Maiden Lane LLC

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Overview

Maiden Lane LLC is a limited liability company established by the Federal Reserve Bank of New York following the collapse of Bear Stearns.  The company was incorporated on April 29, 2008 in the state of Delaware under the authority of section 13(3) of the Federal Reserve Act.  A 2009 report from the Federal Reserve Bank of New York describes the company as a “special purpose vehicle” which was created for the purpose of facilitating “the merger of the Bear Stearns Companies, Inc. and JPMorgan Chase & Co.”¹ In the formation of the company,  JPMorgan Chase & Co. contributed $1 billion and the Federal Reserve Bank of New York contributed $29 billion in the form of a senior loan that was used to purchase the asset portfolio of Bear Stearns.  As of March 30, 2009, Maiden Lane LLC was showing approximately $300 million dollars in losses.²

Formation of the LLC

According to the Federal Reserve, the authority to form Maiden Lane LLC is derived from section 13(3) of the Federal Reserve Act.  This section states:

In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may authorize any Federal reserve bank, during such periods as the said board may determine, at rates established in accordance with the provisions of section 14, subdivision (d), of this Act, to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are indorsed or otherwise secured to the satisfaction of the Federal Reserve bank: Provided, That before discounting any such note, draft, or bill of exchange for an individual, partnership, or corporation the Federal reserve bank shall obtain evidence that such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions. All such discounts for individuals, partnerships, or corporations shall be subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe.³

According to section 13(3) of the Federal Reserve Act, this authority to discount “notes, drafts, and bills of exchange” for “any individual, partnership, or corporation” has only two requirements.  First, the action must be approved by five members of the Federal Reserve Board of Governors.  Second, the institution issuing the “notes, drafts, and bills of exchange” to be discounted must be unable to “secure adequate credit accommodations from other banking institution.”⁴

Written testimony submitted to the House Banking Committee by Timothy Geithner, chairman of the Federal Reserve Bank of New York at the time, indicates that the bank “extended credit in connection with the acquisition of Bear Steams by JPMC pursuant to section 13(3) of the Federal Reserve Act, which was enacted in 1932. Under section 13(3), in unusual and exigent circumstances, the Board may authorize any Reserve Bank to extend credit to any individual, partnership, or corporation if the Reserve Bank obtains evidence that the borrower is unable to secure adequate credit accommodations from other banking institutions. Credit extended under section 13(3) must be secured to the satisfaction of the Reserve Bank. From July 1932 to July 1936, several Reserve Banks made loans using section 13(3) authority to a number of individuals and businesses. Records indicate that these loans were secured by a diverse range of collateral, including common stock, commercial inventory, and receivables of the borrowing businesses.”⁵

Using this authority, the Federal Reserve Bank of New York formulated Maiden Lane LLC as a holding company for the discounted assets of the recently collapsed Bear Stearns.  The website for the New York Fed describes the action thusly:

In March 2008, the Federal Reserve Bank of New York (New York Fed) and JPMorgan Chase & Co. (JPMC) entered into an arrangement related to the financing provided by the New York Fed 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 New York Fed under section 13(3) of the Federal Reserve Act, to extend credit to a Delaware limited liability company, Maiden Lane LLC (ML LLC), to fund the purchase of a portfolio of mortgage related securities, residential and commercial mortgage loans and associated hedges (Asset Portfolio) from Bear Stearns.

The New York Fed has all material control rights over the Asset Portfolio and is the sole and managing member of ML LLC.

ML LLC borrowed approximately $28.8 billion from the New York Fed in the form of a senior loan (Senior Loan), which, together with funding from JPMC of approximately $1.15 billion in the form of a subordinate loan (Subordinate Loan, and together with the Senior Loan, the Loans) was used to purchase the Asset Portfolio from Bear Stearns.  The Asset Portfolio had an estimated fair value as of March 14, 2008, of approximately $30 billion.⁶

In Mr. Geithner’s testimony to the House Banking Committee, he claims that the contents and structuring of the portfolio controlled by Maiden Lane LLC are unable to be made public.  This is because  “public disclosure of individual assets in the collateral pool and of the hedging strategies that are employed to reduce the risk in the portfolio would undermine our ability to best protect the taxpayer against loss on the liquidation of the portfolio.”⁷

Geithner also describes the decision to form a limited liability company with Bear Stears assets:

