Our Next Troubled Bank: The Fed
Fascinating stuff:
“All of this garbage paper that’s going bad — the troubled residential mortgage backed securities (RMBS), the commercial mortgage backed securities (CMBS), the asset backed securities (ABS), the Fannie Mae bonds, the corporate loans, and so on — hasn’t just gone “Poof.”
Instead, more and more of it has been landing on the Fed’s doorstep — either through direct ownership or as collateral against Fed loans that keep getting rolled over.
The result? The Fed’s once pristine balance sheet is starting to look more and more like the balance sheet of a troubled financial institution.”
The quality of the balance sheet of the U.S. central bank is deteriorating. The Fed is now heavily burdened by the same kind of crappy paper that has been hammering private U.S. banks for several quarters.
And the Fed banks are holding total capital of just $45.7 billion against the sum total of $2.19 trillion in assets, meaning the Fed is leveraging its capital 48-to-1. That compares to only 27-to-1 two years ago…
>
Source:
The Fed: Our Next Troubled Bank?
Friday, April 24, 2009 11:46 AM
http://www.istockanalyst.com/article/viewarticle/articleid/3206140
April 27th, 2009 at 4:23 pm
Isn’t that how it’s supposed to work? The Fed doesn’t have to worry about turning a profit, it doesn’t have to worry about panicked shareholders, and it can afford to hold assets in perpetuity if necessary.
Comparing the Fed to a private bank is comparing apples to oranges.
April 27th, 2009 at 4:29 pm
Eventually all institutions have to deleverage. That means liquidation. Since the Fed is holding a large quantity of illiquid assets, that will eventually mean selling Treasuries, which will mean a lower $ and higher commodities.
All roads lead to an inflationary depression?
April 27th, 2009 at 4:33 pm
@leftback
Eventually, the Sun will expand into a red giant and boil off Earth’s oceans and atmosphere, before cooling into a dead, white dwarf. We have about 5 billion years before that happens, so enjoy it.
It’s the same for the Fed.
April 27th, 2009 at 4:35 pm
Got that Leftback? We’re in a bull market that’s going to last 5 billion years.
April 27th, 2009 at 4:37 pm
http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=354
Maybe this will add context.
April 27th, 2009 at 4:42 pm
how does one get an inflationary depression? how does one even get inflation if demand dies off? mainly because consumers (aka employees) are in fear of their jobs going away, and their incomes have been (and still are) collapsing. and that collapse was what drove the demand for credit. which wall street was so happy to supply, and to encourage by beating on incomes (thus making more demand for credit. what a deal!).
April 27th, 2009 at 4:44 pm
@franklin: You may have problems a little bit earlier than you anticipate. Even in the ivory tower…..
This myth of American exceptionalism is amazingly strong isn’t it? You really do think the bloody cavalry are going to ride in at any moment and deliver free cheeseburgers and really neat Jeeps for all the cool kids (that’s you, franklin, OK?) and then go to Chipotle to pick up chicks and on to DQ for shakes.
Meanwhile John Wayne will chase the Bears back into the woods, where they will retreat to their small shacks with no running water or electric power, to read their well-worn copies of the constitution by candlelight.
No possibility that the Fed could go bust or force the printing presses to run non-stop. None at all.
April 27th, 2009 at 4:46 pm
Ever heard of the Weimar Republic?
April 27th, 2009 at 4:49 pm
@leftback
Nobody here goes to Dairy Queen: we don’t want to get fat.
Nobody here knows who John Wayne is either. =)
April 27th, 2009 at 4:51 pm
willid,
it’s known as ‘change in asset preference’, relative Prices can radically change, even in a Deflationary Monetary/Credit (less thereof) environment..
LSS: if peep started buying More Things, and Less Paper…guess what would happen to the relative price of Things?
April 27th, 2009 at 4:53 pm
AND we’re nowhere yet near the end given the waves of additional RE (commercial and residential) stress to pile on. A bad frickin’ dream.
April 27th, 2009 at 4:53 pm
@ franklin411
My nickname at work is “the Duke”!
Why would the Fed lever up so high? Do they have some sort of bonus/compensation structure going on that we should blog about?
