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Periodic Report Pursuant to Section 129(b) of the
Emergency Economic Stabilization Act of 2008:
Update on Outstanding Lending Facilities Authorized by the Board
Under Section 13(3) of the Federal Reserve Act
February 25, 2009
Overview
Pursuant to section 129(b) of the Emergency Economic Stabilization Act of
2008 (“EESA”), the Board of Governors of the Federal Reserve System
(the “Board”) is providing the following updates concerning the lending facilities
established by the Board under section 13(3) of the Federal Reserve Act
(12 U.S.C. § 343). This report is the second periodic report filed pursuant to
section 129(b) of the EESA 1 and provides an update concerning all of the loans
and lending facilities authorized by the Board under section 13(3) since March 1,
2008, that are outstanding. These facilities are: (1) the Term Securities Lending
Facility, (2) the loan to Maiden Lane LLC to facilitate the acquisition of The Bear
Stearns Companies, Inc. (“Bear Stearns”) by JPMorgan Chase & Co., Inc.
(“JPMorgan Chase”), (3) the Primary Dealer Credit Facility, (4) the Asset-Backed
Commercial Paper Money Market Mutual Fund Liquidity Facility, (5) the
Commercial Paper Funding Facility, and (6) the lending facilities established for
American International Group, Inc. (“AIG”).
In addition to the credit facilities discussed in this report, the Board also has
authorized the establishment of the following credit facilities under section 13(3)
of the Federal Reserve Act: the Money Market Investor Funding Facility
(“MMIFF”), 2 certain residual financing for Citigroup, Inc., the Term Asset-Backed
Securities Loan Facility (“TALF”), and certain residual financing for Bank of
America Corporation following its acquisition of Merrill Lynch & Co., Inc. No
loans have been made under these credit facilities to date. When a loan is made
under any of these facilities in the future, the Board will file a report with the
Committees concerning the facility in accordance with section 129(b) of the
EESA.
Additional information concerning the MMIFF, TALF, and the residual
financing for Citigroup and Bank of American is available in the reports filed with
1
The Board’s first periodic report was filed on December 29, 2008.
On February 3, 2009, the Board extended the termination date of the MMIFF
until October 30, 2009.
2
1
the Committees on October 28, 2008, December 1, 2008, December 2, 2008, and
January 27, 2009. As indicated in these reports, the Board expected that the terms
for the MMIFF and TALF might be modified to improve the effectiveness and
operations of the programs. Consistent with these efforts, the Board recently
announced a number of material changes to the MMIFF and TALF.
With respect to the MMIFF, the Board announced on January 7, 2009, that
the set of institutions eligible to participate in the MMIFF was expanded to include
a broader set of money market investors. The Board also authorized the
adjustment of several of the economic parameters of the MMIFF. More
information concerning this set of changes to the MMIFF is available on the
Board’s public website. 3
On February 6, 2009, the Board announced additional terms and conditions,
including loan rates and collateral haircuts, for the TALF, and on February 10,
2009, announced its readiness to undertake a substantial expansion of the TALF.
The expansion could increase the size of the TALF to as much as $1 trillion and
could broaden the eligible collateral to encompass additional types of AAA-rated
asset-backed securities, such as commercial-mortgage backed securities and
private-label residential-mortgage backed securities. More information concerning
these changes and the potential for expansion of the TALF in the future is available
on the Board’s public website. 4
In addition, on February 23, 2009, the Board announced and launched a new
section of its public website—“Federal Reserve Credit and Liquidity Programs and
the Balance Sheet.” The new website expands the information provided about the
policy tools the Federal Reserve has employed to address the financial crisis and
simplifies access to that information. The website section presents a wide range of
material, including a detailed explanation the Federal Reserve’s balance sheet;
descriptions of all of the Federal Reserve’s liquidity and credit facilities; discussion
of the Federal Reserve’s risk management practices; information on the types and
amounts of collateral being pledged at the various lending facilities; and an
extensive set of links to Congressional reports and other resources.
3
See http://www.federalreserve.gov/newsevents/press/monetary/20090107a.htm.
4
See http://www.federalreserve.gov/newsevents/press/monetary/20090206a.htm
and http://www.federalreserve.gov/newsevents/press/monetary/20090210b.htm.
2
A. Term Securities Lending Facility
On March 11, 2008, the Board, in conjunction with the Federal Open Market
Committee (“FOMC”), established the Term Securities Lending Facility (“TSLF”)
and authorized the Federal Reserve Bank of New York (the “New York Reserve
Bank”) to lend under this program. The TSLF generally was intended to promote
liquidity in the financing markets for Treasury and other collateral and, in doing so,
foster improved functioning of the financial markets more broadly. Under the
TSLF, the Federal Reserve auctions term loans of U.S. Treasury securities to
primary dealers and accepts a broad range of other securities as collateral. On
July 30, 2008, the Federal Reserve established the TSLF Options Program (“TOP”)
as an extension of the TSLF. Under the TOP, options to draw shorter-term TSLF
loans at future dates are auctioned to the primary dealers. All loans under the
facility are collateralized by a pledge of other securities deemed eligible collateral
by the New York Reserve Bank. Eligible collateral includes (i) all collateral
eligible for tri-party repurchase agreements arranged by the Open Market Trading
Desk, such as Treasury obligations and debt obligations (including mortgagebacked securities) for which the payment of the principal and interest is fully
guaranteed by an agency of the United States, and (ii) investment grade corporate,
municipal, mortgage-backed and asset-backed securities. Collateral is pledged by
winning dealers from their clearing bank custodial accounts and valued daily.
Additional information concerning the TSLF and TOP is available in the report
provided to the Committees on November 3, 2008.
Update. In light of the continuing and substantial strains in many financial
markets, on February 3, 2009, the Board and the FOMC extended the termination
date of the TSLF until October 30, 2009. As of February 18, 2009, the aggregate
par value of Treasury securities lent under the TSLF (including the TOP) was
$115.3 billion. As of the same date, the market value of the collateral pledged
under the TSLF (including the TOP) was $146.1 billion. The Board does not
anticipate any losses to the Federal Reserve or the taxpayers as a result of
securities lending under the TSLF. Any potential losses are mitigated by haircuts
on the value of the collateral, daily revaluation of the collateral, and limits on the
participation of individual dealers. Moreover, loans extended under this program
are with recourse to the borrower beyond the specific collateral pledged.
3
B. Loan to Maiden Lane LLC to facilitate the acquisition by JPMorgan
Chase & Company of Bear Stearns
On March 16, 2008, the Board authorized the New York Reserve Bank to
make a senior loan to a limited liability company, Maiden Lane LLC (“Maiden
Lane”), to acquire $30 billion of identified, less liquid assets of Bear Stearns to
facilitate the purchase of Bear Stearns by JPMorgan Chase. As part of the
agreement among the parties, JPMorgan Chase lent $1 billion to Maiden Lane that
is subordinated for repayment purposes to the New York Reserve Bank’s loan.
When the loan closed on June 26, 2008, because of adjustments in the values of
some of the assets purchased by Maiden Lane from Bear Stearns, the New York
Reserve Bank actually lent $28.8 billion to Maiden Lane, and JPMorgan Chase
actually lent $1.1 billion to Maiden Lane. The New York Reserve Bank’s loan is
secured by a first priority security interest in all of the assets of Maiden Lane.
Additional information concerning the loan to Maiden Lane is available in the
report provided to the Committees on November 3, 2008. 5
Update. As of February 18, 2009, the principal amount of the loan extended
by the New York Reserve Bank to Maiden Lane was $28.8 billion. The current
fair value of the portfolio holdings of Maiden Lane reported on the Board’s
weekly H.4.1 Statistical Release, “Factors Affecting Reserve Balances of
Depository Institutions and Condition Statement of the Federal Reserve Banks,”
for February 18, 2009, was $25.9 billion. Consistent with generally accepted
accounting principles (“GAAP”), the portfolio holdings are revalued as of the end
of each quarter to reflect an estimate of what would be received if the assets were
sold on the measurement date. The fair value reported for February 18, 2009, is
based on the revaluations as of December 31, 2008. The fair value determined
through these revaluations may fluctuate over time. The fair value of the portfolio
holdings that is reported on the weekly H.4.1 release also reflects any accrued
interest earnings, expense payments and, to the extent any may have occurred since
the most recent measurement date, realized gains or losses.
