Trust 2004-C1 CSFB Commercial Mortgage Trust 2004-C3 CSFB Commercial Mortgage Trust 2005-C1 CSFB Commercial Mortgage Trust 2005-C2 CSFB Commercial Mortgage Trust 2005-C3 CSFB Commercial Mortgage Trust 2005-C4 CSFB Commercial Mortgage Trust 2005-C5 CSFB Commercial Mortgage Trust 2005-C6 GE Commercial Mortgage Corporation Series 2004-C3 GE Commercial Mortgage Corporation Series 2005-C1 13 August 2010 Table 12C. Issuers of Legacy CMBS that Collateralize Outstanding TALF Loans—Continued Table 12C. Issuers of Legacy CMBS that Collateralize Outstanding TALF Loans—Continued As of July 28, 2010 As of July 28, 2010 Issuers GE Commercial Mortgage Corporation Series 2005-C4 GE Commercial Mortgage Corporation Series 2007-C1 Trust GMAC Commercial Mortgage Securities, Inc. Series 2006-C1 Trust GS Mortgage Securities Corporation II Series 2005-GG4 GS Mortgage Securities Trust 2006-GG6 GS Mortgage Securities Trust 2006-GG8 GS Mortgage Securities Trust 2007-GG10 J.P. Morgan Chase Commercial Mortgage Securities Corp. Series 2004-C2 J.P. Morgan Chase Commercial Mortgage Securities Corp. Series 2004-C3 J.P. Morgan Chase Commercial Mortgage Securities Corp. Series 2004-CIBC8 J.P. Morgan Chase Commercial Mortgage Securities Corp. Series 2004-CIBC10 J.P. Morgan Chase Commercial Mortgage Securities Corp. Series 2004-PNC1 J.P. Morgan Chase Commercial Mortgage Securities Corp. Series 2005-CIBC11 J.P. Morgan Chase Commercial Mortgage Securities Corp. Series 2005-CIBC13 J.P. Morgan Chase Commercial Mortgage Securities Corp. Series 2005-LDP1 J.P. Morgan Chase Commercial Mortgage Securities Corp. Series 2005-LDP3 J.P. Morgan Chase Commercial Mortgage Securities Corp. Series 2005-LDP4 J.P. Morgan Chase Commercial Mortgage Securities Corp. Series 2005-LDP5 J.P. Morgan Chase Commercial Mortgage Securities Trust 2006-CIBC14 J.P. Morgan Chase Commercial Mortgage Securities Trust 2006-CIBC15 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 2006-LDP6 J.P. Morgan Chase Commercial Mortgage Securities Trust 2006-LDP7 J.P. Morgan Chase Commercial Mortgage Securities Trust 2006-LDP8 J.P. Morgan Chase Commercial Mortgage Securities Trust 2006-LDP9 J.P. Morgan Chase Commercial Mortgage Securities Trust 2007-CIBC20 J.P. Morgan Chase Commercial Mortgage Securities Trust 2007-LDP11 J.P. Morgan Chase Commercial Mortgage Securities Trust 2007-LDP12 LB Commercial Mortgage Trust 2007-C3 LB-UBS Commercial Mortgage Trust 2004-C1 LB-UBS Commercial Mortgage Trust 2004-C4 LB-UBS Commercial Mortgage Trust 2004-C7 LB-UBS Commercial Mortgage Trust 2005-C2 LB-UBS Commercial Mortgage Trust 2005-C3 LB-UBS Commercial Mortgage Trust 2006-C1 LB-UBS Commercial Mortgage Trust 2006-C3 LB-UBS Commercial Mortgage Trust 2006-C6 LB-UBS Commercial Mortgage Trust 2006-C7 LB-UBS Commercial Mortgage Trust 2007-C1 LB-UBS Commercial Mortgage Trust 2007-C2 LB-UBS Commercial Mortgage Trust 2007-C6 LB-UBS Commercial Mortgage Trust 2007-C7 LB-UBS Commercial Mortgage Trust 2008-C1 Merrill Lynch Mortgage Trust 2004-KEY2 Merrill Lynch Mortgage Trust 2005-CIP1 Merrill Lynch Mortgage Trust 2006-C1 Merrill Lynch Mortgage Trust 2007-C1 ML-CFC Commercial Mortgage Trust 2006-2 ML-CFC Commercial Mortgage Trust 2006-4 ML-CFC Commercial Mortgage Trust 2007-5 ML-CFC Commercial Mortgage Trust 2007-6 ML-CFC Commercial Mortgage Trust 2007-7 ML-CFC Commercial Mortgage Trust 2007-8 ML-CFC Commercial Mortgage Trust 2007-9 Morgan Stanley Capital I Trust 2003-IQ4 Morgan Stanley Capital I Trust 2004-TOP13 Morgan Stanley Capital I Trust 2005-HQ5 Morgan Stanley Capital I Trust 2005-HQ6 Morgan Stanley Capital I Trust 2005-HQ7 Morgan Stanley Capital I Trust 2005-IQ9 Morgan Stanley Capital I Trust 2006-HQ8 Morgan Stanley Capital I Trust 2006-HQ10 Morgan Stanley Capital I Trust 2006-IQ11 Issuers Morgan Stanley Capital I Trust 2006-IQ12 Morgan Stanley Capital I Trust 2006-TOP21 Morgan Stanley Capital I Trust 2006-TOP23 Morgan Stanley Capital I Trust 2007-HQ11 Morgan Stanley Capital I Trust 2007-IQ13 Morgan Stanley Capital I Trust 2007-IQ14 Morgan Stanley Capital I Trust 2007-IQ15 Morgan Stanley Capital I Trust 2007-TOP27 Wachovia Bank Commercial Mortgage Trust Wachovia Bank Commercial Mortgage Trust Wachovia Bank Commercial Mortgage Trust Wachovia Bank Commercial Mortgage Trust Wachovia Bank Commercial Mortgage Trust Wachovia Bank Commercial Mortgage Trust Wachovia Bank Commercial Mortgage Trust Wachovia Bank Commercial Mortgage Trust Wachovia Bank Commercial Mortgage Trust Wachovia Bank Commercial Mortgage Trust Wachovia Bank Commercial Mortgage Trust Wachovia Bank Commercial Mortgage Trust Wachovia Bank Commercial Mortgage Trust Wachovia Bank Commercial Mortgage Trust Wachovia Bank Commercial Mortgage Trust Wachovia Bank Commercial Mortgage Trust Wachovia Bank Commercial Mortgage Trust Wachovia Bank Commercial Mortgage Trust Wachovia Bank Commercial Mortgage Trust Wachovia Bank Commercial Mortgage Trust Wachovia Bank Commercial Mortgage Trust Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series 2002-C1 2003-C9 2004-C14 2005-C16 2005-C17 2005-C18 2005-C19 2005-C20 2005-C22 2006-C23 2006-C24 2006-C25 2006-C26 2006-C27 2006-C28 2006-C29 2007-C30 2007-C31 2007-C32 2007-C33 2007-C34 Troubled Asset Relief Program (TARP) will provide additional subordinated debt funding to TALF LLC to finance up to $4.3 billion of asset purchases. Subsequently, the FRBNY will finance any additional purchases of securities by providing senior debt funding to TALF LLC. Thus, the TARP funds provide credit protection to the FRBNY. Financial information on TALF LLC is reported weekly in tables 1, 2, 8, 10, and 11 of the H.4.1 statistical release. As of July 28, 2010, TALF LLC had purchased no assets from the FRBNY. 14 Credit and Liquidity Programs and the Balance Sheet Lending in Support of Specific Institutions Quarterly Developments • Cash flows generated from the Maiden Lane II LLC and Maiden Lane III LLC portfolios are used to pay down the Federal Reserve Bank of New York’s (FRBNY’s) loans to those LLCs. For the second quarter of 2010, repayments totaled approximately $2 billion, as presented in tables 18 and 21. • As of June 26, 2010, cash flows from the Maiden Lane LLC portfolio were reinvested primarily in agency mortgage-backed securities (MBS). In July 2010, Maiden Lane LLC paid about $30 million to the FRBNY from the proceeds of its portfolio. This amount was used to pay down the principal on the loan extended by the FRBNY to Maiden Lane LLC. Table 14. Maiden Lane LLC Outstanding Principal Balance of Loans Background Millions of dollars During the financial crisis, the Federal Reserve 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 committed to extend credit, if necessary, to support important financial firms. Bear Stearns and Maiden Lane LLC 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. (Bear Stearns). In connection with the transaction, the Federal Reserve 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 partially fund the purchase of a portfolio Table 13. Fair Value Asset Coverage Millions of dollars Fair value asset coverage of FRBNY loan on 6/30/2010 Maiden Lane LLC . . . . . . . Maiden Lane II LLC . . . . . Maiden Lane III LLC . . . . of mortgage-related securities, residential and commercial mortgage loans, and associated hedges from Bear Stearns. The LLC is managing its assets through time to maximize the repayment of credit extended to the LLC and to minimize disruption to the financial markets. In the second quarter of 2008, the FRBNY extended credit to Maiden Lane LLC. The assets of Maiden Lane LLC are presented weekly in tables 1, 10, and 11 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 statistical release. Details of the terms of the loan, as well as information on the holdings of the Maiden Lane LLC, including the CUSIP number, descriptor, and the cur- Fair value asset coverage of FRBNY loan on 3/31/2010 (17) 1,652 7,453 (1,255) 915 6,374 Note: Unaudited. Fair value asset coverage is the amount by which the fair value of the net portfolio assets of each LLC (refer to table 27) is greater or less than the outstanding balance of the loans extended by the FRBNY, including accrued interest. FRBNY senior loan Principal balance at closing . . . . . . . . . . . . . . . . Most Recent Quarterly Activity Principal balance on 3/31/2010 (including accrued and capitalized interest) . . . . . . . . . Accrued and capitalized interest 3/31/2010 to 6/30/2010 . . . . . . . . . . . . . . . . . . Repayment during the period from 3/31/2010 to 6/30/2010 . . . . . . . . . . . . . . . . . . Principal balance on 6/30/2010 (including accrued and capitalized interest) . . . . . . . . . JPMC subordinate loan 28,820 1,150 29,276 1,264 55 17 — — 29,331 1,280 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. Table 15. Maiden Lane LLC Summary of Portfolio Composition, Cash and Cash Equivalents, and Other Assets and Liabilities Millions of dollars Fair value on 6/30/2010 Federal Agency and GSE MBS . . . . . . . . Non-agency RMBS . . . . . . . . . . . . . . . . . . . . Commercial loans . . . . . . . . . . . . . . . . . . . . . . Residential loans . . . . . . . . . . . . . . . . . . . . . . . Swap contracts1 . . . . . . . . . . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . Other assets2 . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities1,3 . . . . . . . . . . . . . . . . . . . . . . Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value on 3/31/2010 19,880 1,922 4,823 611 958 1,029 1,299 463 (1,671) 29,314 18,794 1,936 4,464 604 903 969 1,229 297 (1,173) 28,022 Note: Unaudited. Components may not sum to totals because of rounding. 1. Fair value of swap contracts is presented net of associated liabilities. 2. Including interest and principal receivable and other assets. 3. Including amounts payable for securities purchased, collateral posted to Maiden Lane LLC by swap counterparties, and other liabilities and accrued expenses. 15 August 2010 Table 16. Maiden Lane LLC Securities Distribution by Sector and Rating Percent, as of June 30, 2010 Rating Sector1 Federal Agency and GSE MBS . . Non-agency RMBS . . . . . . . . . . . . . . Other2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AAA AA+ to AA− A+ to A− BBB+ to BBB− 0.0 0.3 1.0 1.2 0.0 0.4 0.5 0.9 0.0 0.5 0.3 0.8 BB+ and lower Gov’t/ Agency Not rated Total 0.0 0.2 1.3 1.5 0.0 7.1 1.3 8.4 87.1 0.0 0.1 87.1 0.0 0.0 0.1 0.1 87.1 8.4 4.5 100.0 Note: Unaudited. This table presents the sector and ratings composition of the securities in the Maiden Lane LLC portfolio as a percentage of all securities in the portfolio. It is based on the fair value of the securities. Lowest of all ratings is used for purposes of this table. Rows and columns may not sum to totals because of rounding. 1. Does not include Maiden Lane LLC’s swaps and other derivative contracts and commercial and residential mortgage loans. 2. Includes all asset sectors that, individually, represent less than 5 percent of the aggregate fair value of securities in the portfolio. Figure 2. Maiden Lane LLC Securities Distribution as of June 30, 2010 rent principal balance or notional amount outstanding for nearly all of the holdings of Maiden Lane LLC with the exception of residential whole loans, is published on the FRBNY website at www.newyorkfed.org/ markets/maidenlane.html. Information about the assets and liabilities of Maiden Lane LLC is presented as of June 30, 2010, in tables 14 through 16 and figure 2. This information is updated on a quarterly basis. American International Group (AIG) Recent Developments • On August 11, 2010, AIG announced the sale of an 80 percent interest in American General Finance, Inc. (AGF) to Fortress Investment Group LLC for $125 million in cash. • On August 6, 2010, AIG announced a net loss of $2.7 billion in the second quarter of 2010, compared to net income of $1.8 billion in the second quarter of 2009. AIG reported that the loss was primarily due to a $3.3 billion non-cash goodwill impairment charge associated with discontinued operations of American Life Insurance Company (ALICO), which the Metropolitan Life Insurance Company is under contract to purchase from AIG. AIG’s adjusted net income for the quarter was $1.3 billion, including operating income of $2.2 billion from continuing insurance operations. • The balance on the AIG revolving credit facility decreased by $1.3 billion between June 30 and July 28, 2010, as presented in table 17A. The decline was primarily attributable to principal repayments and reductions, which outpaced principal drawdowns on the facility. • As of July 28, 2010, the maximum principal amount of credit available under the AIG revolving credit Table 17A. AIG Revolving Credit Facility Billions of dollars Value Balance on June 30, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Principal drawdowns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Principal repayments and reductions . . . . . . . . . . . . . . . . Recapitalized interest and fees . . . . . . . . . . . . . . . . . . . . . . Restructuring allowance, net . . . . . . . . . . . . . . . . . . . . . . . . Balance on July 28, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.7 0.4 (1.6) * * 23.4 Note: Unaudited. Components may not sum to total because of rounding. Does not include Maiden Lane II LLC and Maiden Lane III LLC. Does not include preferred interests in AIA Aurora LLC and ALICO Holdings LLC. * Less than $500 million. 16 Credit and Liquidity Programs and the Balance Sheet Table 17B. Preferred Interests in AIA Aurora LLC and ALICO Holdings LLC Billions of dollars Balance on July 28, 2010 Preferred Interests in AIA Aurora LLC and ALICO Holdings LLC1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued dividends on preferred interests in AIA Aurora LLC and ALICO Holdings LLC . . . . . . . . . . . . Value 25.7 0.1 Note: Unaudited. 1. Book value. facility was reduced from $33.7 billion to approximately $33.6 billion in connection with the sale of AIG Consumer Finance Group, Argentina. • In July 2010, AIG announced plans to conduct an initial public offering of AIA Group Limited (AIA) by seeking a listing of AIA on the Hong Kong Stock Exchange. AIG also announced in July that it had named Mark Tucker as Executive Chairman and Chief Executive Officer of AIA, succeeding Mark Wilson. Tucker had previously been the Chief Executive Officer of Prudential plc (Prudential). Background On September 16, 2008, the Federal Reserve, with the full support of the Treasury Department, announced that it would lend to AIG to prevent a disorderly failure of this systemically important firm, protect the financial system and the broader economy, and provide the company time to restructure its operations in an orderly manner. Initially, the FRBNY extended an $85 billion line of credit to the company. The terms of the credit facility are disclosed on the Board’s website at 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 tables 10 and 11 of the H.4.1 statistical 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, and the line of credit extended to AIG was reduced from $85 billion to $60 billion. (On October 8, 2008, the FRBNY was authorized to extend credit under a special securities borrowing facility to certain AIG subsidiaries. This arrangement was discontinued after the establishment of the Maiden Lane II facility.) More detail on these 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 March 2, 2009, the Federal Reserve and the Treasury announced further 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 April 17, 2009, the FRBNY implemented a loan restructuring adjustment that was previously approved and announced on March 2, 2009. The interest rate on the loan to AIG, the three-month Libor plus 300 basis points, was modified by removing the existing interest rate floor of 3.5 percent on the Libor component. Consistent with generally accepted accounting principles (GAAP), as of July 29, 2009, the reported value of the AIG revolving credit extension was reduced by a $1.3 billion adjustment to reflect the loan restructuring. 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. 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. On June 25, 2009, the FRBNY entered into agreements with AIG to carry out two transactions previously approved and announced on March 2, 2009, as part of the restructuring of the U.S. government’s assistance to AIG. These transactions were completed on December 1, 2009. Under these agreements, the FRBNY received preferred interests in two SPVs, AIA Aurora LLC and ALICO Holdings LLC, formed to hold the outstanding common stock of AIG’s largest foreign insurance subsidiaries, AIA Group, Limited (AIA) and American Life Insurance Company (ALICO). In exchange, upon the closing of each transaction and the resulting issuance of preferred interests, the outstanding balance of, and amount available excluding capitalized interest and fees to, AIG under the revolving credit facility was reduced by $25 billion. Specifically, the maximum amount available was reduced from $60 billion to $35 billion. By establishing the AIA and ALICO SPVs as separate legal entities, these transactions positioned AIA and ALICO for future initial public offerings (IPOs) or sale. On the 17 August 2010 Figure 3. AIG Revolving Credit Note: The above data illustrate selected components of the amount of credit extended to the American International Group Inc., 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 December 12, 2008, under a securities borrowing arrangement. The facility ceiling represents the limit on the credit agreement plus capitalized interest and fees. From November 7, 2008, until December 1, 2009, the ceiling was $60 billion (excluding capitalized interest and fees); on December 1, 2009, it was reduced to $35 billion. The ceiling continues to decrease as a result of asset sales. H.4.1 statistical release, accrued but unpaid dividends on the preferred interests in the two SPVs are included in “Other Federal Reserve assets” in table 1, and in “Other assets” in tables 10 and 11. action. On June 3, 2010, Prudential and AIG confirmed that the parties had agreed to terminate the definitive agreement for the sale of AIA, as provided for in the sale agreement. On March 1, 2010, AIG announced the signing of a definitive agreement for the sale of AIA to Prudential plc (Prudential) for approximately $35.5 billion, including approximately $25 billion in cash, $8.5 billion in face value of equity and equity-linked securities, and $2.0 