THE FEDERAL RESERVE PAGE 1

How do you think the Federal Reserve ended

up owning a shopping mall and controlling
loans to luxury hotels?

Listen to the first part of the report and find

out why the Fed bought $75 billion of troubled
financial products.

Listen to the next part of the report and answer these questions:
1 How does David Zervos describe the Maiden Lane assets?
2 What does the portfolio contain?
3 In what ways is the Fed now like a high street bank?
4 What is the Fed planning to do with the Crossroads Mall?

The portfolio also contains credit-default swaps. What are they? Listen to the next part of the
report and check your ideas.

Listen to the final part of the report and answer these questions:
1 How does the president of the New York Federal Reserve Bank explain the Fed stepping in like it
did?
2 Why is all this important to the average American?
3 What has been the biggest change for the Fed as a result of acquiring these assets?
Now read the article below about the fund and suggest words for the gaps.

BusinessWeek Mutual Inc. and Countrywide

Financial Corp., loans that
April 2010
were made with limited
Fed Reveals Assets borrower documentation.

After months of litigation and The Bear Stearns assets

political scrutiny, the Federal
Reserve yesterday ended
a policy of secrecy over its
Bear Stearns Cos. bailout.
The Fed’s vehicle known
as Maiden Lane LLC has
________________ backed
by mortgages from lenders
including Washington
include bets against the credit
of bond insurers such as
MBIA Inc., Financial Security
Assurance Holdings Ltd. and
a unit of Ambac Financial
Group, putting the Fed in
the position of wagering
companies will stop paying
their ____________.
THE FEDERAL RESERVE PAGE 2
The Fed disclosed that
some of Maiden Lane’s
assets were portions of
commercial ___________ for
hotels, including Short Hills
Hilton LLC in New Jersey,
Hilton Hawaiian Village
LLC in Hawaii, and Hilton
of Malaysia LLC, in addition
to securities backed by
residential mortgages.
The ______________ also
includes $618.9 million
of securities backed by
Countrywide, mortgages
now rated CCC, eight
levels below investment
grade. All the underlying
loans are adjustable-rate
mortgages, with about 88
percent requiring only limited
borrower documentation,
according to Bloomberg
data. About 33.6 percent of
the borrowers are at least
60 days late. Countrywide is
now part of Charlotte, North
Carolina-based Bank of
America Corp.
Maiden Lane has $19.5
million of securities from a
series of collateralized debt
obligations called Tropic
CDO that are backed by
trust preferred securities
of community banks and
thrifts. CDOs are investment
pools made up of a variety of
____________ that provide a
flow of cash.
Yesterday’s release by the
Fed, through its New York
regional bank, also identified
securities acquired in the
bailout of AIG held in vehicles
known as Maiden Lane II and
III.
Assets in Maiden Lane
II totaled $34.8 billion,
according to the Fed, which
set their current market value
in its weekly balance sheet
at $15.3 billion. That means
Maiden Lane II assets are
worth 44 cents on the dollar,
or 44 percent of their face
value, according to the Fed.
Maiden Lane III, which has
$56 billion of assets at face
value, is worth $22.1 billion,
or 39 cents on the dollar,
according to the Fed’s
weekly _______________
sheet. A similar calculation
for the Bear Stearns portfolio
couldn’t be made because
of outstanding derivatives
trades.
“The Federal Reserve
recognizes the importance of
transparency to its financial
stability efforts and will
continue to review disclosure
practices with the goal of
making additional information
publicly available when
possible,” the New York Fed
said in yesterday’s statement.
The central bank said it
reached agreement on
“issues of confidentiality” for
the assets with JPMorgan
Chase, which bought Bear
Stearns in 2008, and AIG.
New York-based JPMorgan
and AIG would incur the first
losses on the portfolios.
Joe Evangelisti, a spokesman
for JPMorgan, and Mark
Herr, a spokesman for AIG,
declined to comment.
Bloomberg filed suit in
November 2008 in U.S.
District Court in New York,
challenging the Fed’s denial,
as well as the denial of a
separate request made in
May 2008, seeking records
of four other emergency
______________ programs.
The district court held that
the Fed should release
documents related to those
four programs, and should
search documents held by
the New York regional bank
to determine whether any of
them should be considered
records of the board of
governors.
The U.S. Court of Appeals on
March 19 upheld the district
court’s ruling on the lending
programs.
Representative Darrell
Issa of California said in a
statement that yesterday’s
disclosure may “signal a new
willingness to cooperate with
Congress as we investigate
how these ____________
deals were structured and
what the decision making
process entailed.”
THE FEDERAL RESERVE PAGE 3
Teacher’s notes
