WASHINGTON — Despite past assurances from the Federal Reserve Board that the assets it assumed from Bear Stearns Cos. and American International Group Inc. could make money for the government, the central bank said Wednesday the holdings lost $5.3 billion in the first quarter.
The decline was revealed in a report the Fed compiled in response to congressional demands for details about its interventions in financial markets. The report, which is to be issued monthly, included data on the number of borrowers that have taken advantage of the Fed's various liquidity programs and the type of collateral they posted.
Most of the loss is related to the rescue of AIG. Maiden Lane III, a limited liability corporation created with $30 billion of the Fed's money to take on the insurance giant's collateralized debt obligations, lost $3.4 billion. A separate LLC, Maiden Lane II, which used $22.5 billion from the Fed to target AIG's holdings of residential mortgage-backed securities, lost $1.6 billion.
A breakdown of Maiden Lane III's portfolio shows that 16.3% of its assets were rated AAA and 71.7% were BB-plus or lower. Most of the assets are high-grade, asset-backed securities; 19.6% are commercial real estate CDOs.
Maiden Lane II, meanwhile, held 12.6% in AAA-rated securities and 64.6% in BB-plus or lower. Nearly 60% of the holdings are tied to subprime mortgages; 26.9% are related to Alt-A loans.
The Fed has also spent $29 billion to take on some of Bear's assets, an investment that lost $332 million. In a briefing for reporters Wednesday, senior Fed officials blamed the losses on mark-to-market accounting and said the central bank's financial advisers think the assets could still make money if they are held to maturity.
The Fed officials said their report was an effort to address the sentiment in Congress recently displayed in a nonbinding budget resolution approved by the Senate in April. It called on the central bank to reveal more information about its lending programs. Another resolution that was approved asked the Fed to disclose the identity of borrowers at its discount window, but Fed officials said Wednesday that such a move would disrupt financial markets.
Some of the reported numbers gave more insight into how the central bank's programs have been used. One of the Fed's first responses to the financial crisis, in August 2007, was to expand access to the discount window. Nearly two years later, it is clear that larger banks are taking the most advantage of this decision.
In the four weeks leading up to May 27, an average of 27 banks with more than $50 billion of assets did more than half — $257 billion — of the average borrowing. By contrast, an average of 95 institutions with less than $250 million of assets borrowed $1 billion during the period.
The Fed also tried to make the point that plenty of collateral supports its lending. On May 27, 113 banks were borrowing $47 billion from the discount window against less than 25% of their collateral held at the Fed. Another 118 institutions borrowed $184 billion using between 50% and 75% of their collateral. Fourteen institutions borrowed $2 billion against more than 90% of collateral.
The Fed said it held $965 billion of collateral at May 27 for loans to depository institutions, which includes the discount window as well as other programs, such as cash auctions.
At $279 billion, commercial loans were the biggest chunk of collateral, followed by $173 billion of asset-backed securities. The central bank also held $94 billion worth of residential mortgages and $93 billion of commercial real estate loans.
The report could also signal how the Fed plans to manage its programs in the future. Though it is unlikely to shut down any program soon, it must consider whether all its programs are being used.
The Fed specifically noted lesser use of the primary dealer credit facility, which lends to investment banks, and the commercial paper facility, which buys corporate debt, and said those markets appear to be improving. The central bank's policymaking committee will probably consider its options for an exit strategy from some programs when it meets this month.