April 27th, 2009 at 4:54 pm
speaking of yon’ Constitution..
here: http://www.nccs.net/
those things are a steal @ U$D .30/ea. x 100 ~U$D30.
one might be surprised at how few of us have actually read it..
April 27th, 2009 at 4:56 pm
@willid: A quick lesson on Inflation. Forget about Milton f***ing Friedman. OK? F*** the Chicago School.
Mark is right. Everyday people don’t look at the price of gold, or Treasuries, or the money supply.
They look at the cost of a loaf of bread, a ride on the bus, a pint of milk, maybe a gallon of gasoline.
The heating bill, the rent. All that stuff can actually get more expensive – even during a depression.
@franklin. Ha. Me too. I thought John Wayne was an airport!
April 27th, 2009 at 4:56 pm
It is not comparing apples to oranges, it is comparing apples to apple orchards. I wish Barry could explain more why he thinks this matters. I do not see how it matters in the same way it would matter for a private U.S. bank with reserve requirements and shareholders and expenses and debt service that must be paid out of actual revenue from operations.
April 27th, 2009 at 4:56 pm
5 billion years. I think we just have 4.999 billion. I hope I’m wrong.
That extra million years would allow the magic of compound interest to build my short term treasury account to the point that I will own the universe.
Gee, this long term thinking is making me a little happier. I’m going to be rich.
April 27th, 2009 at 5:02 pm
we don’t want to get fat.
franklin,
out of curiosity, how much High Fructose Corn Syrup do you eat?
http://www.westonaprice.org/motherlinda/cornsyrup.html
April 27th, 2009 at 5:03 pm
DL Says:
“Got that Leftback? We’re in a bull market that’s going to last 5 billion years.”
that seals it- I’m going long
April 27th, 2009 at 5:07 pm
@meh 4:54
I have the feeling the constitution is just a quaint document relegated to the interest level of , say something like instructions for field dressing a rabbit. “Interesting in a historical context, but not relevant today.”
Of course, it is relevant if you want to be on the gov’t’s watch list. (how about the double apostrophe?)
April 27th, 2009 at 5:09 pm
@ahab 5:03 – only for buy and holders here at these levels. Don’t get whipsawed!
April 27th, 2009 at 5:13 pm
@ tagyoureit
OT
Meant to ask you on the Knievel thread, when, where did you moto?
I raced in New Mex and Texas
Did get to ride Saddleback, Indian Dunes and Carlsbad CA
My fave steed was ‘79 YZ 250F
Now back to your regularly scheduled disaster of the day.
April 27th, 2009 at 5:16 pm
I’ve sortof got that that the inflationary part is particularly bad for the USA b/c we don’t make our own stuff. And if we want the stuff that is produced elsewhere, say oil, the exchange rate on the dollar is going to be very important. Also, TVs and all the goods made in other countries with other currencies.
So, if the Fed/Treasury prints too many dollars, and pushes yields down too far, the appetite for our currency will take a hit. It seems clear to many that the fed is on this road, and if it continues for a sufficient period, the dollar is going to buy much less overseas.
Our dollars can be worth less and things really suck at the same time.
April 27th, 2009 at 5:23 pm
cjc-
global parity my man- when companies can start making products in the USA that improves their margins- done deal- we just have to lower our standard of living- that’s the part that people don’t like- can’t have the “whole pie” and eat it to
April 27th, 2009 at 5:24 pm
extra points for the double apostrophe~
hopeImwrong,
this: “Of course, it is relevant if you want to be on the gov’t’s watch list.” to me, says it all.
it’s the same ‘Gov’t’ whose purported officials still swear an Oath by, and to, it:
“In the United States, the oath of office for the President of the United States is specified in the U.S. Constitution (Article II, Section 1):
I do solemnly swear (or affirm) that I will faithfully execute the Office of President of the United States, and will to the best of my Ability, preserve, protect and defend the Constitution of the United States. ”
We should Wake up. Practical Jokes can be hiliarious, but this current scene is neither Practical, nor a Joke.