billion in face value of preferred stock of Prudential, subject to closing adjustments. AIG stated that the cash portion of the proceeds from the sale would be used to fully redeem the approximately $16 billion of preferred interests held by the FRBNY in the SPV that holds AIA, and to repay approximately $9 billion of its borrowing under the revolving credit facility with the FRBNY. The transaction was approved by the boards of directors of both AIG and Prudential, and was expected to close by the end of 2010, subject to approval by Prudential shareholders, regulatory approvals, and customary closing conditions. On March 8, 2010, AIG announced the signing of a definitive agreement for the sale of ALICO to MetLife, Inc. for approximately $15.5 billion, including $6.8 billion in cash and the remainder in equity securities of MetLife, subject to closing adjustments. AIG stated that the cash portion of the proceeds from this sale would be used to redeem an equivalent amount of the approximately $9 billion of preferred interests held by the FRBNY in the SPV that holds ALICO. The transaction was approved by the boards of directors of both AIG and MetLife, and is expected to close by the end of 2010, subject to the approvals of certain domestic and international regulatory bodies and to customary closing conditions. AIG has stated that it intends to monetize the securities received in the ALICO transaction over time, subject to market conditions, following the lapse of certain minimum holding periods set forth in the definitive agreement entered into with Metlife. Excess cash proceeds and proceeds from AIG’s efforts to monetize the securities received in the transaction will be used to redeem any outstanding preferred interests and then to repay outstanding amounts borrowed under the revolving credit facility with the FRBNY. In early June 2010, in response to efforts by Prudential to negotiate for a lower purchase price of $30.4 billion, AIG announced that it would not consider modification to the agreed-upon terms (described above) of the transaction. Subsequently, Prudential announced its intention to not proceed with the trans- 18 Credit and Liquidity Programs and the Balance Sheet Under the AIG revolving credit facility, as a general matter, all net cash proceeds received from the sale by AIG of its subsidiaries or businesses (other than sales in the ordinary course of business) must be applied to pay down outstanding borrowings under the facility (and related accrued and unpaid interest) unless otherwise waived. Additionally, the maximum amount of available credit to AIG under the revolving credit facility is reduced by the amount of net cash proceeds applied to pay the principal amount of outstanding borrowings under the facility, unless such requirement is waived by the FRBNY. In March 2010, the maximum amount available under the AIG revolving credit facility was reduced from $34.4 billion to approximately $34.1 billion in connection with AIG’s sale of equity interests in its subsidiary, CFG Colombia, and the sale of a portion of its asset management business, PineBridge Global Investments LLC, to Pacific Century Group, an Asiabased private investment firm. On May 6, 2010, the maximum amount available under the AIG revolving credit facility was further reduced, from $34.1 billion to approximately $34.0 billion, in connection with AIG’s sale of HighStar Port Partners, L.P. Figure 3 presents 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 Pursuant to authority granted by the Federal Reserve Board under Section 13(3) of the Federal Reserve Act, the FRBNY, on December 12, 2008, lent approxiTable 18. Maiden Lane II LLC Outstanding Principal Balance of Senior Loan and Fixed Deferred Purchase Price Millions of dollars FRBNY senior loan Principal balance at closing . . . . . . . . . . . . . . . . Most Recent Quarterly Activity Principal balance on 3/31/2010 (including accrued and capitalized interest) . . . . . . . . . Accrued and capitalized interest 3/31/2010 to 6/30/2010 . . . . . . . . . . . . . . . . . . Repayment during the period from 3/31/2010 to 6/30/2010 . . . . . . . . . . . . . . . . . . Principal balance on 6/30/2010 (including accrued and capitalized interest) . . . . . . . . . AIG fixed deferred purchase price 19,494 1,000 15,283 1,045 48 9 (660) — 14,672 Table 19. Maiden Lane II LLC Summary of RMBS Portfolio Composition, Cash and Cash Equivalents, and Other Assets and Liabilities Millions of dollars Fair value on 6/30/2010 Alt-A ARM . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subprime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Option ARM . . . . . . . . . . . . . . . . . . . . . . . . . . . Other1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . Other assets2 . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities3 . . . . . . . . . . . . . . . . . . . . . . . . Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value on 3/31/2010 4,957 8,781 1,089 1,264 230 4 (1) 16,323 4,934 8,791 1,032 1,225 220 3 (7) 16,198 Note: Unaudited. Components may not sum to totals because of rounding. 1. Includes all asset sectors that, individually, represent less than 5 percent of aggregate outstanding fair value of securities in the portfolio. 2. Including interest and principal receivable and other receivables. 3. Including accrued expenses and other payables. mately $19.5 billion to a newly formed Delaware limited liability company, Maiden Lane II LLC, to partially fund the purchase of residential mortgage-backed securities (RMBS) from the securities lending portfolio of several regulated U.S. insurance subsidiaries of AIG. Maiden Lane II LLC acquired the RMBS, which had an aggregate par value of approximately $39.3 billion, at the then-current market value of the RMBS of approximately $20.8 billion, which was substantially below par value.5 The full portfolio of RMBS held by Maiden Lane II LLC serves as collateral for the Federal Reserve’s loan to Maiden Lane II LLC. AIG’s insurance subsidiaries also have a $1 billion subordinated position in Maiden Lane II LLC that is available to absorb first any losses that may be realized. The net portfolio holdings of Maiden Lane II LLC are presented in tables 1, 10, and 11 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 statistical release. Details on the terms of the loan, as well as information on the holdings of the Maiden Lane II LLC, including the CUSIP number, descriptor, and the current principal balance or notional amount outstanding for all the positions in the portfolio, is published on the FRBNY website at www.newyorkfed.org/markets/maidenlane2.html. Information about the assets and liabilities of Maiden Lane II LLC is presented as of June 30, 2010, in tables 18 through 20 and figure 4. This information is updated on a quarterly basis. 1,053 Note: Unaudited. As part of the asset purchase agreement, AIG subsidiaries were entitled to receive from Maiden Lane II LLC 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 LLC for the assets by a corresponding amount. 5. The aggregate amount of interest and principal proceeds from RMBS received after the announcement date, but prior to the settlement date, net of financing costs, amounted to approximately $0.3 billion and therefore reduced the amount of funding required at settlement by $0.3 billion, from $20.8 billion to $20.5 billion. 19 August 2010 Table 20. Maiden Lane II LLC Securities Distribution by Sector and Rating Percent, as of June 30, 2010 RMBS sector Alt-A ARM . . . . . . . . . . . . . . . . . . . . . . Subprime . . . . . . . . . . . . . . . . . . . . . . . . . Option ARM . . . . . . . . . . . . . . . . . . . . . Other1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rating AAA AA+ to AA− A+ to A− BBB+ to BBB− BB+ and lower Total 0.4 4.9 0.0 0.1 5.3 2.8 2.9 0.0 0.5 6.2 1.4 2.2 0.0 0.0 3.7 1.3 1.3 0.1 0.1 2.7 24.9 43.3 6.7 7.2 82.1 30.8 54.6 6.8 7.9 100.0 Note: Unaudited. This table presents the sector and ratings composition of Maiden Lane II LLC’s RMBS portfolio as a percentage of aggregate fair value of the securities in the portfolio. Lowest of all ratings is used for the purposes of this table. Rows and columns may not sum to totals because of rounding. 1. Includes all asset sectors that, individually, represent less than 5 percent of the aggregate fair value of securities in the portfolio. Figure 4. Maiden Lane II LLC Securities Distribution as of June 30, 2010 Maiden Lane III LLC Pursuant to authority granted by the Federal Reserve Board under Section 13(3) of the Federal Reserve Act, the FRBNY in November and December 2008, lent approximately $24.3 billion to a newly formed Delaware limited liability company, Maiden Lane III LLC, to fund the purchase of certain asset-backed collateralTable 21. Maiden Lane III LLC Outstanding Principal Balance of Senior Loan and Equity Contribution Millions of dollars FRBNY senior loan Principal balance at closing . . . . . . . . . . . . . . . . Most Recent Quarterly Activity Principal balance on 3/31/2010 (including accrued and capitalized interest) . . . . . . . . . Accrued and capitalized interest 3/31/2010 to 6/30/2010 . . . . . . . . . . . . . . . . . . Repayment during the period from 3/31/2010 to 6/30/2010 . . . . . . . . . . . . . . . . . . Principal balance on 6/30/2010 (including accrued and capitalized interest) . . . . . . . . . AIG equity contribution 24,339 ized debt obligations (ABS CDOs) from certain counterparties of AIG Financial Products Corp. (AIGFP) on which AIGFP had written credit default swaps and similar contracts. Maiden Lane III LLC acquired these CDOs, which had an aggregate par value of approximately $62.1 billion, at the then-current market value of the CDOs of approximately $29.6 billion, which Table 22. Maiden Lane III LLC Summary of Portfolio Composition, Cash and Cash Equivalents, and Other Assets and Liabilities Millions of dollars 5,000 17,324 5,235 54 43 (1,083) 16,294 — 5,278 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 the FRBNY. Fair value on 6/30/2010 High-grade ABS CDO . . . . . . . . . . . . . . . . . Mezzanine ABS CDO . . . . . . . . . . . . . . . . . . Commercial real estate CDO . . . . . . . . . . . RMBS, CMBS, and Other . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . Other assets1 . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities2 . . . . . . . . . . . . . . . . . . . . . . . . Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value on 3/31/2010 15,500 1,997 5,564 266 390 32 (3) 23,747 15,437 2,098 5,517 269 354 28 (5) 23,699 Note: Unaudited. Components may not sum to totals because of rounding. 1. Including interest and principal receivable and other receivables. 2. Including accrued expenses. 20 Credit and Liquidity Programs and the Balance Sheet Table 23. Maiden Lane III LLC Securities Distribution by Sector, Vintage, and Rating Percent, as of June 30, 2010 Sector and vintage1 High-grade ABS CDO . . . . . . . . . . . . . Pre-2005 . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mezzanine ABS CDO . . . . . . . . . . . . . . Pre-2005 . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate CDO . . . . . . . Pre-2005 . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RMBS, CMBS, and Other . . . . . . . . . Pre-2005 . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rating AAA AA+ to AA− A+ to A− BBB+ to BBB− BB+ and lower Total 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.9 0.9 0.0 0.0 0.0 0.1 0.0 0.1 0.0 0.0 0.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.6 0.6 0.0 0.0 0.0 0.2 0.0 0.1 0.0 0.0 0.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.1 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.1 0.0 0.0 0.2 66.4 22.8 30.2 6.7 6.8 8.4 5.1 2.7 0.0 0.7 22.4 3.1 0.0 0.0 19.4 0.7 0.1 0.5 0.1 0.0 98.0 66.4 22.8 30.2 6.7 6.8 8.6 5.2 2.7 0.0 0.7 23.9 4.5 0.0 0.0 19.4 1.1 0.2 0.9 0.1 0.0 100.0 Note: Unaudited. This table presents the sector, vintage, and rating composition of the securities in the Maiden Lane III LLC portfolio as a percentage of all securities in the portfolio. It is based on the fair value of the securities. Lowest of all ratings is used for purposes of this table. Rows and columns may not sum to totals because of rounding. 1. The year of issuance with the highest concentration of underlying assets as measured by outstanding principal balance determines the vintage of the CDO. Figure 5. Maiden Lane III LLC Securities Distribution as of June 30, 2010 was substantially below par value.6 The full portfolio of CDOs held by Maiden Lane III LLC serves as collateral for the Federal Reserve’s loan to Maiden Lane III LLC. An AIG subsidiary also has a $5 billion subordinated position in Maiden Lane III LLC that is available to absorb first any losses that may be realized. Details of the terms of the loan are published on 6. The aggregate amount of interest and principal proceeds from CDOs received after the announcement date, but prior to the settlement dates, net of financing costs, amounted to approximately $0.3 billion and therefore reduced the amount of funding required at settlement by $0.3 billion, from $29.6 billion to $29.3 billion. the FRBNY website at www.newyorkfed.org/markets/ maidenlane3.html. Assets of the portfolio of the LLC will be managed to maximize cash flows to ensure repayment of obligations of the LLC while minimizing disruptions to financial markets. The net portfolio holdings of Maiden Lane III LLC are presented in tables 1, 10, and 11 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 statistical release. Information on the holdings of the Maiden Lane III LLC, including the CUSIP number, descriptor, and the current principal August 2010 balance or notional amount outstanding for all the positions in the portfolio, is published on the FRBNY website at www.newyorkfed.org/markets/ maidenlane3.html. 21 Information about the assets and liabilities of Maiden Lane III LLC is presented as of June 30, 2010, in tables 21 through 23 and figure 5. This information is updated on a quarterly basis. 22 Credit and Liquidity Programs and the Balance Sheet Federal Reserve Banks’ Financial Tables Quarterly Developments • The average daily balance of the Federal Reserve System Open Market Account (SOMA) holdings was approximately $2.1 trillion during the first half of 2010, as presented in table 25. Net earnings from the portfolio were approximately $36.9 billion; most of the earnings were attributable to interest income on U.S. Treasury securities and federal agency and government-sponsored enterprise (GSE) mortgagebacked securities (MBS). • Interest earned from Federal Reserve lending programs was approximately $1.3 billion during the first half of 2010, as presented in table 26; interest earned on credit extended to American International Group, Inc. (AIG) and loans made by the Term AssetBacked Securities Loan Facility (TALF) accounted for most of the total. • Net income reported on the consolidated financial statements of the Federal Reserve Bank of New York (FRBNY) includes changes in valuation for the Maiden Lane, Maiden Lane II, and Maiden Lane III LLCs, which were approximately $2.3 billion, $0.7 billion, and $1.6 billion, respectively, in the second quarter of 2010. Net income for the Commercial Paper Funding Facility (CPFF) LLC was approximately $0.2 billion in the first half of 2010, as presented in table 27. • After providing for the payment of dividends and reserving an amount necessary to equate surplus with capital paid in, distributions to the U.S. Treasury as interest on Federal Reserve notes totaled $34.1 billion during the first half of 2010, as presented in table 24. Background The Federal Reserve Banks prepare annual 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 an independent audit- ing firm 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 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 auditing firm retained by the Board’s Office of Inspector General (OIG). The audit firm also provides a report on compliance and on internal control over financial reporting in accordance with government auditing standards. The OIG 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. In this report, the Federal Reserve prepares unaudited quarterly updates to tables included in the Federal Reserve Board’s Annual Report (available at www.federalreserve.gov/boarddocs/ rptcongress/default.htm). Combined Statement of Income and Comprehensive Income Table 24 presents unaudited combined Reserve Bank income and expense information for the first half of 2010. Tables 25 through 27 present information for the SOMA portfolio, the Federal Reserve loan programs, and the variable interest entities (VIEs)—the CPFF LLC; Maiden Lane, Maiden Lane II, and Maiden Lane III LLCs; and TALF LLC—for the period from January 1, 2010, to June 30, 2010. These tables are updated quarterly. SOMA Financial Summary Table 25 shows the Federal Reserve’s average daily balance of assets and liabilities in the SOMA portfolio for the period from January 1, 2010, though June 30, 2010, the related interest income and expense, and the 23 August 2010 Table 24. Federal Reserve Banks’ Combined Statement of Income and Comprehensive Income Millions of dollars January 1, 2010 − June 30, 2010 Interest income: Loans to depository institutions (refer to table 26) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other loans (refer to table 26) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . System Open Market Account (refer to table 25) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated variable interest entities (refer to table 27): 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,186 213 41,508 Interest expense: System Open Market Account (refer to table 25) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depository institution deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Term deposit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beneficial interest in consolidated variable interest entities (refer to table 27) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 1,378 0 135 1,550 Provision for loan restructuring (refer to table 26) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income, after provision for loan restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 39,958 50 1,286 37,773 Non-interest income (loss): Other loans unrealized gains1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . System Open Market Account—realized and unrealized losses, net (refer to table 25) . . . . . . . . . . . . . . . . . . . . . . . Investments held by consolidated variable interest entities gains (losses), net (refer to table 27): Maiden Lane, Maiden Lane II, and Maiden Lane III LLCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial Paper Funding Facility LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TALF LLC2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beneficial interest in consolidated variable interest entities gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends on preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income from services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reimbursable services to government agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-interest income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,280 1 — (2,687) 626 294 195 47 2,623 Operating expenses: Salaries and other benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assessments by the Board of Governors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Professional fees related to consolidated variable interest entities (refer to table 27) . . . . . . . . . . . . . . . . . . . . . . . Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,104 140 85 488 49 481 2,348 Net income prior to distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,233 2 (253) (880) Change in funded status of benefit plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income prior to distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 40,391 Distribution of comprehensive income: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends paid to member banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transferred to surplus and change in accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . 782 39,609 Memo: Distributions to U.S. Treasury (interest on Federal Reserve notes)3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,068 Note: Unaudited. 1. The fair value option was elected for all TALF loans. Recording all TALF loans at fair value, rather than at the remaining principal amount outstanding, results in consistent accounting treatment among all TALF-related transactions and provides the most appropriate presentation of the TALF program in the financial statements by matching the change in fair value of TALF loans, the related put agreement with the consolidated TALF LLC, and the valuation of the other beneficial interests in TALF LLC. 2. Represents the recognition of benefit plan deferred actuarial gains and losses and prior service costs. 3. 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 is affected by significant losses and increases in capital paid-in at a Reserve Bank, requires that the Reserve Bank retain 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, 2010, through June 30, 2010, were $35.1 billion. realized and unrealized gains and losses for the year. U.S. Treasury securities, government-sponsored enterprise (GSE) debt securities, as well as federal agency and GSE mortgage-backed securities (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 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 24 Credit and Liquidity Programs and the Balance Sheet Table 25. SOMA Financial Summary Millions of dollars January 1, 2010 − June 30, 2010 Average daily balance Interest income (expense) Realized gains (losses) SOMA assets U.S. Treasury securities1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Government-sponsored enterprise debt securities1 . . . . . . . . . . . . . . . . Federal agency and government-sponsored enterprise mortgage-backed securities2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments denominated in foreign currencies3 . . . . . . . . . . . . . . . . . . Central bank liquidity swaps4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . Other assets5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 804,967 173,632 13,086 1,803 — — 1,068,884 24,431 1,625 — 477 2,074,016 22,764 111 9 — — 37,773 714 — — — — 714 SOMA liabilities Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . Other liabilities6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,043 1,438 59,481 SOMA assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,014,535 (37) — (37) 37,736 — — — 714 Unrealized gains (losses) — — — (1,594) — — — (1,594) — — — (1,594) Net earnings 13,086 1,803 23,478 (1,483) 9 — — 36,893 (37) — (37) 36,856 Note: Unaudited. Components may not sum to totals because of rounding. 1. Face value, net of unamortized premiums and discounts. 2. 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, net of premiums and discounts. Does not include unsettled transactions. 3. Includes accrued interest. Investments denominated in foreign currencies are revalued daily at market exchange rates. 4. 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. 5. Cash and short-term investments related to the federal agency and government-sponsored enterprise mortgage-backed securities portfolio. 6. Related to the purchases of federal agency and government-sponsored enterprise mortgage-backed securities that the seller fails to deliver the securities on the settlement date. losses have no effect on the ability of the Reserve Banks to meet their financial obligations and responsibilities. As of June 30, 2010, the fair value of the U.S. Treasury securities held in the SOMA, excluding accrued interest, was $866.0 billion (amortized cost was $804.2 billion); the fair value of the GSE debt, excluding accrued interest, was $175.7 billion (amortized cost was $171.5 billion); the fair value of the federal agency and GSE MBS, excluding accrued interest, was $1,168.4 billion (amortized cost was $1,132.7 billion); and the fair value of investments denominated in foreign currencies was $24.0 billion (amortized cost was $23.8 billion). Fair value was determined by reference to quoted prices for identical securities, except for MBS, for which market values are determined using a model-based approach based on observable inputs for similar securities. eign 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 MBS guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Transactions in MBS are recorded on settlement dates, which can extend several months into the future. MBS dollar roll transactions, which consist of a purchase or sale of “to be announced” (TBA) MBS combined with an agreement to sell or purchase TBA MBS on a specified future date, may generate realized gains and losses. The FRBNY conducts purchases and sales of U.S. government securities under authorization and direction from the Federal Open Market Committee (FOMC). The FRBNY buys and sells securities at market prices from securities dealers and foreign and international account holders. The FOMC has also authorized the FRBNY to purchase and sell U.S. government securities under agreements to resell or repurchase such securities (commonly referred to as repurchase and reverse repurchase transactions). The SOMA holds foreign currency deposits and foreign government debt instruments denominated in for- Table 26 summarizes the average daily loan balances and interest income of the Federal Reserve for the first half of 2010. The most significant loan balance is the Term Asset-Backed Securities Loan Facility (TALF), which was established in 2009. 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. Many of these lending facilities have closed (refer to Appendix B in this report for a discussion of those facilities). The remaining facilities include the TALF and the credit extended to American International Group, Inc. (AIG); the Loan Programs Financial Summary 25 August 2010 Table 26. Loan Programs Financial Summary Millions of dollars January 1, 2010 − June 30, 2010 Loan programs1 Average daily balance2 Interest income3 Provision for loan restructuring Total Primary, secondary, and seasonal credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Term Auction Facility (TAF) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total loans to depository institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,395 14,327 23,722 32 18 50 — — — 32 18 50 Credit extended to American International Group, Inc. (AIG), net . . . . . . Term Asset-Backed Securities Loan Facility (TALF)4 . . . . . . . . . . . . . . . . . . . Total loans to others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,798 46,014 70,812 841 445 1,286 — — — 841 445 1,286 Total loan programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total loan programs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,534 — 94,534 1,336 — 1,336 — — — 1,336 — 1,336 Note: Unaudited. Components may not sum to totals because of rounding. 1. Does not include loans to consolidated VIEs. Does not include preferred interests in AIA Aurora LLC and ALICO Holdings LLC. 2. Average daily balance includes outstanding principal and capitalized interest net of unamortized deferred commitment fees and allowance for loan restructuring, and excludes undrawn amounts. 3. Interest income includes the amortization of the deferred commitment and administrative fees. 4. Book value. Table 27. Consolidated Variable Interest Entities Financial Summary Millions of dollars Item CPFF TALF LLC ML ML II ML III Total Maiden Lane LLCs Net portfolio assets of the consolidated LLCs and the net position of FRBNY and subordinated interest holders as of June 30, 2010 Net portfolio assets1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities of consolidated LLCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net portfolio assets available . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0 1 507 0 507 30,985 (1,671) 29,314 16,325 (1) 16,324 23,750 (3) 23,747 71,060 (1,675) 69,385 Loans extended to the consolidated LLCs by FRBNY2 . . . . . . . . . . . . . . . . . . . Other beneficial interests2,3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total loans and other beneficial interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 ... 0 0 104 104 29,332 1,280 30,612 14,672 1,053 15,725 16,294 5,278 21,572 60,298 7,611 67,909 Allocated to FRBNY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allocated to other beneficial interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative change in net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ... 1 (255) 657 402 (18) (1,280) (1,298) 499 100 599 1,450 725 2,175 1,931 (455) 1,476 Summary of consolidated VIE net income for the current year through June 30, 2010, including a reconciliation of total consolidated VIE net income to the consolidated VIE net income recorded by FRBNY Portfolio interest income4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense on loans extended by FRBNY5 . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense—other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio holdings gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) of consolidated LLCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 4 0 1 (2) 216 0 0 (2) 0 0 (2) 588 (99) (32) 1,754 (31) 2,180 416 (95) (17) 1,431 (5) 1,730 1,182 (107) (84) (2,095) (11) 3,075 2,186 (301) (133) 5,280 (47) 6,985 ... 216 (42)* 40 (32) 2,212 1,136 593 1,625 1,450 2,729 4,255 (4) 212 0 40** 99 2,311 95 688 107 1,557 301 4,556 Cumulative change in net assets since the inception of the programs 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 consolidation5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) recorded by FRBNY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note: Unaudited. * Represents the amount of TALF LLC’s income allocated to the U.S. Treasury. ** In addition to the TALF LLC net income of $40 million, the FRBNY reported $192 million of income on TALF loans during the quarter ended June 30, 2010. Earnings on TALF loans include interest income and fees of $445 million and losses on the valuation of loans of $253 million for the first half of 2010. 1. CPFF LLC commercial paper holdings are recorded at book value; other holdings are recorded at fair value. TALF LLC, Maiden Lane, Maiden Lane II, and Maiden Lane III holdings are recorded at fair value. 2. Includes accrued interest. 3. The other beneficial interest holder related to TALF LLC is the U.S. Treasury. JPMC is the beneficial interest holder for Maiden Lane LLC. AIG is the beneficial interest holder for Maiden Lane II and Maiden Lane III LLCs. 4. Interest income is recorded when earned, and it includes amortization of premiums, accretion of discounts, and paydown gains and losses. 5. 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. 26 Reserve Banks record amounts funded under these programs as loans. Interest income from these loan programs was about $1.3 billion during the first half of 2010. 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, 2010, no loans were impaired, and an allowance for loan losses was not required. Consolidated Variable Interest Entities (VIEs) Financial Summary Table 27 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 CPFF LLC, the sole and managing member of TALF LLC, and the primary beneficiary of the Maiden Lane LLCs. Commercial paper holdings are recorded at book value, which includes amortized cost and related fees. Maiden Lane LLC, Maiden Lane II LLC, Maiden Lane III LLC, and TALF LLC holdings are recorded at fair value, which Credit and Liquidity Programs and the Balance Sheet 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 (GAAP), 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” represents 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, 2010. 27 August 2010 Appendix A Additional Information Provided Pursuant to Section 129 of the Emergency Economic Stabilization Act of 2008 In light of improved functioning of financial markets, on February 1, 2010, the Federal Reserve closed the Term Securities Lending Facility (TSLF), Primary Dealer Credit Facility (PDCF), Commercial Paper Funding Facility (CPFF), and the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF). As of that date, all loans under the TSLF, PDCF, and AMLF had been repaid in full, with interest, in accordance with the terms of each facility, and each of the facilities resulted in no loss to the Federal Reserve or taxpayers. All remaining commercial paper holdings of the CPFF matured on April 26, 2010, and the CPFF LLC is expected to be dissolved following the payment of expenses and the termination or expiration of existing contractual agreements. For the reasons discussed below, the Board does not anticipate that the Federal Reserve or taxpayers will incur any net loss on the loans provided by the Federal Reserve Bank of New York (FRBNY) under the Term Asset-Backed Securities Loan Facility (TALF), to American International Group, Inc. (AIG), or to Maiden Lane LLC, Maiden Lane II LLC, or Maiden Lane III LLC (collectively, the “Maiden Lane facilities”). In making these assessments, the Board has considered, among other things, the terms and conditions governing the relevant facility and the type, nature, and value of the current collateral or other security arrangements associated with the facility. As discussed earlier in this report, the Federal Reserve has established various terms and conditions governing the types of collateral that may be pledged in support of a loan under a facility in order to mitigate the risk of loss. In the case of the Maiden Lane facilities, the Board also has considered analyses of the projected returns on the portfolio holdings of the respective special purpose vehicle (SPV) (the assets of which serve as collateral for the loan(s) extended to the SPV) conducted by the FRBNY or its advisors in connection with the most recent quarterly revaluation of the assets of each SPV. Commercial Paper Funding Facility As noted above, all commercial paper holdings of the CPFF have matured. The CPFF incurred no losses on its commercial paper holdings, and accumulated nearly $5 billion in earnings, primarily from interest income, credit enhancement fees, and registration fees. The cash equivalents and other securities held by the CPFF LLC have also matured, and the Federal Reserve expects that it will dissolve the LLC following the payment of accrued professional fees and the termination or expiration of existing contractual arrangements. In light of the substantial amount of interest income and fees earned under the CPFF, the Board does not expect the CPFF to result in any loss to the Federal Reserve or taxpayers after dissolution of the CPFF LLC. Term Asset-Backed Securities Loan Facility Under the TALF, the FRBNY made loans on a collateralized basis to holders of eligible asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS). The potential for the Federal Reserve or taxpayers to incur any net loss on the TALF loans extended by the FRBNY to the holders of ABS and CMBS is mitigated by the quality of the collateral, the risk assessment performed by the FRBNY on all pledged collateral, and the margin by which the value of the collateral exceeds the amount of the loan (the haircut). Potential losses to the Federal Reserve also are mitigated by the portion of interest on the TALF loans to borrowers transferred to TALF LLC and by the credit protection provided by the Treasury under the Troubled Asset Relief Program (TARP) (initially $20 billion and subsequently reduced to $4.3 billion in light of the $43 billion in TALF loans outstanding when the TALF closed to new lending on June 30, 2010), both of which are available to TALF LLC to purchase any collateral received by the FRBNY from a borrower in lieu of repaying a TALF loan or foreclosed upon due to a default by the borrower. The TALF closed to new lending on June 30, 2010. TALF loans extended by the FRBNY during the program will mature over the next several years, with all loans maturing no later than March 30, 2015. Loans to Maiden Lane LLC, Maiden Lane II LLC, and Maiden Lane III LLC The portfolio holdings of each of Maiden Lane LLC (Maiden Lane), Maiden Lane II LLC (ML-II), and Maiden Lane III LLC (ML-III) are revalued in accordance with generally accepted accounting principles 28 (GAAP) as of the end of each quarter to reflect an estimate of the fair value of the assets on the measurement date. The fair value determined through these revaluations may fluctuate over time. In addition, the fair value of the portfolio holdings that is reported on the weekly H.4.1 statistical release reflects any accrued interest earnings, principal repayments, expense payments and, to the extent any may have occurred since the most recent measurement date, realized gains or losses. The fair values as of July 28, 2010—as shown in table 1 of this report and reported in the H.4.1 release for that date—are based on quarterly revaluations as of June 30, 2010. Because the collateral assets for the loans to Maiden Lane, ML-II, and ML-III are expected to generate cash proceeds and may be sold over time or held to maturity, the current reported fair values of the net portfolio holdings of Maiden Lane, ML-II, and ML-III do not reflect the amount of aggregate proceeds that the Federal Reserve could receive from the assets of the respective entity over the extended term of the loan to the entity. The extended terms of the loans provide an opportunity to dispose of the assets of each entity in an orderly manner over time and to collect interest on the assets held by the entity prior to their sale, other disposition, or maturity. Each of the loans extended to Maiden Lane, ML-II, and ML-III is current under the terms of the relevant loan agreement. In addition, JPMorgan Chase will absorb the first $1.15 billion of realized losses on the assets of Maiden Lane, should any occur. Similarly, certain U.S. insurance subsidiaries of AIG have a $1 billion subordinated position in ML-II and an AIG affiliate has a $5 billion subordinated position in ML-III, which are available to absorb first any loss that ultimately may be incurred by ML-II or ML-III, respectively. Moreover, under the terms of the agreements, the FRBNY is entitled to any residual cash flow generated by the collateral assets held by Maiden Lane after the loans made by the FRBNY and JPMorgan Chase are repaid, and five-sixths and two-thirds of any residual cash flow generated by the assets held by ML-II and ML-III, respectively, after the senior note of the Credit and Liquidity Programs and the Balance Sheet FRBNY and the subordinate positions of AIG affiliates for these facilities are repaid. Revolving Credit Facility and Preferred Interests Relating to American International Group, Inc. In light of the extremely broad and diverse range of collateral (including AIG’s ownership interest in numerous nonpublic companies) and guarantees securing advances under the Revolving Credit Facility and the term of the credit facility, it is difficult to estimate with precision the aggregate value that ultimately will or may be received in the future from the sale of collateral or the enforcement of guarantees supporting the Revolving Credit Facility or from the sale of assets of the two SPVs, AIA Aurora LLC and ALICO Holdings LLC (including any noncash consideration that may be received in connection with the sale of the assets of the AIA or ALICO SPVs), and disclosure of any such estimate could interfere with the goal of maximizing value through the company’s global divestiture program and, consequently, diminish the proceeds available to repay the loan or redeem the preferred interests held by the FRBNY in the AIA and ALICO SPVs. However, based on the substantial assets and operations supporting repayment of the loan or redemption of the preferred interests, the terms of the agreement entered into by AIG for the sale of American Life Insurance Company (ALICO), the capital and capital commitments provided to AIG under the TARP, and the most recently completed quarterly review of the security arrangements supporting the Revolving Credit Facility conducted as of June 30, 2010, by the FRBNY supported by analyses performed by its advisors, the Federal Reserve anticipates that the loans provided by the Federal Reserve under the Revolving Credit Facility, including interest and commitment fees under the modified terms of the facility, will be fully repaid and the face value of the preferred interests in the AIA and ALICO SPVs, plus accrued dividends, will be received. Accordingly, the Federal Reserve anticipates that the facility will not result in any net loss to the Federal Reserve or taxpayers. 29 August 2010 Appendix B Information about Closed and Expired Credit and Liquidity Facilities and Programs During the financial crisis that emerged during the summer of 2007, the Federal Reserve took 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 were directed toward achieving the Federal Reserve’s statutory monetary policy objectives. Specifically, the Federal Reserve implemented a number of programs designed to support the liquidity of financial institutions and foster improved conditions in financial markets, and also extended credit to certain specific institutions and committed to extend credit to support systemically important financial firms. In light of ongoing improvements in the functioning of financial markets, many of the facilities and programs established to help address the financial crisis have closed or expired. Specifically, on February 1, 2010, the Federal Reserve closed the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Commercial Paper Funding Facility (CPFF), the Primary Dealer Credit Facility (PDCF), and the Term Securities Lending Facility (TSLF). On April 26, 2010, all remaining commercial paper holdings of the CPFF matured, and the CPFF LLC is expected to be dissolved following the payment of expenses and the termination or expiration of existing contractual agreements. Finally, in April 2010, the credit extended through the last Term Auction Facility (TAF) auction in March matured, marking the close of the facility. The temporary liquidity swap arrangements between the Federal Reserve and other foreign central banks (FCBs) also expired on February 1, 2010. However, the Federal Reserve re-established temporary liquidity swap arrangements with a group of FCBs in May 2010, enabling them to offer U.S. dollar liquidity to financial institutions in their jurisdictions. Information related to these arrangements can be found in the body of this report. Background information about the TAF, the PDCF, the TSLF, the CPFF, and the AMLF, previously included in the body of this report, as well as information about the support provided to Citigroup and Bank of America is presented in this appendix. Historical data related to these facilities, previously reported on the H.4.1 statistical release, “Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks,” which includes the weekly publication of the Federal Reserve’s balance sheet, is available through the Data Download Program, available at www.federalreserve.gov/ datadownload. The Data Download Program provides interactive access to Federal Reserve statistical data in a variety of formats. Lending Facilities to Support Overall Market Liquidity Term Auction Facility (TAF) On December 12, 2007, the Federal Reserve created the TAF to improve depository institutions’ access to term funding. The TAF provided credit through an auction mechanism to depository institutions in generally sound financial condition. The TAF offered 28-day and, beginning in August 2008, 84-day loans. On September 24, 2009, the Federal Reserve announced that the TAF would be scaled back in response to continued improvements in financial market conditions. The auction amount for the 84-day auctions was reduced in late 2009 and the maturity dates of the 84-day auctions were adjusted over time to align with the maturity dates of the 28-day auctions. Subsequently, the auction amount for the remaining 28-day auctions was tapered, and the final TAF auction was held on March 8, 2010. Credit extended under the March 2010 auction matured on April 8, 2010. All TAF loans were fully collateralized to the satisfaction of the lending Reserve Bank, with an appropriate “haircut” applied to the value of the collateral and were repaid in full, with interest, in accordance with the terms of the facility. Lending to Primary Dealers On March 16, 2008, the Federal Reserve announced the creation of the PDCF, an overnight loan facility that provided funding to primary dealers and helped foster improved conditions in financial markets more generally. All credit provided under the PDCF was fully secured by collateral with appropriate haircuts— that is, the value of the collateral exceeded the value of the loan extended. Initially, eligible collateral was 30 restricted to investment-grade securities. On September 14, 2008, however, the set of eligible 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, 2008, and November 23, 2008, the Federal Reserve authorized the extension of credit to a set of other securities dealers on terms very similar to the PDCF. There was no borrowing at the PDCF after mid-May 2009. The Federal Reserve closed the PDCF on February 1, 2010. All loans extended under this facility were repaid in full, with interest, in accordance with the terms of the facility. Eligible collateral for loans extended through the PDCF included 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 could not exceed the lendable value of eligible collateral that the dealer provided to the Federal Reserve Bank of New York (FRBNY). The collateral was valued by the clearing banks; values were based on prices reported by a number of private-sector pricing services widely used by market participants. Loans extended under the PDCF were made with recourse