Recently, I’ve been mocking the fools who have been claiming the TARP is showing a profit. Their absurd conclusion was based on a few TARP holdings going up, while the entire portfolio has yet to reach breakeven (forget being paid back any time soon).

Today, we look at another Bailout disaster: The decaying balance sheets of the U.S. Federal Reserve Bank. The size of the Fed’s balance sheets are huge: They will be at least three times their size from just 18 months ago, when they were primarily US Treasury securities.

Looking at the holdings, its no mystery why:

“It has loads of subprime-mortgage bonds, souring commercial real-estate debt and collateralized debt obligations worth a fraction of their original value. This isn’t Citigroup Inc. or Merrill Lynch. It is the Federal Reserve.

In the past year, the Fed lent out more than $1 trillion in its efforts to stabilize the financial and credit markets. A chunk of that was used to buy mortgage-related securities and loans in the rescues of Bear Stearns Cos. and American International Group Inc., as well as other debt shunned by investors.

Now, the government’s recent aid packages for Bank of America Corp. and Citigroup have the Fed playing the additional role of a backstop guarantor for portfolios of about $400 billion in troubled assets that were dragging down those banks. Those assets include residential- and commercial-mortgage loans, mortgage securities, corporate leveraged loans and credit-derivative positions…

Some of the assets on the Fed’s balance sheet already have lost substantial value over the past six months. In the next several weeks, the Fed will provide an update on the value of assets in Maiden Lane LLC, a company it lent $29 billion last June to purchase $30 billion in assets formerly held by Bear Stearns. Those assets included securities backed by shaky Alt-A residential mortgages — a category of loans between prime and subprime — and commercial real-estate loans tied to companies, such as Hilton Hotels Corp., that are in slowing industries.”

Last quarter, Triple-A rated securitized commercial mortgages declined 11%, single-As lost 49%, Alt-A bonds collapsed as loan defaults spiked.

And the future risks? 4 main factors put the Fed’s balance sheet at further risk:

• The economy is still slowing;

• Mortgage foreclosures are rising:

• Corporate defaults continue to climb;

• Asset prices are declining.

The WSJ looks for the Fed’s lending to rise “by another $1 trillion or more in 2009 as its liquidity programs are tapped further by borrowers and it purchases more bonds, such as those issued by Fannie Mae and Freddie Mac, as well as securities backed by student loans, auto loans, credit-card receivables and small-business loans.

The Fed’s advantage over the Citis and Wamus:  No shareholders, no reporting requirements, zero transparency, and no mark-to-market.

To quote Mel Brooks, “Its good to be the king . . .”


Fed Grapples With a New Risk Reality
WSJ, JANUARY 20, 2009, 5:54 A.M.

Category: Bailouts, Credit, Federal Reserve

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

22 Responses to “Fed Balance Sheet Decaying”

  1. Scott F says:

    Exactly as expected.

    Its why I own so much gold stocks and physical gold

  2. gordo365 says:

    Barry – can you connect the dots? What happens if Fed writes down huge losses? My initial reaction is SO WHAT if they mark to model now, then in a couple years mark to market and admit huge real losses? Doesn’t every major buyer of US debt know that this is just a garbage disposal move?

  3. constantnormal says:

    @ gorgo365 — “Writes down huge losses?”

    Read back to Barry’s list of advantages that the Fed enjoys … “no reporting requirements”.

    No reporting, no writing down. If they somehow feel insecure in their pigsty of garbage, they can always print themselves lots of nice new, clean money (or pick up the phone and have those nice chaps over at Treasury send over a truckload or two).

    You are correct in that this is a garbage disposal move, A better move would have been to ingest C and BAC, and excrete new banks, with different names, different management, shiny new balance sheets and a burning desire to lend money. Either way, the Fed gets all the crap assets that they have today.

  4. constantnormal says:

    Sorry for the mangling of your handle. No caffeine yet for me.