The decision to incorporate as an LLC was based on the tax pass-through feature of the LLC, the liability protection the LLC structure affords to its members, and the ability of its members to tailor the LLC form to suit their needs. The decision to incorporate in Delaware was based on the quality of Delaware law which is updated regularly to reflect current corporate developments, the flexibility of the Delaware statute, the speed in which administrative matters can be handled in Delaware, and our belief that it was appropriate in this context to incorporate in the United States.⁸

The testimony of Mr. Geithner indicates that the Federal Reserve Bank of New York can not identify “any record indicating the prior use of a limited liability company to hold collateral securing an extension of credit made by a Reserve Bank pursuant to section 13(3).”⁹

BlackRock Financial Management and Conflicts of Interest

Following the formation of Maiden Lane LLC, the Federal Reserve Bank of New York chose BlackRock Financial Management, an investment management firm which helped to pioneer the idea of mortgage-backed securities, to manage the firm’s assets.  BlackRock was originally the Financial Management portion of Peter G. Peterson and Stephen A. Schwarzman’s Blackstone Group. The Blackstone Group and BlackRock Financial Management both derive their name from their cofounders’ surnames; schwarz means “black” in German and Peter is derived from the Greek word πετρος meaning “stone”. Laurence Fink, who ran the Financial Management division of the Blackstone Group, was heavily involved with the initial creation of mortgage-backed securities, the same type of financial products that would later lead to the Global Financial Crisis of 2008-2009.¹⁰

Peter G. Peterson, the cofounder of the Blackstone Group, is the Chairman Emeritus of the Council on Foreign Relations, as well as the former Chairman of the Federal Reserve Bank of New York prior to Mr. Geithner.  James Dimon, Timothy Geithner, and Stephen A. Schwarzman are all members of the Council on Foreign Relations.  James Dimon is also a Class A director of the Federal Reserve Bank of New York. Mr. Schwarzman was a member of the Skull and Bones society at Yale University.¹¹¹²¹³

Financial Status of the LLC

The assets held by Maiden Lane LLC are mostly “mortgage-related securities” and “whole mortgage loans” which are held by two grantor trusts, a total return swap with JPMC, as well as “mortgage commitments to be announced”. Two grantor trusts were established to directly acquire the whole mortgage loan assets. One was formed to acquire the portfolio of commercial mortgage loans and one was formed to acquire the portfolio of residential mortgage loans, Maiden Lane Commercial Mortgage Backed Securities Trust 2008-I and Maiden Lane Asset Backed Securities I Trust 2008-1. The Grantor Trusts own the whole mortgage loans. The LLC owns the trust certificates representing all of the beneficial ownership interest in each trust and as a result controls and consolidates the Grantor Trusts. According to the Federal Reserve, the trustee and master servicers for each Grantor Trust are “nationally recognized financial institutions”.¹⁴

In connection with the acquisition of the assets, the LLC paid a cost of $249 million to JPMC, representing a financing cost incurred from March 14, 2008 through the settlement dates on the various assets. The cost of carry is recorded as “Other interest expense” in the Consolidated Statement of Income. The transaction was completed based upon a March 14, 2008 purchase date but with settlement dates of June 26, 2008 or later. Due to the extended settlement dates, interest was charged on the cost of securities purchased or credited for cash flows on the purchased
securities that occurred after March 14, 2008 through the date the securities were either paid for or received by the LLC.¹⁵

The Federal Reserve Bank of New York says that following an initial accumulation period distribution of the proceeds realized on the asset portfolio of the LLC will occur on a monthly basis, and will be made in the following order (each category must be fully paid before proceeding to the next lower category):

• first, to pay any costs, fees and expenses of Maiden Lane LLC then due and payable;
• second, to pay any amounts owed to derivative counterparties under the related derivative contracts;
• third, to repay the outstanding principal amount of the Senior Loan;
• fourth, so long as the entire outstanding principal amount of the Senior Loan has been repaid in full, to pay unpaid interest outstanding on the Senior Loan accrued at the Primary Credit Rate;
• fifth, so long as the entire outstanding principal amount of and all accrued and unpaid interest outstanding on the Senior Loan have been paid in full, to repay the outstanding principal amount of the Subordinate Loan;
• sixth, so long as (i) the entire outstanding principal amount of and all accrued and unpaid interest on the Senior Loan have been paid in full and (ii) the entire outstanding principal amount of the Subordinate Loan has been repaid in full, to pay unpaid interest outstanding on the Subordinate Loan accrued at the Primary Credit Rate plus 450 basis points;
• seventh, so long as the entire outstanding principal amount of and all accrued and unpaid interest on the Loans have been paid in full, and after termination and payment of any amounts owed to the counterparties under the related derivative contracts, to pay all available proceeds to the New York Fed as holder of the Senior Loan. ¹⁶