Total pages 3 / student pages 2 / week of 26.04.10 / CD track 4 / advanced (C1)
Gapfill Words in order of appearance:
securities - debts - loans - portfolio - assets - balance - lending - bailout
Transcript
Part 1
MELISSA BLOCK, host: Now, the mystery of Maiden Lane. That’s the name the Federal Reserve gave to $75 billion of
troubled financial products. It bought those products from Bear Stearns and AIG to save the companies from collapse.
But in the nearly two years it’s owned the package, the central bank has refused to say what exactly is in it - until last
week, when the Fed opened its Maiden Lane books. Chana Joffe-Walt, with our Planet Money team, took a look inside.
Part 2
CHANA JOFFE-WALT: David Zervos is one of those guys who writes a report every time the central bank coughs.
He’s an equity strategist with Jefferies and Company. And usually his reports are pretty technical. Not the report on the
Maiden Lane assets. It announced: To say this portfolio is a pile of junk is being unkind to junk.
Dr. DAVID ZERVOS (Head, Global Fixed Income Strategy, Jefferies and Company): It was just unbelievable. However,
Wall Street decided to cut up and dice up and slice up all the risk on all these different loans. It’s all there. It’s disturbing.
JOFFE-WALT: What’s all there? Loans to luxury hotels in Malaysia, Hawaii, Trinidad, the Orchard Hotel in Baton Rouge,
the Civic Opera House in Chicago. Spring 2008, Bear Stearns was on the brink. JP Morgan was interested in taking
over the company but did not want these assets. So the Fed told JP Morgan: OK, you take Bear; we will take the toxic
assets. And in that moment, the Fed went from being a boring, button-up-shirt central bank to a bank that now receives
mortgage payments every month from American homeowners and Hiltons in Hawaii and Malaysia. I talked to Vincent
Reinhart, with the American Enterprise Institute, about this. Now, that’s a strange position for the Fed to be in.
Mr. VINCENT REINHART (American Enterprise Institute): You know what’s even stranger? What would happen if one
of those entities actually failed, that it stopped making payments? The Federal Reserve could wind up owning a hotel in
an airport or a hotel out, you know, overlooking a golf course.
JOFFE-WALT: As Reinhart says this, I point out that on page 24, it does look like there’s one asset that has already
failed: Crossroads Mall.
Mr. REINHART: Yeah, it owns it. REO means real estate owned.
JOFFE-WALT: So the Fed owns that mall?
Mr. REINHART: Yeah.
Unidentified Woman: Thank you for calling the Crossroads Mall shopping line. If you know the name of the store you
are interested in...
JOFFE-WALT: The Fed’s mall has a Chick-fil-A, an AMC theater, and an annoying phone directory. This month, it is
some guy’s job to sell the mall for the Federal Reserve.
Part 3
Deeper into the pages of Maiden Lane, there are credit-default swaps. Credit-default swaps are basically a bet on the
success of an investment. And the Fed has swaps on the state of California, Nevada. In one case, the Fed is in the
unlikely position of betting against a Florida school district - meaning, if the district can’t make good on its debt, the Fed
makes money.
Mr. REINHART: It’s mind-bending, isn’t it?
JOFFE-WALT: It is a little mind-bending.
Part 4
Mr. REINHART: So actually, you should have the image of Chairman Ben Bernanke flying to a speaking engagement.
And he could look out the window and look down and say: Boy, I own a piece of that, I own a piece of that, I own a piece
of that. And that’s the way the Fed’s balance sheet is right now.
Mr. WILLIAM DUDLEY (President, New York Federal Reserve): Well, we’re not happy about this. You know, these were
special circumstances.
JOFFE-WALT: This is not Ben Bernanke, but close - William Dudley. He’s president of the New York Federal Reserve
Bank. We talked to him yesterday. And imagine you’re him. You came into your job thinking: OK, central bank president,
invest in one boring thing, U.S. treasuries, not the wildest creations Wall Street ever dreamed up.
Mr. DUDLEY: I did not expect, as president of the New York Federal Reserve, that I’d be having to worry about a mall
in Oklahoma City.
JOFFE-WALT: The Fed didn’t go into these investments blindly or without reason. Dudley says everyone truly believed
that it would be financial Armageddon if they didn’t step in. And the Fed’s an independent entity. It can do what it
wants. But there are two big reasons this all matters to us. Every week, the Federal Reserve hands over profits to the
government. So gambling on toxic assets could mean less for us. Second, to buy up all this junk, the Fed essentially
had to create money. Creating money often leads to inflation - bad for you and me. So far, neither of these things has
happened. The biggest change has simply been one of identity, a transformation from a boring central bank to more of
a regular bank. And actually not just a regular bank, but a pretty risky one.