Your Government & Your Financial Markets

Seems like a good time to review the governmental & quasi governmental rescues so far:

Bear Stearns - 3/14/08

The Federal Reserve Bank of New York provided JP Morgan with a $29 billion loan to facilitate JPM's acquisition of Bear Stearns. The loan is backed by mortgages and mortgage backed debt. It is a non-recourse loan: if the stated mortgage collateral is insufficient to pay back the loan (should JPM not repay), The Federal Reserve can't lay claim to any other JPM assets. This is not a U.S. Government rescue since the Federal Reserve is not part of the U.S. Government

Fannie Mae & Freddie Mac - 9/7/08

Fannie & Freddie were placed into conservatorship, run by the Federal Housing Finance Agency. Conservatorship is established by a court order and cedes legal control of an entity to the conservator. It does not eliminate the rights of shareholders and management (such as in a receivership), it simply transfers those rights. The U.S. Treasury Department commits $200 billion dollars to acquire preferred stock in Fannie & Freddie. The preferred stock will pay a 10% dividend. In addition, the U.S. Treasury Department will receive 20 year warrants representing a 79.9% equity stake each entity. The debt of Fannie & Freddie, as well as the mortgages they guarantee are NOT explicitly guaranteed by the Federal Government in this action. The "implicit"guarantee is strengthened. As such, the Federal Government is committed to at least the $200 billion used to acquire the preferred stock and at most the $6.1 trillion in Fannie & Freddie debt and guarantees. The taxpayer is on the hook for this one, this is a Government rescue.

AIG - 9/16/08

The Federal Reserve Bank of New York provided AIG with an $85 billion 2 year loan. The Federal Reserve will receive warrants representing a 79.9% equity stake in AIG. The interest rate on the loan is 3 month LIBOR + 8.50% (roughly 11.4% for the first set). The collateral on the loan is comprised of the total assets of AIG, non-regulated and regulated subsidiaries included. This is not a U.S. Government rescue since the Federal Reserve is not part of the U.S. Government

Note: The Federal Reserve Bank of New York is the main operating entity of the Federal Reserve System. Open market operations are conducted by the New York branch on behalf of the entire System. The System is owned by private banks and is charged by the U.S. Government to conduct monetary policy. It is supplied with a credit line from the U.S. Treasury Department.