Most people don't really understand what Maidon Lane I,II, III are, or what they do?
Well what it really is to what it should be doing are two different things.
Maidon Lane I was created via an LLC, established by the Federal Reserve Bank of New York following the collapse of Bear Stearns. JP Morgan decided to take over Bear Stearns as long as the bad Bear debt was backstopped.
It holds an asset portfolio that JP Morgan found too risky to assume in whole, and consequently the Federal Reserve Bank of New York extended a $30B credit line to Maidon Lane I to facilitate the unwinding of these assets over time.
A recent report from FRBNY, which JP Morgan is on the board of directors stated that the LLC was created as a “Special Purpose Vehicle” or SIV, which was created for the purpose of facilitating “the merger of the Bear Stearns Companies, Inc. and JPMorgan Chase & Co.
This is the same type of vehicle that blew up Citigroup, the same type of vehicle that the FASB has deemed toxic and dangerous, and should be repatriated onto corporate balance sheets.
JP Morgan only contributed $1B to this venture, while the FRBNY patched in $29B in the form of a senior loan used to purchase the asset portfolio of Bear Stearns.
On top of this BlackRock which was singularly chosen is managing this for a nice fee.
As of March 30, 2009, Maiden Lane LLC was showing approximately $300 million dollars in losses, this was a lot better then the $2B in losses it was showing on November 2008.
The assets held by Maiden Lane LLC are mostly "MBS" 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” at a later date.
Two grantor trusts were established to directly acquire the whole mortgage loan assets.
One was formed to acquire the portfolio of commercial mortgage loans.
Maiden Lane Commercial Mortgage Backed Securities Trust 2008-I
The other one was formed to acquire the portfolio of residential mortgage loans.
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.
In connection with the acquisition of the assets, the LLC paid a cost of $249 million to JP Morgan, 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.
So JP Morgan rapes Bear, makes FRBNY set up LLC, contributes only 1/30 of the cost, and also receives $249MM in interest, all at the expense of the Fed/Treasury.
Currently its running a deficit of $300 Million, on top of that any initial accumulation proceeds realized on the LLC, will be paid out as following:
Note that each category must be fully paid before proceeding to the next lower category.
Sounds like a Ponzy Scheme.
1-To pay any costs, fees and expenses of Maiden Lane LLC then due and payable.
2-To pay any amounts owed to derivative counterparties under the related derivative contracts.
3-To repay the outstanding principal amount of the Senior Loan.
4-To 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.
5-To 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.
6-To long as the entire outstanding principal amount of and all accrued and unpaid interest on the Senior Loan have been paid in full and 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.
7-To 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.
You notice that the FBRNY is the last ones to get paid. The ones that fronted the loan in the first place
This is ultimately a giant Ponzy Scheme where everyone gets paid form JP Morgan to Blackrock, except the Fed/Treasury.
This is just Maiden Lane I. There is a Maiden Lane II and III, where it was set up on behalf of AIG.
You don't even want to know the shenanigans here.
The larger point is this.
How in the world can government and the so called regulators hope to resolve the credit crisis, a crisis that partly evolved from dubious transactions carried out through SIVS, OBS, etc when at the heart its the same government that is creating these dubious investment vehicles like Maidon Lane.?
I can understand Maidon Lane I, it was partly created before the broader credit problems, but whats the excuse for II and III?
We have heard from the likes of Bernanke and Geithner explain to us what went wrong, but is not creating these same vehicles counter intuitive to what ever needs to be done?
Also, we here that losses are only $300M. I dont believe it. Who is auditing these books? We have BlackRock who is in charge of daily trading/managing. Where are they getting their pricing from?
From the looks of it, most of these MBS securities are not nearly marked down to what they would trade if a secondary market existed. Blackrock is following Wall Street in placing artificial over valued prices to these bonds. Remember, they get paid partly on the value of the portfolio.
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