Despite the decline in the current fair value of the collateral, the Board does
not anticipate that the loan to Maiden Lane will result in any net loss to the Federal
Reserve or taxpayers. The Maiden Lane loan was extended with the expectation
5
The Federal Reserve also extended a bridge loan under section 13(3) to Bear
Stearns on March 14, 2008. This loan was repaid in full and with interest on
March 17, 2008. Additional information concerning this bridge loan is available in
the report filed with the Committees on November 3, 2008.
4
that the value of its portfolio would be realized either by holding the assets to
maturity or by selling the assets over an extended period of time during which the
full value of the assets could be realized. The ten-year term of the loan provides
Maiden Lane’s asset manager, BlackRock Financial Management, Inc., an
opportunity to dispose of the assets in an orderly manner over time. In addition,
JPMorgan Chase will absorb the first $1.1 billion of realized losses, should any
occur. Moreover, under the terms of the agreement, the New York Reserve Bank
is entitled to receive interest payments on the loan to Maiden Lane as well as any
residual cash flow generated by the collateral after the loans to the New York
Reserve Bank and JPMorgan Chase are repaid.
C. Primary Dealer Credit Facility
On March 16, 2008, the Board established the Primary Dealer Credit Facility
(“PDCF”) and authorized the New York Reserve Bank to lend under that facility.
The PDCF is an overnight loan facility that provides funding to primary dealers
secured by collateral eligible for tri-party repurchase agreements in the systems of
the major clearing banks. The facility is intended to help address the liquidity
needs of primary dealers and foster improved functioning of financial markets
more generally. On September 21, 2008, the Board authorized the London-based
broker-dealer subsidiaries of Merrill Lynch & Co., Inc. (“Merrill Lynch”), The
Goldman Sachs Group, Inc. (“Goldman Sachs”), and Morgan Stanley to borrow
from the New York Reserve Bank under the PDCF. In addition, with the separate
approval of the applications of Goldman Sachs and Morgan Stanley to become
bank holding companies, the Board authorized the New York Reserve Bank to
extend credit to the U.S. broker-dealer subsidiaries of these firms under the PDCF
against the types of collateral that may be pledged by depository institutions at the
Federal Reserve’s primary credit facility. The Board extended the same collateral
arrangement to the U.S. broker-dealer subsidiary of Merrill Lynch. On
November 23, 2008, in connection with the other actions taken by the Treasury
Department, the Federal Deposit Insurance Corporation and the Federal Reserve
with respect to Citigroup, Inc., the Board authorized the London-based brokerdealer subsidiary of Citigroup, Inc. to borrow from the New York Reserve Bank
under the PDCF.
Collateral eligible to be pledged under the PDCF includes all collateral
eligible as of September 12, 2008, for pledge in tri-party repurchase agreement
transactions through the major clearing banks. Such collateral includes (i) all
collateral eligible for pledge in open market operations, such as Treasury
obligations and debt obligations (including mortgage-backed securities) for which
5
the payment of the principal and interest is fully guaranteed by an agency of the
United States, and (ii) corporate securities, municipal securities, mortgage-backed
securities and asset-backed securities that as of September 12, 2008, were eligible
for pledge in tri-party repurchase agreement transactions through the major
clearing banks. The U.S. broker-dealer subsidiaries of Merrill Lynch, Goldman
Sachs, and Morgan Stanley also may borrow against types of collateral that may be
pledged by depository institutions at the discount window. Additional information
concerning the PDCF, including the expansions described above, is available in the
report provided to the Committees on November 3, 2008.
Update. In light of the continuing and substantial strains in many financial
markets, on February 3, 2009, the Board extended the termination date of the
PDCF until October 30, 2009. As of February 18, 2009, the amount of loans
outstanding under the PDCF was $25.3 billion. As of the same date, the market
value of the collateral pledged under the PDCF was $27.2 billion. The Board does
not anticipate that lending under the PDCF will result in any losses to the Federal
Reserve or the taxpayers. Any loans made under the PDCF are with recourse to
the broker-dealer entity beyond the pledged collateral, and the risk of loss is
mitigated by daily revaluation of the collateral and haircuts on the collateral value.