  5. Stuart says:

    Janet Tavakoli yesterday during an interview on BNN had a few choice observations about these assets and the original peddling of them. In reference to the originator perpetrators (IBs) and the ratings agencies, she compared them to Hannibal Lecter and that the rating agencies were merely selling cutlery to the Hannibal Lecters of Wall Street. Also, that the blowups in the CDS and CDO markets and other derivative markets weren’t “outliers”, they were caused by “outright liars”. Love it.

    The OTC derivative market has destroyed financial commerce and that it is being moved now on to the public purse, well, it’s outrageous that as many people haven’t show up protesting in Washington as will be there today. The Fed’s balance sheet is almost certainly to materially grow from here as the fuse has been lit in those markets.

  6. wally says:

    But if WE don’t take those losses, the bankers will have to. Couldn’t have that, now could we?

  7. How is it the federal reserve gets to hide what it’s doing on its balance sheet, while the publicly-traded companies ostensibly have to fully disclose the crap that’s steaming away on theirs?

    Going further, how is it that the FDIC won’t tell which banks it is watching more closely than others for signs of failure?

    In neo-classical economics, the key criteria for an efficient market is perfect information, i.e., prices are only efficient if all the knowable information is available to all the potential and actual market participants.

    It is obviously true, as the Fed’s actions in refusing to disclose its holdings and the FDIC’s refusal to divulge information about banks under its regulatory watch prove, that the very last thing the Feds want is price discovery. It’s why, unless you are an insider in a bank or in the government, that investing in banks is a fool’s errand.

    The Fed’s seem to think that opacity will prevent financial system chaos. In fact, like all government market interventions, it accomplishes the exact opposite of its intent. Without good information, potential bank investors stay away, magnifying the carnage that the ongoing deleveraging is wreaking.

    Where’s Andrew Jackson when you need him?

  8. Thisson says:


    That’s true, but if you indicate which banks are weak, you cause a run on the bank and ensure their failure.

    Plus, our actual economy is acknowledged to have information disparities. So we already know it’s not perfectly efficient. The questions we should ask are how imperfect is it, and how can it be improved?

  9. ellidc says:

    Whether you consider the Fed the lender of last resort or the supplier of dollars, it does not particularly matter to the survival of the Fed whether they get paid back or not. When they buy treasuries, they do not even keep the interest earned but kick the vast bulk of it back to the U.S. Treasury, 34.9 billion of 38.8 billion total income in 2008.

    It seems to me what is happening is rather than the Fed instigating an enormous round of inflationary creation of money, they are after the fact back stopping the enormous round of inflationary creation of money already accomplished by the private sector.

    The Fed has always expanded the money supply at a greater rate than the expansion of the underlying value of things. In other words it has always pumped out dollars and gotten a negative real return. Here we see the process telescoped and the losses first incurred by an intermediary.

  10. Bruce N Tennessee says:

    And all they need to do for the world’s second largest economy is shovel the dirt in.

    Japanese Machine Tool Orders Fall 71.8% Year-Over-Year in December

    Those of you in business know these sorts of figures are not possible for a living, much less thriving business..

  11. Mannwich says:

    Barry – So you don’t believe that Steve Liesman’s recent statements claiming the taxpayer is already making money off of the TARP program? Now why would a hack like Liesman lie to us?

    @Bruce: Those are are scary numbers indeed.

  12. “That’s true, but if you indicate which banks are weak, you cause a run on the bank and ensure their failure”


    More bank failures when banks are insolvent would be a bad thing because…?

    It’s easy how to improve information: Make the government disclose what it is doing. With a banking system that is teetering close to complete nationalization by the feds, forcing them to disclose what they are doing and why should be imperative. Just like shareholders kept in the dark by management until a financial bomb explodes, the fed wants to keep its shareholders (i.e., the taxpayers) in the dark until this “saving” of the financial system fails catastrophically.

    One day, we’ll wish we’d had better information.

    Where’s Andrew Jackson when you need him?