Past that, People would do well to remember that many thought that, even, the Constitution went too far in creating a Creating a Centralized Power..
http://www.constitution.org/afp/afp.htm
April 27th, 2009 at 5:32 pm
cjpa said:
“So, if the Fed/Treasury prints too many dollars, and pushes yields down too far, the appetite for our currency will take a hit”
It’s very easy, you should work with some ex-Enron, experienced traders and start a futures market for a drininkg water, priced in US$ of course
April 27th, 2009 at 5:39 pm
fed has done what it thinks is appropriate for the lat 25-30 year. bottom line is this system is broken and the fed is trying to revive it. simple as that. (it aint gonna work)
April 27th, 2009 at 5:40 pm
MEH Says:
it’s the same ‘Gov’t’ whose purported officials still swear an Oath by, and to, it:
exactly- last I checked- it is the “law of the land”- it just doesn’t fit neatly into some people’s deisres for the role of the Federal Government- the “silly little” document keeps getting inthe way.
April 27th, 2009 at 5:44 pm
@Mark:
Nuthin but pure, raw Turbinado sugar for me!
http://en.wikipedia.org/wiki/Turbinado
Anyway, there’s not going to be any inflation for some time to come. Actually, I’d love to see inflation. Inflation is great for debtors–that is to say, inflation is great for 99% of Americans.
And the Fed can keep printing money and buying “worthless” assets imo. I predict the American people will turn a handsome profit when all is said and done.
April 27th, 2009 at 5:54 pm
franklin Says:
“Inflation is great for debtors–that is to say, inflation is great for 99% of Americans.”
you sho” be wet behind the ears franklin- how do you think the Fed battles inflation- how ’bout by crankin’ up the ol’ interest rates- the higher the inflation- well shucks- that means interest rates go up too- and then when you trying to get that their mortgage – well- kind of tough to qualify when rates are 15%- but hey what do I know- I ain’t got no doctorate or nothin’
April 27th, 2009 at 6:24 pm
@Ahab:
Nothing says the Fed is required to fight a disastrous scorched earth campaign against inflation. All they have to do is emphasize the growth mandate over the price stability mandate. Purged of the Libertarian moron William p(F)ool, we can hope that the Fed has learned its lesson about the dangers of pig-headed anti-inflation policy.
April 27th, 2009 at 6:24 pm
The Fed has provided CDS protection on almost every toxic asset in America. Unfortunately, you can’t extinguish the debt… they’re just playing Whack-a-mole with it. Eventually, it will crop up somewhere else. If the Fed subsumes the debt and then tries to sell print dollars to make up the gap, the dollar will take the hit.
ie. either the loan originator goes bankrupt, or the Fed toxifies its balance sheet and the dollar become toilet paper. Those are your possible outcomes. Take your pick.
Holding a NPA to “maturity” means nothing when there’s zero capacity and zero collateral.
Welcome to the party… I started blogging about this back in January. Hadn’t keyed into the leverage aspect of it, but that’s a great angle.
http://www.dwaserstein.com/blog/?p=9
April 27th, 2009 at 6:27 pm
This illustrates the fundamental problem with bailouts:
They don’t solve problems; they merely relocate them while creating the temporary illusion that these problems solved…
Just like a handful of painkillers creates the temporary illusion that an infection is cured even as it spreads and turns into incurable gangrene.
April 27th, 2009 at 6:35 pm
@super:
Actually a better example would be a nuclear reactor. The plutonium fueling the reactor is deadly. Left alone, it will generate so much heat that it will melt through the reactor wall and cause a cataclysmic disaster. But with careful management of the nuclear pile, a reactor can be a tremendously useful and productive installation. How do you accomplish this? You add or subtract control rods, which are capable of absorbing neutrons, thus slowing the reaction. This keeps the reactor at a happy medium.
The economy is the same. Left to its own devices, the toxic assets would cause a massive economic meltdown. By buying toxic assets temporarily, the Fed is inserting control rods and slowing the unwinding process to a manageable rate.
April 27th, 2009 at 6:38 pm
Leverage of the Fed is oxymoron. What difference does it make?
