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.
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.
After June 26, 2010 (the end of the Accumulation Period), distribution of the proceeds realized on the Asset Portfolio will occur on a monthly basis, unless otherwise directed by the Federal Reserve, 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 Reserve Account is managed in accordance with meeting the objective described above, subject to the maintenance of sufficient liquidity to meet expected payments and obligations. Subsequent to the Accumulation Period, funds may be invested in short-term investments limited to: Treasury securities and agency debt obligations with remaining maturity of a year or less; U.S. 2a-7 Treasury/Agency money market funds; and reverse repurchase agreements collateralized by U.S. Treasury and agency securities.
Additionally, for purposes of managing interest rate risk the Investment Manager may enter into or purchase:
- Interest rate swaps;
- Interest rate caps and floors;
- Swaptions;
- Treasuries;
- Agency TBAs;
- Eurodollar, Federal Funds and Treasury futures; and
- Options on Treasury futures or Eurodollar futures.
Transactions that create new exposures to credit derivatives, equities, commodities, foreign currency-denominated assets or sub-investment grade assets are expressly prohibited. For the avoidance of doubt, termination of a credit derivative that results in a net non-zero exposure to a reference obligation is not considered to be a transaction that creates a new exposure.
For purposes of meeting the investment objective discussed above or to meet contractual obligations to derivative counterparties, the Investment Manager may take the following actions:
- Purchase any underlying assets sold in a CDO (Collateralized Debt Obligation) liquidation where the CDO in the Asset Portfolio has experienced an event of default; or
- Purchase or accept delivery of any reference obligation underlying a Credit Default Swap (CDS) in the Asset Portfolio where the CDS has experienced a credit event.
The Federal Reserve, at its sole discretion, may add permissible categories for investment.
Description of Maiden Lane LLC facility prior to June 26, 2010 
August 23, 2010 Update: The holdings
of Maiden Lane LLC as of June 30, 2010 have now been
posted.
Holdings of Maiden
Lane LLC as of June 30, 2010
Holdings of Maiden Lane LLC as of March 31, 2010
Holdings of Maiden Lane LLC as of January 29, 2010
New York Fed releases additional information on Maiden Lane portfolios ››
Statement on Financing Arrangement of JPMorgan Chase's Acquisition of Bear Stearns ››
ML LLC Annual Financial Statements, year ended December 31, 2009
ML LLC Annual Financial Statements, year ended December 31, 2008
Summary of assets and outstanding principal balance
of the Loans
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