NEXT UP-Bear Stearns portfolio value a litmus test for bonds

By John Parry

NEW YORK, July 2 (Reuters) - The reason JPMorgan Chase & Co didn't want $30 billion of toxic mortgage assets on its books after it took over Bear Stearns may be made clear on Thursday.

The Federal Reserve Bank of New York will report how much those assets are now worth, and many analysts expect it to show a drop in value over the three months the Fed has held the bonds and other securities.

In March, in a highly unusual move, the Fed provided the financing for JPMorgan (JPM.N: Quote, Profile, Research, Stock Buzz) to acquire Bear Stearns in order to prevent Bear from going bankrupt and potentially dragging down the entire financial system. Part of that deal was that the Fed would hold the Bear assets.

The value the Fed now places on Bear's portfolio will be one benchmark for how mortgage-backed assets have performed since March, said William Sullivan, chief economist at JVB Financial Group in Boca Raton, Florida.

"The purpose of this evaluation is what it may mean for other investment banks that have similar collateral. It raises the question of whether these other institutions have marked their portfolios to the current market level," Sullivan said.

If the portfolio's value were to drop to below about $24 billion, that could indicate mortgage-backed securities have fared even worse in the second quarter than markets have already reflected, analysts said.

Such a poor showing could weigh on shares of banks -- many of which still hold huge portfolios of hard to value mortgage bonds -- and possibly spur safe-haven buying in the U.S. Treasury market.

On Thursday at 4.30 p.m., along with the H.4.1. release on custody holdings and discount window borrowing, the Fed plans to release its decision on the fair value of that portfolio as of June 26. Given the decline of many sectors of U.S. mortgage-backed securities since then, most analysts expect the $30 billion total to fall.