D. Asset-Backed Commercial Paper Money Market Mutual Fund
Liquidity Facility
On September 19, 2008, the Board authorized the creation of the AssetBacked Commercial Paper Money Market Mutual Fund Liquidity Facility
(“AMLF”) and authorized the Federal Reserve Bank of Boston (“Boston Reserve
Bank”) to lend under the AMLF. The AMLF provides funding to U.S. depository
institutions and bank holding companies to finance their purchases of high-quality
asset-backed commercial paper (“ABCP”) from money market mutual funds
(“MMMFs”) under certain conditions. The program is intended to assist money
market funds that hold such paper in meeting demands for redemptions by
investors and to foster liquidity in the market for ABCP as well as the market for
money market funds more generally. The collateral for loans is the pledged
ABCP, which is equal to the amount of the advances. Additional information
concerning the AMLF is available in the report provided to the Committees on
November 3, 2008.
Update. In light of the continuing and substantial strains in many financial
markets, on February 3, 2009, the Board extended the termination date of the
AMLF until October 30, 2009. As of February 18, 2009, the aggregate amount of
6
outstanding advances under the AMLF was $12.7 billion for which an equal
amount of ABCP at amortized cost has been pledged as collateral. The Board does
not expect that advances under the AMLF will result in any realized losses to the
Federal Reserve or the taxpayers. The program is limited to ABCP that receives
the highest rating from a major credit-rating agency. Moreover, ABCP is
supported by the assets backing the paper.
E. Commercial Paper Funding Facility
On October 14, 2008, the Board authorized the creation of the Commercial
Paper Funding Facility (“CPFF”) and authorized the New York Reserve Bank to
extend credit under the facility. The CPFF is designed to provide a liquidity
backstop to U.S. issuers of commercial paper through a special purpose vehicle
(“SPV”) that purchases three-month unsecured and asset-backed commercial paper
directly from eligible issuers. Loans provided to the SPV have a three-month term
to match the term of the commercial paper acquired. Additional information
concerning the CPFF is available in the report provided to the Committees on
October 14, 2008.
Update. In light of the continuing and substantial strains in many financial
markets, on February 3, 2009, the Board extended the termination date of the
CPFF until October 30, 2009. As of February 18, 2009, the aggregate amount of
outstanding advances under the CPFF was $246.5 billion. As of the same date, the
value of the collateral pledged under the CPFF, as determined on an amortized cost
basis, was $248.7 billion. The Board does not anticipate that advances made under
the CPFF will result in any losses to the Federal Reserve or the taxpayers. All
advances to the SPV are made with full recourse to the SPV and are secured by all
the assets of the SPV. In addition, in situations where the obligations acquired by
the SPV are ABCP, the Federal Reserve’s advances will be secured by the assets
that support the commercial paper. To use the CPFF, each issuer must pay a
proportional fee, and all fees are retained by the SPV to provide an additional
cushion against losses. In addition, issuers of commercial paper that is not ABCP
pay an additional fee, provide acceptable collateral, or have the paper indorsed.
F. Loans to American International Group, Inc.
On November 10, 2008, the Board and the U.S. Department of the Treasury
(“Treasury Department”) announced the restructuring of the U.S. government’s
support for AIG. AIG is a large, diversified financial services company that, as of
September 30, 2008, reported consolidated total assets of slightly more than
7
$1 trillion. In 2007, AIG's U.S. life and health insurance businesses ranked first in
the United States in terms of net premiums written ($51.3 billion), and its U.S.
property and casualty insurance businesses ranked second in the United States in
terms of net premiums written ($35.2 billion). In addition to its on-balance-sheet
positions, AIG is a major participant in a wide range of derivatives markets
through its Financial Services division, and is a significant counterparty to a
number of major national and international financial institutions. The actions
taken by the Board and the Treasury Department were intended to facilitate AIG’s
execution of its plan to sell certain of its businesses in an orderly manner, resolve
temporary liquidity issues, and promote financial stability, while protecting the
interests of the U.S. government and taxpayers.
