I'm posting this in behalf of a TF member who has been working his ass off, quietly, behind the scenes, with no fanfare or help. It's time for people to stand up and give him some help, because I think, like me, you might be just a bit impressed with what he's been able to do.

Quote:

Dear TickerForum Members:

Last month I spent a couple of days in Washington DC meeting with my congressman and requesting appointments with any congressmen (members of House Financial Services Committee)/senators/staffers who would see me about the BSC "bailout". I used an introductory letter and this summary (provided below). My efforts resulted in five private sessions (two congressmen, US Senate Chief Economist and financial advisor to a senator, Dem and Rep senior counsel to HFSC, and Chief of Staff to congressman) and plenty of contacts with staffers that might be helpful in trying to protect taxpayers.

Until someone convinces me otherwise, I think the most direct route to arouse taxpayers about their slight "problem" is through the House hearing on BSC. The exact date of the hearing can only be pinned down to "in two to three weeks with a three day notice". Consequently, I opened communication channels that can get questions back to members of the HFSC to help them "prepare" for the hearing.

So this is our chance to possibly affect the outcome of the hearing and I challenge everyone to come up with questions that can be directed to someone from the Fed (could be Bernanke), Treasury, etc.

You have undoubtedly watched hearings and are aware of the time constraints so, in that short time, we have to expose why and to what extent taxpayers are at risk in graphic terms and language that taxpayers will be able to understand. I would be especially grateful if someone can figure out how to do this regarding credit default swaps. I know cynics have already concluded the whole process is one big charade, and that may be true, however let's pretend they are being forthright in their "discovery" for the next three weeks. I have promised my contacts anonymity. I said I would solicit the questions if they will be reviewed by members of the HFSC. I am highly confident they will be reviewed. Whether members choose to use them is out of my control.

So now you have something constructive to do to help taxpayers. I would like to have something to send them in about a week.

Thanks for your help.

Rutben

The following is the Summary that Rutben has prepared:

Quote:

SUMMARY from reports written by Bill Bennett from Jan. 8, 2001 through Jan. 21, 2008.

Something More than "normal" Recession

This is not a "normal" business cycle with a "shallow recession" followed by rebound in economy and housing prices. It is the unwinding of the largest credit bubble in history. The downside will be just as upleasant as the upside was pleasant and it will be unavoidable. If everything was normal, it would have been unnecessary to bail out Bear Stearns creditors to prevent a "meltdown" and nobody would be talking about a depression with the Dow off only 5-7% from its highs. There was no growth in GDP in the last five years without the extraction of home equity via debt and its consumption.


Complicated?

Financial institutions and regulators want everyone to think the credit crisis is too "complicated" to understand. However, with the Enron road map, it is quite understandable. The Federal Reserve and regulators have copied the Enron model. Letting corporations "hide" assets off balance sheet and in "Level III" has enabled them to accumulate debt far exceeding the collateral that is supposed to "secure" it. We lack the will to to find out in aggregate by how much the debt now exceeds its collateral. What's complicated is finding an equitable solution when it becomes necessary to write down debt to its true market value by the amount it exceeds the collateral.


Size of Problem

The size of the problem is best understood by comparing derivatives ($600 trillion) to world GDP ($60 trillion). Why are derivatives ten times more than GDP? Many are used to "bet" rather than just hedge. Sponsors describe them as a way to "transfer" risk to "risk takers" but they end up in what taxpayers think are the most conservative investments. Derivatives are supposed to be "symmetrical", i. e. losing bets = winning bets and therefore a zero sum game, but it became necessary to bail out Bear Stearns (BSC) creditors to prevent systemic meltdown. It is no coincidence Bear Stearns is party to $11 trillion derivatives, including $4 trillion credit default swaps (CDS) or derivatives that supposedly "insure" against debt default. This is an illusion. Counterparty "sellers" of CDS do not have the capital to pay off buyers since they were never regulated and forced to be adequately capitalized. Taking Greenspan's advice, this was left to human nature. Although there are plenty of other problems, CDS are the main problem and why they could not let BSC go through bankruptcy. Bankruptcy, in addition to forcing executives to give up their bonuses, would have forced CDS to be "marked to market", thereby revealing "insurers" did not have the capital to pay off purchasers. This would have triggered "mark to market" of all other financial institution CDS contracts and risked systemic meltdown because losses would likely have been more than the total capital of parties to CDS contracts.


Moral Hazard - Irresponsible, Dishonest, Lack of Transparency

My April 9, 2002 report said "my complaint has always been about the imprudence of exposing the country to monumental risk while simultaneously obfuscating the facts and not being honest to taxpayers". A series of bailouts, starting with the S&L crisis, has cultivated a belief that all crises can be "solved" with bailouts. Bailouts are now expected and none are believed to be too big for an omnipotent Fed. In fact, we are now the bailout nation. While becoming bailout nation, we have simultaneously devalued the currency used to bail out. Bailees used to be bailed out by currency backed by gold. Now they are paid with currency backed by derivatives. The Fed, now following the same strategy as Enron, makes Enron accounting seem OK, i. e. no problem if assets are hidden off balance sheet and if debt is valued arbitrarily by model rather than by market value and collateral. The irony is the perverse incentive for lenders to lend preferably to least qualified borrowers. Knowing borrowers were unlikely to pay, it would be logical for investment banks (as Goldman loudly proclaimed to have done) to buy CDS on their own "clients". I do not have proof of this, but I wouldn't be surprised if many home loans were made and securitized with this in mind. The less the quality control, the greater the gain.