  13. willid3 says:

    so if the problems are bad banks, why not just nationalize them now and break them up later. it would be cheaper to the tax payers, but not very politically correct I am sure.

  14. Bruce N Tennessee says:


    Those are scary numbers, and I talked last night with the builder who built our horse barn. When this was finished last May, he had 15 men working for him. Last night I asked him how his business was doing, and he says he has 5 workers now, and there is enough business for the 5 for about 8 weeks. I also related this weekend about another friend who builds equipment for the trucking industry has laid off 50 of his 150 employees in the last 2 months…and he told me Saturday that it appears they will go bankrupt in May, the longest he can reasonably hold out. Tough times for everyone.

    Banks Foreclose on Builders With Perfect Records

  15. DL says:

    “Looking at the holdings, it’s no mystery why. It has loads of subprime-mortgage bonds, souring commercial real-estate debt and collateralized debt obligations worth a fraction of their original value”

    This is no doubt true. But the Fed isn’t willing to provide any details, and so we are left to speculate as to the actual gap between prices paid, and present value. I suppose the motivation of Fed officials is that they don’t want to foster a sense of panic on the part of the general public. And they may be afraid that there’ll be runs on banks if they provide bank-specific details.

  16. DL says:

    willid3 @ 10:59
    “…just nationalize them now and break them up later. it would be cheaper to the taxpayers…”

    Would it be cheaper? I haven’t seen any detailed analysis. If it would indeed be cheaper, then I’m all for it. (But I have my doubts).

  17. bdg123 says:

    Ah, it is good to be the king.
    The piss boy

  18. Simon says:

    I have a question Did the assets the Fed has aquired belong to the shareholders of the banks or were they held by the banks creditors?

    I mean the world of banking is soooo opaque. It’s amazing how they have successfully hid behind the facade of respectability for so long. The opaqueness is what has got them into trouble (inter bank trust loss) but it is a large part of its success as well. I mean if more people new how flawed the system is, international banking fiat currency, fractional reserve banking and interest, they would lose all their credibility. It’s like John Law’s South Sea Bubble all over again.

    Even now the Fed and the Treasury won’t say exactly whats going on with the Banks and the Tax Payers money they are spending.

  19. Pat G. says:

    Instead of capitalizing companies, the government should just buy them outright. If the companies screwed up enough to get themselves in the situation they now find themselves they will do it again. Don’t keep inflating a ruined tire. It has too many leaks.

  20. Blurtman says:

    What I do not understand is the CDS market. It is said that the notional value of this market is $50-70 trillion. Around half apparently is held for hedging bond exposure risk, and the other half outright speculation.

    AIG wrote CDS on CDO’s, couldn’t pay out, and so Tim Geithner believes the taxpayers should make good on the bets of Goldman Sachs. Merrill Lynch. Morgan Stanley and non-US investment banks. This would include paying out speculators. $85 billion plus $40 billion plus who knows how much?

    Why? Why not just chide these IB’s for not doing proper due diligence, as they have to folks who were suckered into buying their fraudulently rated toxic sludge? They made billions selling this garbage, and now they want taxpayers to pay out billions on the insurance, too? This cannot be true, can it?

    Why does Geithner believe taxpayers should pay off Wall Street speculators?

    And how then is Obama change you can believe in, unless the change is some combination of coin?

  21. scepticus says:

    “And the future risks? 4 main factors put the Fed’s balance sheet at further risk:”

    ” • Asset prices are declining.”

    Anyone have any idea on how much risk remains in the boomer asset meltdown theory? This theory has been around for a while now and basically says an asset price meltdown happens when the boomers retire and start selling their investments to younger generation, who are both a lot less numerous and also a lot less rich. Have we had that meltdown now or is there some more of it still to come?

  22. bondjel says:

    I’d like to see Barry do an attempt at an objective, unemotional analysis of what the Fed’s balance sheet deterioration has to do, if anything, with the future prospects for inflation, and whether inflation in future is more likely to be cost-push, demand-pull or some mix of both.