beyond the collateral to the primary dealer entity itself. On March 11, 2008, the Federal Reserve announced the creation of the TSLF. Under the TSLF, the FRBNY lent Treasury securities to primary dealers for 28 days against eligible collateral in two types of auctions. For “Schedule 1” auctions, the eligible collateral consisted of Treasury securities, agency securities, and agencyguaranteed mortgage-backed securities (MBS). For “Schedule 2” auctions, the eligible collateral included Schedule 1 collateral plus highly rated private securities. In mid-2008, the Federal Reserve introduced the Term Securities Lending Facility Options Program (TOP), which offered options to primary dealers to draw upon short-term, fixed-rate TSLF loans from the System Open Market Account (SOMA) portfolio in exchange for program-eligible collateral. The TOP was intended to enhance the effectiveness of the TSLF by offering added liquidity over periods of heightened collateral market pressures, such as quarter-end dates. Transactions under the TSLF involved lending securities rather than cash: A dealer borrowed Treasury securities from the Federal Reserve and provided another security as collateral. Eligible collateral was determined by the Federal Reserve. Two schedules of collateral were defined. Schedule 1 collateral consisted of Treasury, agency, and agency-guaranteed MBS. Schedule 2 collateral included investment-grade corporate, municipal, mortgage-backed, and asset-backed securities, as well as Schedule 1 collateral. Haircuts on Credit and Liquidity Programs and the Balance Sheet posted collateral were determined by the FRBNY using methods consistent with current market practices. TSLF Schedule 1 and TOP auctions were suspended effective July 2009 in light of considerably lower use of the facility. Furthermore, in September 2009 the Federal Reserve announced its intention to scale back the size of TSLF auctions held between October 2009 and January 2010. The size of TSLF auctions was reduced to $50 billion in October 2009 and $25 billion in November 2009; offering amounts remained at $25 billion in December 2009 and January 2010. Since mid-August 2009, borrowing from the TSLF had remained unchanged at zero. The January 7, 2010, TSLF Schedule 2 auction was the last auction conducted prior to the closure of the TSLF on February 1, 2010. All loans extended under these facilities were repaid in full, with interest, in accordance with the terms of the facility. Commercial Paper Funding Facility (CPFF) The CPFF, which was authorized under Section 13(3) of the Federal Reserve Act, was designed to support liquidity in the commercial paper markets. The CPFF provided a liquidity backstop to U.S. issuers of commercial paper through a specially created limited liability company (LLC) called CPFF LLC. This LLC purchased three-month unsecured and asset-backed commercial paper directly from eligible issuers. The FRBNY provided financing to the LLC, and the FRBNY’s loan to the LLC was secured by all of the assets of the LLC, including those purchased with the accumulated upfront fees paid by the issuers. Outstanding assets and liabilities of the CPFF LLC are consolidated onto the balance sheet of the FRBNY. The CPFF was announced on October 7, 2008, and purchases of commercial paper began on October 27, 2008. The FRBNY administered the program until it was closed on February 1, 2010. The CPFF incurred no losses on its commercial paper holdings, and accumulated nearly $5 billion in earnings primarily from interest income, credit enhancement fees, and registration fees, which has been paid to the FRBNY as Managing Member. The CPFF’s holdings of commercial paper, which peaked at $350 billion in January 2009, fell to zero on April 26, 2010, as remaining issuers repaid their commercial paper at maturity. The cash equivalents and other securities held by the CPFF LLC have matured, and the Federal Reserve expects that it will dissolve the LLC following the payment of accrued professional fees and the termination or expiration of existing contractual arrangements. 31 August 2010 Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) The AMLF was a lending facility that financed the purchase of high-quality asset-backed commercial paper from money market mutual funds (MMMFs) by U.S. depository institutions and bank holding companies. The program was intended to assist money funds that held such paper in meeting the demand for redemptions by investors and to foster liquidity in the asset-backed commercial paper (ABCP) market and money markets more generally. The loans extended through the AMLF were non-recourse loans; as a result, the Federal Reserve had rights to only the collateral securing the loan if the borrower elected not to repay. To help ensure that the AMLF was used for its intended purpose of providing a temporary liquidity backstop to MMMFs, the Federal Reserve established a redemption threshold for use of the facility. Under this requirement, a MMMF had to experience material outflows—defined as at least five percent of net assets in a single day or at least 10 percent of net assets within the prior five business days—before the ABCP that it sold was eligible collateral for AMLF loans to depository institutions and bank holding companies. Any eligible ABCP purchased from a MMMF that had experienced redemptions at these thresholds could have been pledged to the AMLF at any time within the five business days following the date that the threshold level of redemptions was reached. The creation of the AMLF, announced on September 19, 2008, relied on authority under Section 13(3) of the Federal Reserve Act. It was administered by the Federal Reserve Bank of Boston, which was authorized to make AMLF loans to eligible borrowers in all 12 Federal Reserve Districts. AMLF Collateral. Collateral eligible for the AMLF was limited to ABCP that: — was purchased by the borrower on or after September 19, 2008, from a registered investment company that held itself out as a MMMF and had 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 F1 at the time it was pledged to the Federal Reserve Bank of Boston (this would exclude paper that is rated A-1/P-1/F1 but was 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 — had a stated maturity that did not exceed 120 days if the borrower is a bank, or 270 days if the borrower is a non-bank. The qualifying ABCP was transferred to the Federal Reserve Bank of Boston’s restricted account at the Depository Trust Company before an advance, collateralized by that ABCP, was approved. The collateral was 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 were made without recourse, provided the requirements in the Letter of Agreement were met. Since May 8, 2009, there had been no new borrowing through the AMLF, and as of October 13, 2009, all prior outstanding AMLF credit had matured. The AMLF was closed on February 1, 2010. All loans made under the facility were repaid in full, with interest, in accordance with the terms of the facility. Lending in Support of Specific Institutions During the financial crisis, the Federal Reserve agreed to provide credit, if necessary, to support Citigroup Inc. (Citigroup) and Bank of America Corporation (Bank of America), two important financial firms, as part of a package of supports for these institutions made available by the Treasury Department, the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve. Citigroup On November 23, 2008, the Treasury, the Federal Reserve, and the 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, under which the government parties had agreed to provide certain loss protections and liquidity supports to Citigroup with respect to a designated pool of $301 billion of assets, are provided on the Federal Reserve website at www.federalreserve.gov/ monetarypolicy/bst_supportspecific.htm. The FRBNY did not extend credit to Citigroup under this arrangement. On December 23, 2009, the Treasury, the Federal Reserve, and the FDIC agreed to terminate the Master Agreement dated January 15, 2009, with Citigroup. In consideration for terminating the Master Agreement, the FRBNY received a $50 million termination fee 32 from Citigroup. Outstanding expenses in connection with the Master Agreement and not yet reimbursed by Citigroup will continue to be reimbursable. Bank of America On January 16, 2009, the Treasury, the Federal Reserve, and the FDIC jointly announced that the U.S. government had agreed to provide certain support to Bank of America to promote financial market stability. Information concerning these actions is available on the Federal Reserve website at www.federalreserve.gov/ monetarypolicy/bst_supportspecific.htm. Credit and Liquidity Programs and the Balance Sheet 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 the package of supports announced in January 2009—specifically, a residual financing arrangement with the Federal Reserve 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. In September 2009, Bank of America paid an exit fee in order to terminate the term sheet, which was never implemented, with the Treasury, the Federal Reserve, and the FDIC. The Federal Reserve’s portion of the exit fee was $57 million.
@FedFRASER