Race to Fed's Balance Sheet

A Feb. 18, 2002 Barron's article by Martin Meyer describes derivatives as "shifting risk to the dumbest guy in the room". The dumbest guy in the room is now the taxpayer as the deleveraging will force more assets of indeterminate value from bank balance sheets to the Fed's balance sheet. The incentive will be to transfer them at "model" value to make taxpayers responsible for the loss when they are forced to be marked to market value. As if this is not bad enough, the Fed is now out of "lendable" assets. Should another asset transfer become necessary to avoid meltdown, the Fed would have to "monetize" assets from Treasury. With Treasury already agreeing to make up losses suffered by the Fed on BSC assets, you can be certain they stand ready to supply the Fed with as many treasuries needed without asking congress or taxpayers.


Listen to Whom? Those Who Have Been Consistently Right or Those Who Have Been Consistently Wrong

Read the Fed minutes as described in Bill Fleckenstein's book "Greenspan's Bubbles". Make a list of Greenspan and Bernanke quotes from my reports. Read my reports and what Fleckenstein, Peter Schiff, Jim Grant, Jim Rogers, Marc Faber, Warren Buffett, Paul Volcker et al have said in the last ten years. Who seems to have understood what was coming and who was clueless? Why keep listening to the clueless and the greedy who caused this problem?


Who Represents Taxpayers? - Frame the Argument

A debate seems to be raging over who is more deserving of bailouts, financial institutions or over-extended homeowners. They both have advocates in congress. However, responsible taxpayers who lived within their means and avoided being part of either group have no advocates. The real debate should be whether taxpayers should be forced to bail out anyone against their will. I can assure you in the strongest terms, that is not their will. Noone should get a bailout, especially if they committed fraud.


What To Do

Enact the recommendations of the Petition you received "Bring Transparency to our Financial System". The recommendations are: no bailouts, no stimulus plans, force all off balance sheet assets back on to balance sheets, audit all financial institutions for capital ratio compliance, mark all assets to market, regulate derivatives and have them trade on exchanges. To eliminate moral hazard applicants and lenders that lied on loan applications, lenders that acted usuriously, rating agencies that falsified credit ratings and brokers that securitized debt based upon dishonest ratings should all be prosecuted. Penalizing taxpayers and not penalizing those who created the crisis with greed and fraud will put the next president in an untenable position. There are already rumblings among taxpayers, eg. national moratorium on paying mortgages. I don't think further injustice will be accepted peacefully. Therefore, it is incumbent on congress to get out in front of this potentially worse problem by admitting the excesses, taking the financial setback whatever it may be and begin prosecuting to prevent moral hazard in the future. Staying the course, i. e. hiding the truth from taxpayers and forcing them to bear the financial hardship through debasement of the dollar will result in an even worse problem. There is no pleasant pathway to pay for our past excesses and fraud. This will be a difficult period. However, there is a just pathway and we should take it.

Below is an example of why financial institutions and regulators can no longer be trusted. It is a transcript from the BSC hearing. Please note the extreme difference between the Fed saying it acted to "avoid meltdown" and JP Morgan, the largest participant by far in derivatives - $91 trillion, saying they had zero exposure to BSC and would have been fine. How could a meltdown occur and affect everyone except JP Morgan?

Senator Shelby: Mr. Dimon, for some time JP Morgan Chase has acted as the clearinghouse for BSC. I believe JP Morgan Chase also has extensive OTC derivative contracts with BSC. What was the extent, sir, of JP Morgan Chase's interconnectedness to BSC prior to BSC's announcement of their intention to file for bankruptcy, and what would have been the impact on your company's balance sheet if BSC had been liquidated? Were these considerations that went through your mind, because you were connected - you were the banker, basically, the commercial banker for an investment bank.

Jamie Dimon: Yes. We were one of their bankers, and one of their main clearinghouses, so we had obviously extensive relationships and exposures, but the answer to your question, our direct exposure, on that day, was approximately zero. So if you say, and where we did have exposure it was fully and totally collateralized. Our real exposure would have been, if BSC went bankrupt, the impact (it) would have had on the financial system, we probably would have lost money but we still would have been in fine shape. So (it) really did not, was not one of the reasons we went ahead and did this transaction. Dimon said JPM had zero exposure to BSC, and while their investments may have lost some value if BSC went bankrupt, they would have been "fine".

Why wasn't there an attempt to determine the method(s) used to price BSC "assets"? and why, since Bernanke said a "good bit" of the assets were "highly rated", did no one ask how much is a good bit?
Where is the anger that will finally stop the giant fleecing of taxpayers by wall street?

Seems to me some of the really hard work here has been done - make the contact and get their attention. Let's get our **** together here and finish the job - now that we have some attention, let's not waste it.

Concurrently http://www.FedUpUSA.org will be officially releasing the announcement of their second protest to be held in Washington D.C. in June.

Let's keep this thread ON TOPIC. This is NOT a place to bitch and moan about 'how it can't be done'.

Karl, pin please?

I'm meetimg with my congressman(Sestak) this forthcoming Saturday morning at 8 am at his office....I've got his undivided attention for twenty minutes....I'm going to be watching this thread closely...so...if you have something to say, please post it in this thread.....

Awesome, Arbcon!!! I'm sure that Rutben wouldn't mind at all that you use this information.

