In 2008, as part of extending support to specific institutions, under section 13(3) of the Federal Reserve Act, the Federal Reserve Board authorized the New York Fed to facilitate formation of three limited liability companies.
Maiden Lane LLC (ML LLC) was formed to facilitate the merger
of the Bear Stearns Companies, Inc. and JPMorgan Chase & Co.
The New York Fed extended credit to ML LLC to acquire certain
assets of Bear Stearns.
Maiden Lane II LLC (ML II LLC) and Maiden Lane III LLC (ML
III LLC) were formed to facilitate the restructuring of the
New York Fed’s financial support to American International
Group (AIG). The New York Fed extended credit to ML II LLC
to purchase residential mortgage-backed securities from the
securities lending portfolio of several regulated U.S. insurance
subsidiaries of AIG. The New York Fed extended credit to
ML III LLC to purchase multi-sector collateralized debt obligations
from certain counterparties of AIG Financial Products Corp.
More detailed description of each of the Maiden Lane transactions,
along with certain information on each company’s assets
and liabilities is provided
below.
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.
Transaction Overview
ML LLC was formed in the second quarter of 2008. 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.
The
New York Fed has all material control rights over the Asset
Portfolio and is the sole and managing member
of ML LLC.
Significant Transaction Terms
The Loans are
secured by the Asset Portfolio. The
Senior Loan was issued with a stated term of ten years,
and may be extended at the New York Fed’s discretion.
The interest on the Senior Loan is accrued at the
Primary Credit Rate in effect from time to time. Except
as noted below, after the Senior Loan to the New York Fed
has been repaid in full plus interest, to the extent
that there are sufficient remaining cash proceeds,
JPMC will be entitled to repayment of the Subordinate
Loan, plus accrued interest at the Primary Credit Rate in effect from time to
time plus 450 basis points.
After repayment in full of the Senior Loan
and the Subordinate Loan (each including accrued interest),
any remaining proceeds from the Asset Portfolio that
are available for distribution after termination and
payment in full of any obligations under certain derivative
contracts, will be paid to the New York Fed.
During the period from June 26, 2008 (the Closing
Date) to the second anniversary of the Closing Date
(Accumulation Period), any proceeds realized on the
Asset Portfolio (including interest proceeds and proceeds
from maturity or liquidation of the Asset Portfolio)
after payment of certain fees and expenses and any
payments made pursuant to the derivative contracts
will be deposited into a reserve account (Reserve Account)
and reinvested in certain eligible investments. At
the sole discretion of the New York Fed, repayment
of the Senior Loan could commence during the Accumulation
Period, but only so long as the ML LLC pays in full
the outstanding principal amount of the Subordinate
Loan plus any accrued and unpaid interest.
Following the Accumulation Period, to the extent directed
by the New York Fed, distribution of the proceeds realized
on the Asset Portfolio 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 ML 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.
Management of Assets BlackRock Financial Management
Inc. (Investment Manager) has been retained by the
New York Fed to manage the assets held in the ML LLC
portfolio.
The Investment
Manager’s primary objective in managing the ML
LLC
portfolio is to pay off the Senior Loan, including principal and interest, while
refraining from investment actions that would disturb general financial market
conditions.
The Investment Manager may purchase new assets in
pursuit of the objective noted above. Eligible
assets for reinvestment must be dollar-denominated
and must fall within one of the following two categories:
All
U.S. Treasury securities
Agency
securities (MBS and debentures)
New York Fed, at its sole
discretion, may add permissible categories for reinvestment.
Additionally, the Investment Manager may enter into
OTC and exchange-traded derivatives solely for the
purpose of hedging interest rate risk. Derivative
contracts that would create new exposures to equities,
commodities, foreign currency-denominated assets
or sub-investment grade assets are expressly prohibited.
The Reserve Account is managed in accordance with the
criteria described above, subject to the maintenance
of sufficient liquidity to meet expected payments. Funds
may be invested in short-term investments including money-market
funds and reverse repurchase agreements collateralized
by U.S. Treasury and agency securities to address liquidity
needs.