As part of this restructuring, the Treasury Department acquired $40 billion
in newly-issued senior preferred stock of AIG, using funding from the Troubled
Asset Relief Program ("TARP") established by the EESA. This investment
constituted an important part of the restructuring actions by providing new equity
capital to AIG, a tool that was not available to the U.S. government at the time the
Federal Reserve initially provided liquidity to AIG in September 2008. In
conjunction with the Treasury Department's investment, the Board authorized the
New York Reserve Bank to—
1. Restructure the credit facility initially provided to AIG on September 16,
2008 (the “Revolving Credit Facility”), by, among other things, reducing
to $60 billion from $85 billion the total amount of credit available under
the facility, reducing the interest rate and fees payable under the facility,
and extending to five years from two years the term of the facility;
2. Provide up to $22.5 billion in senior secured credit to a newly formed
limited liability company, Maiden Lane II, LLC (“ML-II”), to partially
fund the acquisition by ML-II from AIG of approximately $40 billion
(par value) in residential mortgage-backed securities (“RMBS”)
purchased by AIG with the cash collateral received through the securities
lending operations of AIG's regulated insurance subsidiaries; and
3. Provide up to $30 billion in senior secured credit to a separate, newly
formed limited liability company, Maiden Lane III, LLC (“ML-III”), to
partially fund the acquisition by ML-III from the current counterparties
of AIG of approximately $69 billion (par value) in multi-sector
collateralized debt obligations (“CDOs”) protected by credit default
swaps and similar contracts written by AIG.
8
Additional information concerning each of these authorizations and credit facilities
is provided in the report filed with the Committees on November 17, 2008.
Update.
Revolving Credit Facility. As of February 18, 2009, AIG had $37.4 billion
in advances outstanding under the Revolving Credit Facility.
As discussed in the report filed on November 17, 2008, AIG is
unconditionally obligated to repay the unpaid principal amount of all advances
under the Revolving Credit Facility, together with accrued and unpaid interest
thereon and any unpaid fees, on the maturity date. Also, all outstanding balances
under the Revolving Credit Facility are secured by the pledge of assets of AIG and
its primary non-regulated subsidiaries, including AIG's ownership interest in its
regulated U.S. and foreign subsidiaries. 6 Furthermore, AIG's obligations to the
New York Reserve Bank continue to be guaranteed by many of AIG's domestic,
nonregulated subsidiaries that have more than $50 million in assets. 7 These
guarantees themselves are separately secured by assets pledged to the New York
Reserve Bank by the relevant guarantor. Additional subsidiaries of AIG may be
added as guarantors over time by signing a short supplemental agreement.
The New York Reserve Bank's agreement to provide advances under the
Revolving Credit Facility also is specifically conditioned on the Reserve Bank
being satisfied in its sole discretion with the nature and value of the collateral
securing AIG's obligations at the time of the advance, and on the Reserve Bank
being reasonably satisfied in all respects with the corporate governance of AIG.
Representatives of the New York Reserve Bank are in regular contact with AIG's
senior management and attend all AIG board of directors meetings, including
committee meetings, as an observer. The New York Reserve Bank also has staff
on-site at AIG to monitor the company's funding, cash flows, use of proceeds and
progress in pursuing its global divestiture plan. Control and management of the
daily business and operations of AIG and its subsidiaries continue to be vested in
the new chairman and chief executive officer of AIG and his management team.
These and other provisions protect the interests of the Federal Reserve, the
6
In the case of foreign subsidiaries, the equity interest the Reserve Bank will
accept as collateral is limited to 66 percent ownership in order to avoid adverse tax
consequences for AIG or its subsidiaries.
7
Regulated subsidiaries, such as insurance companies, typically are not permitted
to provide such guarantees.
9
Treasury Department, and taxpayers in providing for full repayment by AIG of all
of its Federal Reserve borrowing.