Rutben has made an outstanding personal effort to educate any legislator that he could get within earshot. Excellent work, Rutben! When I have time later, and the capacity to research, I will be certain to add to your questions.

I want to know what makes up that BSC portfolio. From what I heard, it is mostly swaps and not actually bonds/securities. This puts the whole question of counterparty risk front and center and shows us how liquid the portfolio actually is and if losses are actual or model-driven mark-to-market. In the agreement, it appears that BSC/JPM will initiate one monster total return swap for this exposure until all the swaps with the various counterparties can be novated or terminated.

Since the taxpayer is backstopping this vehicle through the Treasury, does the Freedom of Information Act give the public:
1. Access to information about the portfolio such as swap terms, bond names, quantities, etc.
2. Access to the models, inputs and outputs that both Blackrock and JPM are using to value the portfolio, especially the exotic, CDS, CDO and other hard to value instruments.

Blackrock is clearly there to make sure the Treasury/taxpayer is not suckered into taking losses that aren't really there or being given 30B of garbage that was never worth 30B, but how can we be sure?

Quote:

Since the taxpayer is backstopping this vehicle through the Treasury, does the Freedom of Information Act give the public:
1. Access to information about the portfolio such as swap terms, bond names, quantities, etc.
2. Access to the models, inputs and outputs that both Blackrock and JPM are using to value the portfolio, especially the exotic, CDS, CDO and other hard to value instruments.

We damn well should be entitled to know this, at a MINIMUM! Excellent point, Sandra.

What is the face value of the portfolio?

Sandra/Pika-steph: The models are probably proprietary, so any likely useful info would be redacted in any govie response to a FOIA request. Nevertheless, it would be good to put the importance of this into the head of our elected reps as they perform due diligence on our behalf. ;-)

Okay, maybe not the code to the models, but the inputs such as default rates are very important, and should not be proprietary. Neither should the outputs like interest-rate sensitivity and credit-spread sensitivity. If they are using a prepayment/default model, a description is in order. I was very alarmed when I heard that they were throwing all of their swaps in there and that it was mostly derivatives. I bet that 30B is not in "notional" terms, but NPVs since there are so many positions. That's scary because if you have a CDS and a default event occurs, you may be responsible for buying the bond in some instances. I think tye are going to be on the hook for way more than 30B in exposure, but congress doesn't have a clue about these things...

Thanks for any and all input. I will try to follow up with everyone. Re. "congress doesn't have a clue about these things", we have a double-edged problem. First we have to get the info to congress in terms they can understand and secondly, we have to help them phrase the questions in terms taxpayers can understand. My goal is to hear Bernanke repeating ad infinitum "yes, you're right congressman, taxpayers would be responsible for that". Sandra, you are probably raising the definitive question "notional vs. NPV". I don't understand it myself but remember reading something back in 2002 suggesting you are indeed right about CDS risk. We must get to the bottom of this and then somehow make it understandable to congressmen and taxpayers. That won't be easy as I was told to my face by Dem senior counsel to HFSC that it will all "net out".

I want to know about all political campaign donations made by BSC, JPM, Blackrock and any one else remotely involved in this bull **** bailout.

These recipients should receive extra pressure to "do the right thing" or face political extinction.

I think that part of the deal was that FOIA requests will be denied to get a detailed look at the portfolio. I could be wrong but that would make a lot of sense and seems to their MO. Keep everything covered up until you are well clear of the stench and then let the bag holders...ummm taxpayers have a look under the skirt. And when that happens, it's everyone's personal Crying Games.

I think you guys in Arizona are really great! You take the initiative to make a difference.

Rutben--both you and Jack-Az have my utmost respect. You really are part of the solution.

Thank you--and it's great to be acquainted with you, and your work.

LOL, and Keep up the good work--and keep us posted as to what you are finding.

Thanks again~

Denriddy posted this on another thread (so, thanks to him for scanning it and making it available). I thought it might be helpful here for the discussion regarding what to ask the members of Congress.

Quote:

Contract Re: JPMorgan & Bear Sterns


Summary of Terms and Conditions

March 28, 2008

Concurrently with, and subject to the consummation of the merger (the "Merger") in all material respects on the terms described in the Agreement and Plan of Merger, dated as of March 16, 2008 (as amended, the "Merger Agreement"), between The Bear Steams Companies Inc. ("Bear Stearns") and JPMorgan Chase & Co., a newly formed Delaware limited liability company (the "Borrower") will enter into an agreement with Bear Stearns and/or certain of its subsidiaries and/or affiliates (collectively, the "Seller") pursuant to which the Borrower will acquire (whether directly or through participations) the Portfolio (as defined below) and the Pre-Closing Date Proceeds Amount (as defined below) from the Seller pursuant to an asset acquisition agreement (the "Asset Acquisition Agreement") in consideration of the payment of a cash Purchase Price (as defined below) and the assumption of certain liabilities, the source of the funding of which shall be the proceeds of(a) borrowings under a Tranche A senior secured loan facility (the "Tranche A Loan Facility") provided by the Federal Reserve Bank of New York (the "NY Fed") in an aggregate principal amount, not to exceed $29,000,000,000, equal to the Purchase Price plus the par value of the Unfunded Forward Commitments (as defined below) less $1,000,000,000 and (b) borrowings under a Tranche B subordinated secured loan facility (the "Tranche B Loan Facility" and, together with the Tranche A Loan Facility, the "Loan Facilities") provided by JPMorgan Chase Bank, NA (the "JPMC") in an aggregate principal amount equal to $1 billion. In addition, the NY Fed will be entitled to a residual interest in the Portfolio (such interest, the "Residual Interest"). Set forth below is a summary of the terms and conditions for the Loan Facilities.

