Could the FED go bankrupt?

[ar81]

New York Fed Warehousing Junk Loans On Its Books: Examiner's Report

Excrept:

As Lehman Brothers careened toward bankruptcy in 2008, the New York Federal Reserve Bank came to its rescue, sopping up junk loans that the investment bank couldn't sell in the market, according to a report from court-appointed examiner Anton R. Valukas.

The New York Fed, under the direction of now-Treasury Secretary Tim Geithner, knowingly allowed itself to be used as a "warehouse" for junk loans, the report says, even though Fed guidelines say it can only accept investment grade bonds.

Meanwhile, the Fed and Geithner both strongly oppose a congressional measure to authorize an independent audit of the central bank and its lending facilities. The provision passed the House but is under attack in the Senate, where Banking Committee Chairman Chris Dodd (D-Conn.) says he hopes to stop it.

Without an audit, the Fed is able to conceal the specifics of what it holds on its balance sheet. If the Lehman deal is any indication, the Fed is hiding billions of dollars in toxic loans on its books.

"The Fed legally is forbidden from taking such assets. There's a legal requirement that the Fed's assets be investment grade," Rep. Alan Grayson (D-Fla.) told HuffPost. Grayson, who is the cosponsor of the Grayson-Paul Audit the Fed measure that passed the House, said the Lehman scandal shows precisely why such an audit is needed.

"The net result of this is we know the Fed knowingly bought assets for more than they were worth -- substantially more than they were worth -- and actually created a market for garbage that Lehman was more than happy to push on the Fed because they regarded the public as the suckers of last resort," said Grayson.

A Fed spokesman told the New York Times that a "third party" valued the assets and found they met the standards. Yet the Fed, after accepting the assets, "reduced prices to limit the risk" -- an immediate concession that they were, in fact, over-priced. Otherwise, why reduce their price?

Do you think it's possible?

[GGT]

Without an audit, who knows? My guess is, if they can't unload the crap or lose money on it, they'll hit up Treasury to print more dollarz.

[GGT]

http://www.nytimes.com/2010/04/22/bu...ml?ref=economy

Federal Reserve Made $47.4 Billion in 2009

By SEWELL CHAN
Published: April 21, 2010


WASHINGTON — The Federal Reserve transferred $47.4 billion, a record sum, to the Treasury Department last year, a result of the central bank’s actions to support the fragile housing market.

The transfer to the public coffers rose roughly 50 percent, or $15.7 billion, from $31.7 billion transferred in 2008, the Fed announced on Wednesday in releasing its annual financial statements, which were audited by Deloitte.

“Central banking is a great business,” joked Vincent R. Reinhart, a former director of monetary affairs at the Fed.

Unlike private banks, the Fed does not exist for the purpose of making a profit, though it inevitably does so. Historically, it paid no interest on the currency and bank reserves that represent its liabilities, while it made interest on the Treasury securities that make up its assets.

The Fed’s profitability increased as an incidental result of the financial turmoil that began in 2007.

To hold down long-term interest rates and support the housing market, the Fed greatly increased its holdings of Treasury securities and acquired mortgage-backed securities and debts owed by Fannie Mae and Freddie Mac, the mortgage-finance companies that are now controlled by the government. The Fed made $20.4 billion in interest on those mortgage-related securities and debt holdings in 2009.

In addition, the Fed profited as troubled banks turned to its discount window and other emergency lending programs.

The Fed paid for the assets by creating reserves and, although it began paying interest, currently 0.25 percent, on those reserves in October 2008, the payments are only a small drag on the central bank’s profitability.

Those seeking to use the Fed to help cover the nation’s steep deficits and debts, however, will inevitably be disappointed.

“The Fed can only play this game as long as the public is willing to hold its liabilities,” said Mr. Reinhart, now a scholar at the American Enterprise Institute, a conservative research organization. “If it tried to increase its balance sheet tenfold, say, the public would be unwilling to hold those reserves. You’d get dollar depreciation and inflation.”

As it is, the Fed’s balance sheet is now roughly $2.3 trillion, about 2.5 times its size before the crisis. Its chairman, Ben S. Bernanke, now faces a set of challenges as the Fed prepares to eventually tighten monetary policy and return its balance sheet to a more normal size.

All told, the Fed’s comprehensive income was $53.4 billion in 2009, a $17.9 billion increase from 2008. After deducting operating expenses, the Fed transferred $47.4 billion to the Treasury.

Along with financial statements for the Fed’s board of governors in Washington and the 12 Fed district banks, the Fed released details about the assets held by five limited liability companies that were created by the Federal Reserve Bank of New York in response to the crisis.

Three of those companies, known as Maiden Lane I, II and III, were created to hold troubled assets, including mortgage-backed securities and collateralized debt obligations, acquired as a result of the government-brokered sale of Bear Stearns to JPMorgan Chase in March 2008 and the takeover of the American International Group, the stricken insurance giant, that September.

The Fed expects to recover the full value of the loans made to those special entities and does not expect any loss to taxpayers from them, senior Fed officials said in a conference call.

The Fed spent $243.7 million on salaries for its roughly 2,200 employees in Washington in 2009. Those numbers could change substantially if Congress creates an independent Consumer Financial Protection Bureau within the Fed, as a Senate bill to overhaul financial regulations seeks to do.