It all made sense when we had gold standard. Now they can print money all they want. Perhaps, they are bound by some regulations but this can easily be fixed.
April 27th, 2009 at 6:39 pm
That is some pretty crazy leverage… which is what got us into this mess.. funny how that works. Who will bail out the Fed? China? Tax payers?? They do have an advantage that they are private but still, if the assets are crap that story won’t end well.
Some like to argue that some of these crap assets will come back in value someday.. if that is the case, why would anyone want to unload this crap on the Fed and let them make the profits? The banks are dumb but you would think they would hold onto any assets with potential because they will need all the help they can get. So much for that argument…
http://moneyneversleepsblog.blogspot.com/
April 27th, 2009 at 6:40 pm
@super:
Actually a better example would be a nuclear reactor. The plutonium fueling the reactor is deadly. Left alone, it will generate so much heat that it will melt through the reactor wall and cause a cataclysmic disaster. But with careful management of the nuclear pile, a reactor can be a tremendously useful and productive installation. How do you accomplish this? You add or subtract control rods, which are capable of absorbing neutrons, thus slowing the reaction. This keeps the reactor at a happy medium.
The economy is the same. Left to its own devices, the toxic assets would cause a massive economic meltdown. By buying toxic assets temporarily, the Fed is inserting control rods and slowing the unwinding process to a manageable rate.
Well I think there’s some sense to that.
But it seems that as part of this process the government is still intent on providing more loans to uncreditworthy home-buyers and car-buyers.
The simple fact is that in this environment expanding aggregate debt is likely to create much more radioactive waste.
The counterargument is that letting credit contract will also lead to more radiactive waste as the economy contracts.
Alas, both positions can simultaneously be correct – which is why it is so essential to avoid credit bubbles to begin with.
April 27th, 2009 at 6:41 pm
That is some pretty crazy leverage… which is what got us into this mess.. funny how that works.
The logic never ceases to amuse me:
Consumer Debt Pyramid = Catastrophe
Wall Street Debt Pyramid = Catastrophe
Government Debt Pyramid = Recovery and Prosperity
“Which one is not like the other?”
April 27th, 2009 at 6:42 pm
“Which one is not like the other?”
Ooooo…. sorry.
“One of these things is not like the other.”
April 27th, 2009 at 6:51 pm
This is right up Jim Rogers’ alley. He’s been predicting the failure of the Fed for over a year, I believe.
Franklin411: Actually the Fed is supposed to remit a profit to the Treasury and has done so more or less forever.
April 27th, 2009 at 7:04 pm
If not for our printing press and awe-inspiring nuclear arsenal, we’d be the worst subprime borrower known to man. Just keep on buying our treasuries or we’ll bomb the f–k out of you, foreigners!!!
HCF
April 27th, 2009 at 7:10 pm
Creating money that does not represent the creation of value does nothing to spur economic growth, and only cheapens the money. Fiat money is only as good as the government that prints it, which in turn, is only as good as the economy it represents. The US government has effectively delegated its money creation function to the Fed, and so long as the Treasury requires payment in dollars for its taxes, has given the Fed the implicit power of taxation.
It matters tremendously how leveraged is the US central bank. It can fail like any other (i.e., being unable to fill its capital holes with profits), but when it goes, there is no calvary to ride to its rescue. It is the calvary, and its horse is the dollar. When they go down, they will go down together.
April 27th, 2009 at 7:11 pm
“Actually the Fed is supposed to remit a profit to the Treasury and has done so more or less forever.”
DoctoRx,
what’s the point you’re trying to make?
April 27th, 2009 at 7:13 pm
Sheila Bair tipped whats brewing, a massive Federal agency to take on the toxic morts & loans and hold them to maturity and manage the abandoned properties collecting a “fair” rent or mortgage until they turn over at a profit due to the inflation that all these bailouts will provoke. In the interim the costs will be huge. Public housing in the broadest sense.
On the sidestage is the creation of gummint jobs at “fair” salaries to keep unemployment in the low teens.
Just need those Chinese to keep buying boatloads of US paper. A big swine flu outbreak in China could gum up the works, bigtime!
