U.S. Treasury and Federal Reserve. Federal Reserve holding over $2 trillion in the Darkest Balance Sheet in Financial History.
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The U.S. Treasury and the Federal Reserve have arguably two of the least transparent balance sheets known to humankind. This wouldn’t be such a big issue if the amount of money funneled into these organizations was small. That is not the case. The Federal Reserve since October of 2008 has held on its balance sheet over $2 trillion in reserve bank credit and also, Federal Reserve Holdings of U.S. Treasuries. This of course is the biggest bait and switch in history because in exchange for U.S. Treasuries, banks can offload practically any collateral (i.e., mortgages, auto loans, credit card loans, etc). The U.S. Treasury and Federal Reserve are creating the biggest put option in the history of the world and the American taxpayer stands to lose big.
Let us take a look at the Fed’s balance sheet:
The Fed doubled its balance sheet in the matter of a few weeks. It went from approximately $900 billion to $1.8 trillion in lightning speed. And with this speed, the public unfortunately did not know what they were exactly buying into. It is important to take a look at the Federal Reserve balance sheet broken down by category:
Now I’ve highlighted a few of the areas that have seen explosive growth over the past few months. Many are not aware that the Fed already has $367 billion in mortgage-backed securities on its books. That is an enormous amount. Also, the Term auction credit which was designed to be short-term is staying absurdly high at $455 billion. We have “other loans” of $102 billion. We need more clarity beyond this. The public isn’t shown exactly how these securities look. There is a big difference between a 30-year fixed MBS and an Alt-A packet that contains questionable mortgages. These are things we do not know but are fully backing up with the full faith of the American taxpayer. The Commercial Paper Funding Facility backstopped a large portion of the money market accounts when they broke the buck last year. These are not assured either but here we are with $242 billion sitting on the balance sheet. What is the quality here?
The Maiden Lane facility, is the holding company that was created when the Fed brokered the JP Morgan and Bear Stearns deal. The Fed expects to lose $2 to $6 billion on this deal. The other Maiden Lane holding companies are setup to bailout uber financial failure AIG. Do these sound like quality assets to you?
There are petitions and now, a realistic push to open up the books at the Federal Reserve. After all, if we are being asked to bail these institutions out we have a right to know what kind of collateral we are receiving. It is not typical for the Fed to be taking on so much onto their balance sheet. But they are. The bet they are taking is that this thing will blow over and Recovery 2nd half 2.0 is going to take hold. Yet that put option is being squarely put on the shoulders of the American people. We are already going to lose money but the question is how much? Take a look at Fannie Mae and Freddie Mac. They went into conservatorship last year and we were initially told it would cost upwards of $25 billion in the worst case scenario. Recent estimates now put it at $177 billion.
The Fed balance sheet has exploded:
This is where things get fascinating. What is really in those other assets category? That is the question many now in Congress are trying to get at. But the Federal Reserve has the darkest balance sheet of any organization in the world. They tell the public enough and convolute things enough where people are snowed over. How can we not demand to know what is in that $2.1+ trillion balance sheet? They only have that because the public has allowed it. They give categories names such as Maiden Lane which sounds much better than garbage can holders for Bear Stearns and AIG.
And recovery 2.0 is not assured. The unemployment claims remain at record highs and as we have stated, with nearly 25,000,000 Americans unemployed or underemployed things are not going to turn quickly. For example, Californians just voted down propositions that would increase taxes to fund state programs. The vote was rather astounding. So now, the biggest state in the nation is gearing up for major cuts. This will push up unemployment. GM is next up on the chopping block and that will produce more job losses in the summer. Ultimately there has to be a convergence between main street and what is occurring in the stock market. The recent rally has benefitted financial companies the most but the public is still largely left to see very little benefit even though we are now approaching the 2nd year anniversary of this crisis.
The U.S. Treasury and Federal Reserve are pushing things and the public is demonstrating a fatigue. They do what they think they know best and that is banking and they are protecting their own. Let us put this in perspective. California with the propositions was looking to increase revenues and taxes by $6 to $10 billion. A total uproar. The Fed just lists on one of its line items “other assets” and it is up to $100+ billion? Do people really not see what is going on? We need to follow the money and the U.S. Treasury and Federal Reserve have it all.
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