The annual financial statements also showed that the Fed spent $479.3 million on currency printing last year. “In just the past 25 years, the value of Federal Reserve notes in circulation has grown from $180 billion to $890 billion, an increase of almost 400 percent,” Mr. Bernanke said at a news conference on Wednesday at the Treasury Department to unveil a new design, incorporating additional anticounterfeiting features, for the $100 note.

“And while in the past, most U.S. dollars were held domestically, today many of these notes circulate outside of our borders,” he added.

"Central banking is a great business".

Will recover full value, expect no losses, let's all remember this for future reference. Any bets?

[Loki]

I don't get what the problem is...

[GGT]

Maybe it won't be a problem. But having read about the crap that's in the Maiden Lanes, it doesn't look pretty. As the OP points out, they probably over paid, then reduced their value. And that 'independent third party' rating this junk is (I assume) reference to Moody's or S & P. Their conflicts of interest and rating junk as AAA is under investigation too.

[CitizenCain]

Do you think it's possible?

I certainly hope so.

I don't get what the problem is...

Strangely enough, I have a problem with letting the same asshats who fuck up everything they touch having ultimate authority over what our money is worth. Fuck that - go back to something that politicians can't manipulate for their own gain. Gold comes to mind immediately, but I'd be willing to settle for a "gravel standard" - just something, anything that's value is not ultimately at the whim of self-serving political sociopaths.

[Loki]

The price of gold is at least as easy to manipulate as fiat currency.

[CitizenCain]

Right, hence the suggestion of a gravel standard.

[ar81]

http://www.nytimes.com/2010/04/22/bu...ml?ref=economy
"Central banking is a great business".

Will recover full value, expect no losses, let's all remember this for future reference. Any bets?

Securities are a bet on future. If they win they make money, if the lose, money is lost.
It creates a chance of having securities backed by bad loans, which would mean that it would not be such a great business.
In 2007 banks seemed quite profitable too...

[GGT]

http://www.cnbc.com/id/36733235

A growing bloc of Federal Reserve committee members favors selling some of the Fed's $1.25 trillion in mortgages and other non-Treasury assets that were bought during the financial crisis to unfreeze credit markets and keep interest rates low, several Fed sources told CNBC.

At least six members of the Fed's policymaking commitee favor near-term asset sales, which—if the economy keeps improving—could lead the Fed to announce a program to sell assets by the third or fourth quarter of this year, these sources said.

While financial markets are focused on the language of the policy statement from next week's meeting of the Federal Open Market Committee, the asset sales are likely to be debated vigorously. The asset sales are not imminent and the views of these members are not monolithic.

If the Fed starts selling too quickly and the market becomes overburdened with supply, that could drive up mortgage rates quickly up and slow the housing recovery.

Yet the Fed is simultaneously faced with having its burdened sheet encumbered with the weight of the mortgages and doesn't want to delay too long, either, and risk inflation by keeping rates artificially low. Many Fed members are concerned that holding mortgages amounts to a politically motivated subsidy of the housing market and would like to return to holding only more neutral treasuries.

Some members, such as Richmond Fed President Jeffrey Lacker want to begin selling assets immediately. He apparently could foresee the Fed retaining the language to keep interest rates "exceptionally low for an extended period" while the Fed unloads the mortgage-backed securities it purchased during the financial crisis.

Other members, such as St. Louis Fed President Jim Bullard, would not be so quick to pull the trigger, but wants asset sales to be one of the first acts the Fed takes to tighten monetary policy.

He favors the assets sales over some of the complicated plans of the Fed to drain liquidity. They include reverse repos and term deposits. Those transactions would only temporarily drain liquidity and would not permanently fix the problem of the bloated size of the Fed’s $2.5 trillion balance sheet.

Meanwhile, some doves on the board are more concerned about the economy and are content to let the mortgages runoff, through prepayment, refinance and default. The concern of the hawks is that this would take too long and would leave the Fed unprepared for the next recession.

The one who matters most, Fed Chairman Ben Bernanke, is said to be still unconvinced on the asset sale issue and sees it more of an issue for next year or beyond. But he has moved towards the hawks in recent weeks, changing his rhetoric publicly to keep the option more on the table. This change was said by some to be the result of pressure from hawks.

Whatever the reason, Bernanke typically likes to remain in the center and his shift is a sign that the board has turned more hawkish overall on the issue.

Key to any decision will be what Fed Governor Kevin Warsh believes. He hasn't spoken much on the issue, but has written that the Fed needs to be as forceful on the way out as it was on the way in. He is likely to join the hawks only if the economy is clearly on a recovery path.

No mention of assets sales is expected in next week’s statement but the debate will show up increasingly in public and in the minutes of this meeting and future meetings.

Obligatory Freeee Markets crack.

[CitizenCain]

Only if you don't know what a "free market" actually is, I suppose. But most people don't, so... three cheers for collective ignorance, or something.

[GGT]

Only if you don't know what a "free market" actually is, I suppose. But most people don't, so... three cheers for collective ignorance, or something.

Go on. Tell everyone what a "free market" means. No rules, some rules? Rules defined by the players or by the regulators? Local, national, or global? Or is Free Market just a semantic accident, when Markets mean "people with money" have the "power"?

[CitizenCain]

[GGT]