1. PARTIES

Borrower:
The Borrower (as defined above).

Administrative Agent, Collateral Agent and Depositary Bank:
An entity (or entities) to be determined by the NY Fed (in such capacities, the "Agent").

Tranche A Lender:
The NY Fed (the "Tranche A Lender").

Tranche B Lender:
JPMC (the "Tranche B Lender" and, together with the Tranche A Lender, the "Lenders").

Asset Manager:
Blackrock Financial Management, Inc. and its affiliates (in such capacity, the "Asset Manager"). The Asset Manager will be solely the agent of the NY Fed, but will owe the other Secured Parties (as defined below) and the Borrower a duty of good faith and fair dealing. The Asset Manager shall be paid fees as determined by the NY Fed and notified to JPMC.

2. DESCRIPTION OF ASSET ACQUISITION AGREEMENT

Seller:
The Seller.

Buyer:
The Borrower.

Asset Acquisition Agreement:
Pursuant to the Asset Acquisition Agreement, the Seller will sell to the Buyer (whether directly or through participations) without recourse (but subject to, and with full recourse for the breach of, representations and warranties relating to good title and authority to transfer) the assets identified by JPMC, the NY Fed and the Asset Manager as described on Schedule A hereto (the "Scheduled Collateral Pool"), together with the hedges identified by JPMC, the NY Fed and the Asset Manager as described on Schedule B hereto (the "Related Hedges") and including the Pre-Closing Date Proceeds Amount. For the avoidance of doubt, the Related Hedges include the amount that the Borrower would have to pay to, or the amount that the Borrower would receive from, the applicable counterparty if the Borrower had entered into an identical transaction on March 14, 2008 based on the Bear Stearns marks as of such date (the "Transfer Value"), as well as all accumulated mark to market gains or losses thereafter and any cash proceeds as a result of Related Hedges' being unwound.

Purchase Price:
The purchase price (the "Purchase Price") for the Scheduled Collateral Pool and the Related Hedges (including the Pre-Closing Date Proceeds Amount) is an amount, not to exceed $30 billion, determined as provided in "Pricing of the Scheduled Collateral Pool and Related Hedges" below minus the par value of the total unfunded forward commitments, whether contingent or non-contingent (the ''Unfunded Forward Commitments") included in the Scheduled Collateral Pool.

Seller Payment:
On the Closing Date, the Seller will pay (the "Seller Payment") to the Borrower, in consideration of the Borrower's assumption of the Seller's liabilities under the Unfunded Forward Commitments, an amount equal to the difference (if positive) between (x) the par value of such commitments and (y) the market value of such commitments as of March 14, 2008 or, if such market value is unavailable, the market value shall be determined by reference to the market value of the related funded portion of any such commitment as of March 14, 2008, but, if no related funded portion exists and there is otherwise no market value associated with such commitment, the market value shall be determined based on "haircuts" to par as shall be mutually agreed between the NY Fed, JPMC and the Asset Manager. Such amount will be deposited into the Reserve Account.

Related Hedges:
As of the Closing Date, the Borrower will assume as an economic matter the obligations under the Related Hedges and receive the benefits thereofby entering into a total return swap with the Seller, such total return swap having an initial fair value as ofthe Closing Date equal to the fair value of the Related Hedges as of the Closing Date. The Controlling Party (as defined below) shall have the right to make all determinations related to the underlying hedges (e.g., whether and when to terminate) that are subject to the total return swap. At the request of the NY Fed, the Seller will use its commercially reasonable efforts to replace the total return swap with direct hedges with underlying counterparties through novation.

Guaranty:
JPMC will irrevocably and unconditionally guaranty the obligations of the Seller under the Asset Acquisition Agreement and the total return swap.

3. AGREEMENTS IN EFFECT PRIOR TO THE CLOSING DATE

Pricing of the Scheduled Collateral Pool and Related Hedges:
The price of the Scheduled Collateral Pool shall equal the sum of (i) the value of such collateral pool on the books of the Seller as of March 14, 2008 (including with respect to the assumption of liabilities for Unfunded Forward Commitments), irrespective of any mark-downs or mark-ups in such collateral after March 14, 2008 and irrespective of when such collateral pool is actually pledged to secure the Loan Facilities and (ii) the Transfer Value of the Related Hedges.

Management of Scheduled Collateral Pool and Related Hedges:
Prior to the Closing Date and upon final determination of each particular asset or hedge comprising a part of the Scheduled Collateral Pool or the Related Hedges, JPMC will delegate management rights with respect to such assets or hedges to the NY Fed which in turn will delegate such rights to the Asset Manager, and the NY Fed and the Asset Manager will have the right to liquidate assets in the Scheduled Collateral Pool and Related Hedges or both in their discretion at any time.

Pre-Closing Date Proceeds Amount:
On the Closing Date, the Pre-Closing Date Proceeds Amount (to the extent such amount is positive) will be deposited into the Reserve Account.

The "Pre-Closing Date Proceeds Amount" means an amount, determined as of the Closing Date, equal to the sum (without duplication) of the following amounts paid or received in respect of the assets and liabilities in the Portfolio during the period from March 14, 2008 to the Closing Date:

(i) the cash proceeds from the sale of assets comprising a portion of the Scheduled Collateral Pool; plus

(ii) all amounts received from the amortization or prepayment of principal on any assets comprising a portion of the Scheduled Collateral Pool; plus

(iii) the interest payments on the Scheduled Collateral Pool; plus

(iv) all periodic, termination and other payments (excluding the posting of margin) received from counterparties on the Related Hedges; minus

(v) all periodic, termination and other payments (excluding the posting of margin) made to counterparties on the Related Hedges; minus

(vi) allocated funding costs (at the Primary Credit Rate (as defined below)).

It is understood that prior to the Closing Date, the NY Fed has no responsibility to provide any margin or other credit support for any hedge.

Guaranty:
JPMC will enter into, and keep in full force and effect, the Guarantee, dated as of March 23, 2008, in favor of the NY Fed.

NY Fed Commitment:
The NY Fed commits to provide the financing described herein in connection with JPMC's acquisition of Bear Steams to address the extraordinary circumstances in the market on March 14,2008 and the surrounding days. The NY Fed has not committed to make a similar facility to any other party or under any different circumstances.

Confidentiality:
The transactions contemplated by this Summary of Terms and Conditions and all other materials, information, documents and discussions regarding this Summary of Terms and Conditions and the transactions contemplated hereby shall be kept confidential by JPMC.

4. TYPES AND AMOUNTS OF LOAN FACILITIES

Loan Facilities
The Lenders hereby agree to provide financing to the Borrower as follows:

Type and Amount: Loan Facilities (the loans thereunder, the "Loans") as follows:

Tranche A Loan Facility:
A ten-year term loan facility (subject to extension as provided below) provided by the Tranche A Lender to the Borrower in a principal amount equal to the Purchase Price plus the par value of the Unfunded Forward Commitments minus $1,000,000,000, but in any case not to exceed $29,000,000,000 (the loan thereunder, the "Tranche A Loan"). The Tranche A Loan shall be repayable or be terminated in the manner described under the section below entitled "Cash Flow Waterfall".

Tranche B Loan Facility:
A ten-year term loan facility (subject to extension as provided below) provided by the Tranche B Lender to the Borrower in a principal amount of$1 ,000,000,000 (the loan thereunder, the "Tranche B Loan"). The Tranche B Loan will be subordinate in right of payment to the Tranche A Loan and shall be repayable or be terminated in the manner described under the section below entitled "Cash Flow Waterfall".

Availability:
The Loans shall be made in a single drawing on the Closing Date (as defined below).

Maturity Date:
The Loans will mature on the tenth anniversary of the Closing Date; provided that the NY Fed may in its sole diScretion at any time and from time to time extend the maturity date of either or both of the Loan Facilities; provided, further, that the NY Fed may not extend the maturity date of the Tranche B Loan after the Tranche A Loan is paid in full or to a maturity date later than the maturity date of the Tranche A Loan without the consent of the Tranche BLender.

Purpose:
The proceeds of the Loans shall be used to finance the acquisition oft he Portfolio and the Pre-Closing Date Proceeds Amount from the Seller and to fund the Delayed Draw Account (as defined below).

5. INTEREST PAYMENT PROVISIONS

Interest Rates:
The Tranche A Loans shall bear interest at a rate per annum equal to the Primary Credit Rate in effect from time to time.

The Tranche B Loans shall bear interest at a rate per annum equal to the Primary Credit Rate plus 450 bps in effect from time to time.

As used herein, the "Primary Credit Rate" means the discount rate charged by the NY Fed for loans under its primary credit program from time to time in effect.

Interest Payment Dates:
Interest shall accrue and be compounded on a quarterly basis and be payable on payment dates as set forth under the section below entitled "Cash Flow Waterfall".

6. COLLATERAL, RESERVE ACCOUNT AND DELAYED DRAW ACCOUNT

Collateral:
The obligations of the Borrower in respect of the Loan Facilities and the hedge agreements entered into by the Borrower shall be secured by a first priority perfected security interest in (a) all of its assets including the Scheduled Collateral Pool and the Related Hedges (collectively, the "Portfolio"), (b) the Reserve Account (as defined below) and related investments, (c) the Delayed Draw Account and related investments and (d) all proceeds ofthe foregoing (collectively, the "Collateral"). The Lenders and the counterparties under the hedge agreements shall collectively be referred to herein as the "Secured Parties".

All of the above described security interests will be created on terms, and pursuant to documentation (including custody and control agreements), satisfactory to the NY Fed, and none of the Coliateral will be subject to any other pledges, liens or security interests.

Reserve Account:
On the Closing Date, the Pre-Closing Date Proceeds Amount'(to the extent such amount is positive) and the proceeds of the Seller Payment, if any, will be deposited into the Reserve Account. On and after the Closing Date, all cash flow generated by the Collateral and any other income or proceeds earned or received by the Borrower shall be deposited with the Agent and credited to a reserve account (the "Reserve Account") and held

in such Reserve Account for the benefit of the Secured Parties pending distribution to the Secured Parties in accordance with the Cash Flow Waterfall as hereinafter provided. Notwithstanding the foregoing, except to the extent funds are required to make a Seller Distribution (as defined below) or to pay any Operating Expenses that were accrued on or prior to the Closing Date and remain unpaid, amounts on deposit in the Reserve Account may not be distributed (other than in respect of paymehts required under the hedge agreements) to the extent that the amount on deposit therein will be less than the Unfunded Swap Exposure (the "Minimum Balance Requirement"). "Unfunded Swap Exposure" means the maximum total liability of the Borrower under all hedge agreements minus all amounts posted as collateral to the related hedge counterparties.

Amounts on deposit in the Reserve Account shall be invested in certain eligible investments at the discretion of the Controlling Party (as defined below).

Subject to the Minimum Balance Requirement, the Controlling Party (and its agents, inCluding the Asset Manager) shall control in its sole discretion all decisions regarding the Collateral, the proceeds on deposit in the Reserve Account and decisions as to timing and amounts of distributions from the Reserve Account.

Delayed Draw Account:

On the Closing Date, a portion of the proceeds from the Loans equal to the amount of Unfunded Forward Commitments shall be deposited with the Agent and credited to a delayed draw account (the "Delayed Draw Account").

Amounts on deposit in the Delayed Draw Account shall be withdrawn from time to time by the Agent in order to satisfy any payment obligations of the Borrower in respect of any such commitments when and as such obligations become due.

Amounts on deposit in the Delayed Draw Account shall be invested in certain eligible investments at the discretion of the Controlling Party (as defined below).

To the extent any such Unfunded Forward Commitments expire or amounts remain on deposit in the Delayed Draw Account in excess of any remain ing Unfunded Forward Commitments, the Agent shall transfer such amounts from the Delayed Draw Account to the Reserve Account.

7. CASH FLOW WATERfALL

Funds in the Reserve Account shall be paid on any business day as determined by the Controlling Party in its sole discretion in the following order of priority, subject, except as set forth in the last paragraph of "Waterfall Priority", to the Minimum Balance Requirement:

Waterfall Priority:
(a) First, to pay Operating Expenses that are then due and payable.

"Operating Expenses" mean all costs and expenses of administering the Portfolio, the Reserve Account, the other Collateral, the Loan Facilities and Loan Documentation (as defined below) and the Borrower, including all fixed fees and expenses of the Asset Manager and the Agent, all legal, accounting and other professional fees and expenses and other administrative costs and expenses of the Borrower, all legal, accounting and other professional fees and expenses and other administrative costs and expenses (other than those of the Tranche B Lender, the Seller or any of their respective advisors or agents) associated with the negotiation, preparation, execution and delivery of this term sheet and the Loan Documentation (as defined below) and with the administration of the Loan Documentation and any amendment or waiver or enforcement action with respect thereto (including the fees, disbursements and other charges of counsel), taxes that are determined to be payable from time to time, all amounts payable in respect of hedges (including, without limitation, periodic payments and termination payments), the costs of entering into any additional hedges as may be determined to be necessary or appropriate by the Controlling Party and any indemnity claims.

(b) Second, beginning on or after the second anniversary of the Closing Date or such earlier date as shall be determined by the Controlling Party (the period from the Closing Date until the second anniversary of the Closing Date or such earlier date the "Accumulation Period"), to pay all or any portion of the outstanding principal amount of the Tranche A Loan Facility; provided that, if the Controlling Party elects to pay any of the outstanding principal amount of the Tranche A Loan Facility prior to the second anniversary of the Closing Date, the full outstanding principal amount of the Tranche B Loan Facility, together with all accrued and unpaid interest thereon, shall be simultaneously repaid.

(c) Third, after the Accumulation Period, but so long as the entire outstanding principal amount of the Tranche A Loan Facility has been repaid in full, to pay allor any portion of the accrued but unpaid interest outstanding under the Tranche A Loan Facility.

(d) Fourth, after the Accumulation Period, but so long as the entire outstanding principal amount, all accrued and unpaid interest and all other outstanding amounts, in each case under the Tranche A Loan Facility have been repaid in full, to pay all or any portion of the outstanding principal amount of the Tranche B Loan Facility.

(e) Fifth, after the Accumulation Period, but so long as the entire outstanding principal amount, all accrued and unpaid interest and all other outstanding amounts, in each case under the Tranche A Loan Facility have been paid in full and so long as the entire outstanding principal amount of the Tranche B Loan Facility has been repaid in full, to pay all or any portion of the accrued but unpaid interest outstanding under the Tranche B Loan Facility.

(f) Sixth, after the Accumulation Period, but so long as the entire outstanding principal amount, all accrued and unpaid interest and all other outstanding amounts, in each case under both the Tranche A Loan Facility and the Tranche B Loan Facility have been paid in full, all hedges have been terminated and all amounts payable under the hedges have been paid in full, to pay any fees and expenses or other amounts owing to the extent not constituting Operating Expenses.

(g) Seventh, after the Accumulation Period, but so long as the entire outstanding principal amount, all accrued and unpaid interest and all other outstanding amounts, in each case under both the Tranche A Loan Facility and the Tranche B Loan Facility have been paid in full, all hedges have been terminated and all amounts payable under the hedges have been paid in full, and any fees and expenses or other amounts owing to the extent not constituting Operating Expenses have been paid in full, to pay all remaining amounts to the NY Fed as holder of the Residual Interest.

Notwithstanding the foregoing on any business day (including the Closing Date) as determined in the sole discretion by the Controlling Party, (i) to the extent that the Pre-Closing Date Proceeds Amount is negative, funds in the Reserve Account shall be withdrawn, from time to time if necessary, to make a payment or payments to the Seller in an amount equal to the absolute value of the Pre-Closing Date Proceeds Amount (the "Seller Distribution") and (ii) after giving effect to all payments required by clause (i), funds in the Reserve Account shall be withdrawn, from time to time jf necessary, and used to pay all Operating Expenses that accrued on or prior to the Closing Date and remain unpaid.

Once prepaid, Loans may not be reborrowed.

Termination:
Regardless of whether any amounts remain outstanding thereunder, each of the Loan Facilities and the Residual Interest shall be terminated on the date on which the entire Portfolio has been fully liquidated and all proceeds thereof, including all amounts on deposit in the Reserve Accou'nt and the Delayed Draw Account, have been distributed in the manner set forth above.

8. CERTAIN CONDITIONS

Initial Conditions:
The availability of the Loan Facilities shall be conditioned upon the satisfaction of the following conditions (the date upon which all such conditions precedent shall be satisfied, the "Closing Date"): the execution and delivery by the Agent, the Lenders, the Borrower and the Asset Manager of Loan Documentation satisfactory to the NY Fed, the closing of the Merger in all material respects on the terms set forth in the Merger Agreement, the consummation of the sale of the Portfolio (including the Pre-Closing Date Proceeds Amount) on the terms set forth in the Asset Acquisition Agreement and the creation and perfection of security interests in the Collateral pursuant to arrangements satisfactory to the NY Fed.

9. CERTAIN DOCUMENTATION MATTERS

The documentation for the Facilities (the "Loan Documentation") shall contain representations, warranties, covenants and events of default (in each case, applicable to the Borrower) customary for financings involving special, liinited purpose borrowers and with other terms deemed appropriate by the NY Fed.

Voting and Control:
The NY Fed shall be the "Controlling Party" on and after the Closing Date and shall be permitted to make all decisions regarding the Collateral, the Reserve Account, the Delayed Draw Account and the Loan Documentation, including the timing and amounts of distributions and whether or not a default or event of default has occurred and whether or not to begin the exercise of remedies.

In addition the Controlling Party will have complete discretion with respect to all decisions regarding the management of the Collateral (which it may elect to delegate to the Asset Manager), including decisions as to when to liquidate Collateral and as to when or if to terminate hedges or enter into hedges. In. exercising such control the Controlling Party and its agents shall have no duty to maximize returns on the Collateral or to take into account the interests of the Tranche BLender.

Notwithstanding the foregoing, the consent of (i) each Lender directly affected thereby shall be required with respect to (a) reductions in the outstanding principal amount of any Loan (except as otherwise expressly permitted above) and (b) any amendment to the Loan Documentation Or any other transaction document that is materially adverse to such Lender and (ii) each Secured Party directly affected thereby shall be required with respect to any materially adverse change in such Secured Party's position in the cash flow waterfall.

Assignments and Participations:
The Tranche B Lender shall not be permitted to assign all or a portion of its Tranche B Loan or sell participations in its Tranche B Loan except to its affiliates.

Indemnification and Exculpation:
The Agent, the Asset Manager, the Controlling Party and the Lenders (and their affiliates and their respective officers, directors, employees, advisors and agents) will have no liability for, and will be indemnified by the Borrower and held harmless against, any losses, claims, damages, liabilities or expenses (collectively, "Liabilities") incurred in respect of, or arising out of, or in connection with, the financing contemplated hereby (including in connection with the management of the Portfolio and other Collateral) or the use Or the proposed use of proceeds thereof, except to the extent they are found by a final, non•appealable judgment of a court of competentjurisdictioll to arise from the gross negligence, bad faith or willful misconduct of such person.

Each Secured Party agrees not to assert or claim that the Agent, the Asset Manager, the Controlling Party or any other Secured Party (and their affiliates and their respective officers, directors, employees, advisors and agents) has any liability for any Liabilities incurred in respect of, or arising out of, or in connection with, the financing contemplated hereby (including in connection with the management of the Portfolio and other Collateral) or the use or the proposed use of proceeds thereof, except to the extent they are found by a final, non-appealable judgment of a court of competent jurisdiction to'arise from the gross negligence, bad faith or willful misconduct of such person.

Governing Law and Forum:
State of New York.


Accepted and agreed to as of
March 28, 2008:
This Summary of Terms and Conditions may be executed in counterparts.

THE FEDERAL RESERVE BANK OF NEW YORK

By: [SIGNATURE]
Name: [HANDWRITTEN] Timothy F. Geithner
Title: [HANDWRITTEN] President

JPMORGAN CHASE & CO.

By: [SIGNATURE]
Name: [HANDWRITTEN] James Dimon
Title: [HANDWRITTEN] Chairman and Chief Executive Officer

Hey pika how about the universal question posed from you own post what they did and why its illegal? why was this deal not taken before congress and voted on before deal was sealed? NO TAXATION WITHOUT REPRESANTATION!

Here's a question that popped into my head (I apologize if someone already covered this):

What specific criteria was used to determine that BSC was too interconnected to fail?

And as a followup:

What regulatory changes need to be made or what current regulations need to be more strictly enforced to ensure that other companies are not also 'too interconnected'?

Hey, if this credit crisis is over (like some people (Dick Bove, cough, cough) say), why doesn't the FED just unwind it now?

You guys are good.