In light of the complexities involved in valuing the extremely broad and
diverse range of collateral and guarantees securing all advances under the
Revolving Credit Facility, the Board believes any estimate at this time of the
aggregate value that ultimately will or may be received from the sale of collateral
or the enforcement of the guarantees in the future would be speculative and could
interfere with the goal of maximizing value through the company’s global
divestiture program and, consequently, diminish the proceeds available to repay
the Revolving Credit Facility. Given the substantial assets and operations
supporting repayment of the loan, as well as the equity interest in AIG that the U.S.
Treasury Department has received or will receive, the Board does not expect that
the Revolving Credit Facility will result in any net loss to the Federal Reserve or
taxpayers.
Maiden Lane II and Maiden Lane III. ML-II commenced operations on
December 12, 2008, through the acquisition from AIG of approximately
$39.3 billion (par value) of RMBS. As of February 18, 2009, the principal amount
of the loan extended to ML-II by the New York Reserve Bank was $18.8 billion.
ML-III commenced operations on November 25, 2008, through the
acquisition of approximately $46.1 billion (par value) of multi-sector CDOs. An
additional $16 billion (par value) of multi-sector CDOs were acquired by ML-III
through additional closings that occurred on December 18, 2008, and
December 22, 2008. As of February 18, 2009, the principal amount of the loan
provided to ML-III by the New York Reserve Bank was $24.3 billion.
The current fair values of the net portfolio holdings of ML-II and ML-III
reported on the weekly H.4.1 release for February 18, 2009, were $18.6 billion and
$27.7 billion, respectively. Consistent with GAAP, the portfolio holdings of ML-II
and ML-III will be revalued as of the end of each quarter to reflect an estimate of
what would be received if the assets were sold on the measurement date. The fair
value reported for February 18, 2009, is based on the revaluations as of
December 31, 2008. The fair value determined through these revaluations may
fluctuate over time. 8 The fair values of the portfolio holdings of ML-II and ML-III
8
The fair value of the additional multi-sector CDOs acquired after the
commencement date of ML-III was determined in connection with the acquisition
of such obligations by ML-III.
10
that are reported on the Board’s weekly H.4.1 release reflect the most recent
valuations of the portfolio holdings of ML-II and ML-III adjusted to reflect any
accrued interest earnings, expense payments and, to the extent any may have
occurred since the most recent valuation date, realized gains and losses.
Because the collateral assets for the loans to ML-II and ML-III are expected
to generate cash proceeds and will be sold over time, the current reported fair
values of the net portfolio holdings of ML-II and ML-III do not reflect the amount
of aggregate proceeds that the Federal Reserve could receive from payments on the
assets over time or from the sale of the assets of these entities over time. The
collateral will be sold over time in a manner that is orderly and designed to reduce
the effects of the unnaturally strong downward market pressures that have been
associated with the recent liquidity crisis. In addition, AIG has a $1 billion
subordinated position in ML-II and a $5 billion subordinated position in ML-III.
These subordinated positions are available to absorb first any loss that ultimately is
incurred by ML-II or ML-III, respectively. The Federal Reserve also is entitled to
receive interest on the loans to ML-II and ML-III while they are outstanding and
5/6ths and 2/3rds of any residual cash flow generated by the collateral held by MLII and ML-III, respectively, after the senior note of the New York Reserve Bank
and the subordinated note of AIG are repaid.
Given these protections, the Board does not believe that the extensions of
credit to ML-II or ML-III will result in any net cost to the taxpayers resulting from
the failure to repay the principal and interest of the senior loans provided by the
New York Reserve Bank.
Securities Borrowing Facility. As explained in the report filed with the
Committees on November 17, 2008, the proceeds received by AIG and its
insurance subsidiaries from the establishment of Maiden Lane II were used to
terminate the securities lending program operated by certain of AIG’s regulated
insurance subsidiaries. Accordingly, the $37.8 billion securities borrowing facility
authorized by the Board for AIG in October 2008 under section 13(3) of the
Federal Reserve Act was terminated on December 12, 2008, and all outstanding
balances under that facility were repaid in full. During the term of the facility, the
Federal Reserve received interest on the loans provided and, as expected, the
securities borrowing facility did not result in any losses to the Federal Reserve or
the taxpayers.
11
@FedFRASER