A Bear Stearns mortgage portfolio backed by the U.S. government racked up $2.7 billion of losses in the third quarter, amounting to a 9 percent decline on about $30 billion of assets, the Federal Reserve said Thursday.
Roughly $2 billion of those losses will be borne by the U.S. taxpayer. As of the end of September, the portfolio, originally worth about $30 billion, was worth $26.8 billion.
The Bear Stearns mortgage portfolio's risk ended up mainly in taxpayers hands in June, after JPMorgan Chase & Co agreed in March to buy the faltering Bear Stearns. JPMorgan Chase would only agree to buy Bear Stearns if the government guaranteed some of the failing investment bank's assets.
The U.S. government has provided well over $1 trillion in support to the financial system this year, through steps ranging from extra deposit guarantees to a $700 billion fund that is buying bad assets and injecting capital into financial companies.
"The government is stemming the crisis by socializing companies' losses," said Steve Persky, chief executive at Dalton Investments.
The decline in the value of the Bear Stearns mortgage assets so far has been about $3 billion, an amount equal to about a quarter of the book value, or accounting value of the company at the end of February. The assets' decline would have severely cut into Bear Stearns' capital had the company survived into the third quarter.
In other words, Bear Stearns could have had trouble surviving even if it hadn't faced a run on the bank in March, analysts said. The four other major U.S. investment banks have either sold themselves, converted to banks, or filed for bankruptcy.
JPMorgan agreed to take about the first $1.15 billion of losses from the portfolio, with the U.S. taxpayers bearing the rest of the losses.
The United States, like other major global economies has been hammered by the credit crisis. U.S. housing prices in major metro areas have fallen 20 percent since July 2006, while the Standard & Poor's 500 index has dropped by almost 40 percent so far this year.
Vast swathes of the corporate bond and mortgage markets are frozen, although many are showing some signs of thawing.
In that kind of an environment, the Bear Stearns portfolio decline seems relatively mild, said William Smith, chief executive of Smith Asset Management.
"When I saw the decline, I said, 'is that all?'" Smith said.