Keep 'em coming! The more questions Rutben gets, the better. He'll sort them out later.

We must be mindful however, that the Treasury, as yet, has given NO MONEY. They have merely guaranteed the exchange here - we, as the taxpayers, will be on the hook ONLY if the BSC collateral goes *boom*. In the current environment, that can only become MORE likely as the 'imaginary' (*cough*) credit crisis gets worse.

In keeping with what British said, indeed, we may very well be responsible for a tax levy which we had no say in, and that is, taxation without representation.

I'm sure that Rutben is familiar with the points I outlined in the Constitution. That is defitely a good starting point - at the top.

In case anyone missed it, tonight's (Sunday 05/11/08) Ticker is a MUST read and pertinent to this entire cause.

http://market-ticker.denninger.net/

Rutben I laud your goal of getting Bernanke to say, "yep, the taxpayers are on the hook for that," over and over again. I hope you can explain to the staffers or the congresspeople with questioning power that it may be necessary to press Bernanke to acknowledge who the ultimate bagholder truly is (are). I can see the questioning going like this:

Congressperson: If some of these assests that JPM pledged to the Fed as collateral decrease substantially in value, who will pick up the tab for the difference in current value and the $29 billion the Fed lent to JPM?

Bernanke: Well, the Fed would then do X,Y,Z to recoup losses, blah, Fed business, blah, blah.

(Now it could be left at that, or pressed)

Congressperson: So when the Fed loses money who's on the hook for that? Who picks up the tab when the Fed does not get paid back?

And so on. It may very well take some real pressure to get Bernanke to say anything about the ultimate bagholder.

Questions (Requests) for Bernanke -
1. Explain a CDS to me in layman's terms, please.
2. What exactly is the composition of the "collateral" pledged to the Fed by JPM? Is it bonds? Swaps on CDS's? REITs? What assests does the Fed have the pleasure of holding on to for at least the next ten years in exchange for $29 billion taxpayer dollars? (hopefully they will go after him on this)
3. Will the Fed provide similar backstops to other large banks that run into trouble, e.g. BAC aquiring CFC?
4. We claim to operate a "free-market", but is it fair to small and midsized banks (and their shareholders) that encounter financial difficulty for the Fed to intervene only on behalf of the biggest institutions?

Pika, one seminal question that I have—which I so far have not found an answer to, and which I haven't seen anyone anywhere even mention—is: "Who is 'The Borrower' in the contract?"

The only rather opaque definition of "The Borrower" in the contract itself is "a newly formed Delaware limited liability company," which anonymous entity "will acquire (whether directly or through participation) the Portfolio..." etc.

This same newly-formed masked-man "limited liability company" is discussed in Fed NY's document, "Summary of Terms and Conditions Regarding the JPMorgan Chase Facility"—again, without being further identified: http://www.ny.frb.org/newsevents/news/ma....

I've been hoping someone could tell me that this rather central question has an easy answer. So far, my hopes have gone unanswered.

Given what's at stake, call me picky, but I'd like to know who "The Borrower" is.

EDIT: Just so it isn't overlooked, "The Borrower" is also defined as "The Buyer" in the contract. And the answer to "who" this "newly formed Delaware limited liability company" is should include Bylaws and Articles of Incorporation, naming all officers, board members, and trustees. Full disclosure.

Denriddy, we all would like to have the answer to THAT question and indeed, it may be one that Rutben addresses. IMHO, it was a shell company, set up, for the sole purpose of holding the 'assets'. It will keep them an 'arm's length' away from JPMorgan. Certainly, the Delaware LLC is not the US Treasury, nor is it the Federal Reserve.

Quote:

we all would like to have the answer to THAT question and indeed, it may be one that Rutben addresses.

I sure hope so; I don't know how much relevance can be imparted to any other questions when no one seems to know who just got handed the ATM card on a $30 billion account.

Quote:

IMHO, it was a shell company, set up, for the sole purpose of holding the 'assets'. It will keep them an 'arm's length' away from JPMorgan. Certainly, the Delaware LLC is not the US Treasury, nor is it the Federal Reserve.

Hm. I think this bears (pun unavoidable) a lot more scrutiny. F'rinstance, here are a few statements from the contract where I have replaced the term "Controlling Party" with who that "Controlling Party" actually is (which definition is coyly deferred almost all the way through the contract):

Quote:

...The NY Fed shall have the right to make all determinations related to the underlying hedges (e.g., whether and when to terminate) that are subject to the total return swap.

....Amounts on deposit in the Reserve Account shall be invested in certain eligible investments at the discretion of the the NY Fed...

...the NY Fed (and its agents, including Blackrock) shall control in its sole discretion all decisions regarding the Collateral, the proceeds on deposit in the Reserve Account and decisions as to timing and amounts of distributions from the Reserve Account.

...Amounts on deposit in the Delayed Draw Account shall be invested in certain eligible investments at the discretion of the NY Fed...

...Funds in the Reserve Account shall be paid on any business day as determined by the NY Fed in its sole discretion...

More to come.

By the way, I've corrected some OCR errors in the text version of the contract in General since you grabbed it for inclusion in this thread. You might want to get the version that's over there now and replace what you posted here with it.

I would like to know the selection process that has Blackrock acting as the Fed's agent. How is Blackrock being paid?

Quote:

How is Blackrock being paid?

Considering the statement made in the Senate hearing that there was not time to negotiate a fee, I'd say the answer is "very well".