April 27th, 2009 at 7:17 pm
Jim Rogers says “you can’t believe the gummint”, when have economic numbers beer revised better? The initial (misleading ) report gets the headline and the subsequent revision worseward doesn’t.
April 27th, 2009 at 7:22 pm
No, the Fed cannot fail like any other bank. Any commercial or investment bank can fail if it does not have enough cash/assets to cover the liabilities. Unlike a regular bank the Fed can *create* assets out of thin air. So there cannot be a run on the Fed. They have as much cash as they need.
Of course, at some point you may end up like Zimbabwe, which is not pretty. But we are still far from it. Even in Zimbabwe the central bank did not fail. They just got tired of printing, perhaps, ran out of ink.
April 27th, 2009 at 7:36 pm
[...] [The Big Picture] [...]
April 27th, 2009 at 7:36 pm
troubled bank? LOL thye have been deemed above the law and untouchable. they have committed so many illegal acts it’s comical. long live the fed. long live the braindead
April 27th, 2009 at 7:39 pm
Unlike a regular bank the Fed can *create* assets out of thin air. So there cannot be a run on the Fed. They have as much cash as they need.
They can create paper assets but not real assets. The run will be on the dollar and US debt when the fear that these paper assets no longer represent real assets reaches a critical threshold – the dollar will lose it’s real purchasing power.
The problem is once this point is reached it’s probably going to be a “dam break” type of event with no turning back – confidence in the US financial system may be lost for the forseeable future.
We may wake up one day suddenly and find ourselves with the borrowing capacity of a 3rd world country instead of a 1st world country and the prosperity we once had only a distant memory.
April 27th, 2009 at 7:39 pm
adeev:
Did you think about your reply? The run on the fed is when other countries stop buying our debt…that is the “run”…instead of running to the bank to get dollars they run from dollars…same end result..failure of the institution…
The fed would have too many liabilities to be covered….
By the way, you thirtysomethings….why would you want higher taxes to pay off the national debt without a contract (national amendment) that makes congress/fed/president not be able to continue deficit spending? This is what you should be pushing…otherwise it is a neverending nightmare..
April 27th, 2009 at 7:44 pm
yea adeev, I do not understand these comments. When you talk about the Fed’s leverage, who do they think the Fed borrowed from or need to pay back? The only problem here is by purchasing assets that have little value, the Fed has injected a lot of money into the system that they will not be able to pull back out by selling the assets. This is theoretically inflationary, but a lot of things the last 8 years have been theoretically inflationary.
April 27th, 2009 at 7:50 pm
When the Fed goes bankrupt, nobody will come to the auction. Or vica-versa.
April 27th, 2009 at 7:54 pm
delliott,
you’re missing the fact that those that fouled-up get patched-up, and you get stuck with the bill..
April 27th, 2009 at 8:09 pm
When the Fed goes bankrupt, nobody will come to the auction.
There will be nothing for sale except broken illusions and squandered credibility.
April 27th, 2009 at 8:28 pm
F411 – I am starting to understand where you are coming from. Finally.
April 27th, 2009 at 9:14 pm
Add another $5 Trillion in Fannie/Freddie Fraud to the Feds balance sheets…
http://bluelori.blogspot.com/2009/04/fanniefreddie-5-trillion-fraud.html
April 27th, 2009 at 11:23 pm
The debt will be addressed in one of four ways: 1) taxes will be raised to pay for it; 2) the treasury will default; 3) the debt will be directly monetized by the Fed or otherwise reduced in real value through inflation; 4) the vast profits from the Fed’s eventual sale of all the Maiden Lane and other new balance sheet “assets”
The explosion of the Fed’s balance sheet means 3 is more likely than 1 and is already happening at a pretty good clip. It does not mean that the debt is going to be larger through the Fed’s “bad investments.”
April 28th, 2009 at 12:13 am
Hopefully this takes down the Fed. Good riddance.
April 28th, 2009 at 12:21 am
[...] BP: Our Next Troubled Bank: The Fed [...]
April 28th, 2009 at 9:05 am
John Wayne is like an analogy for our federal reserve system: a dead actor rumored to have dodo stuck in his colon.