The last quarterly report on the LLC was issued March 30, 2009.  The report revealed a net loss of over $300 million dollars.¹⁷

Outstanding Principal Balance of Loans

(in Millions)	Senior Loan	Subordinate Loan
Principal Balance at Closing	$28,820	$1,150
Accrued and Capitalized Interest to 12/31/2008	267	38
Principal repayment from closing to 12/31/2008	-	-
Principal Balance on 12/31/2008	29,087	1,188
Accrued and Capitalized Interest to 3/31/2009	36	14
Repayment during the period	-	-
Principal Balance on 3/31/2009	$29,123	$1,20

Summary of Portfolio Composition, Cash/Cash Equivalents and Other Assets and Liabilities

(in Millions)	Fair Value on 3/31/2009	Fair Value on 12/31/2008
Agency CMOs	$14,369	$13,565
Non-Agency CMOs	1,552	1,836
Commercial loans	4,697	5,553
Residential loans	780	937
Swap contracts	2,280	2,454
TBA commitments	1,448	2,089
Other investments	1,221	1,360
Cash & Cash Equivalents1	2,640	2,531
Adjustment for other Assets2	1,869	310
Adjustment for other Liabilities3	(5,505)	(4,951)
Net Assets4	$25,352	$25,684

¹ Including cash and cash equivalents on deposit in the Reserve Account
² Including interest and principal receivable and other receivables
³ Including amounts payable for securities purchased, collateral posted to ML LLC by swap counterparties, and other liabilities/accrued expenses
⁴ Columns may not total due to rounding

At March 31, 2009, the ratings breakdown of the $17.1 billion fair value of securities in the ML LLC portfolio (as a percentage of aggregate fair value of all securities in the portfolio) was as follows:

	Rating1
Security Type:2	AAA	AA+ to AA-	A+ to A-	BBB+ to BBB-	BB+ and lower	Gov’t/ Agency	Total4
Agency CMOs	0.0%	0.0%	0.0%	0.0%	0.0%	83.8%	83.8%
Non-Agency CMOs	2.2%	0.2%	0.8%	0.4%	5.4%	0.0%	9.1%
Other3	2.4%	1.4%	0.5%	0.7%	2.2%	0.0%	7.1%
Total4	4.6%	1.6%	1.3%	1.1%	7.6%	83.8%	100.0%

¹ Lowest of all ratings is used for purposes of this table
² This table does not include the ML LLC’s swaps and other derivative contracts, commercial and residential mortgage loans and TBA investments
³ Includes all asset sectors that, individually, represent less than 5% of aggregate portfolio fair value
⁴ Rows and columns may not total due to rounding

The following table summarizes the state in which residential mortgage loans held in the ML LLC are secured at March 31, 2009:

Geographic Location	Percentage1
California	35.9%
Florida	9.1%
Other2	55.0%
Total	100.0%

¹ Based on a percentage of the total unpaid principal balance of the underlying loans
² No other individual state comprises more than 5% of the total

The following table summarizes Commercial Mortgage Loans Property Type Concentration at March 31, 2009:

Property Type	Percentage1,2
Hospitality	79.0%
Office	11.0%
Other3	10.0%
Total	100.0%

¹ Based on a percentage of aggregate unpaid principal balance of the underlying loans
² At March 31, 2009, one issuer represented approximately 48% of aggregated unpaid balance of the commercial mortgage loan portfolio
³ No other individual property type comprises more than 5% of the total

At March 31, 2009, Non-Agency CMOs held by ML LLC were secured by properties at the locations identified below:

Geographic Location	Percentage1
California	39.0%
Florida	12.0%
Other2	49.0%
Total	100.0%

¹ Based on a percentage of aggregate unpaid principal balance of the underlying loans
² No other individual state comprises more than 5% of the total

Source notes: