Accounting Tweak Could Save Fed From Losses

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goes211's picture
goes211
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Accounting Tweak Could Save Fed From Losses

Does anyone know anything more about this NBC news article?

http://www.cnbc.com/id/41198789

Accounting Tweak Could Save Fed From Losses

Published: Friday, 21 Jan 2011 | 4:58 PM ET

"The timing of the change is not coincidental, as politicians and market participants alike have expressed concerns since the announcement (of a second round of asset buys) about the possibility of Fed 'insolvency' in a scenario where interest rates rise significantly," Smedley and his colleague Priya Misra wrote in a research note.

Concerns that the Federal Reserve could suffer losses on its massive bond holdings may have driven the central bank to adopt a little-noticed accounting change with huge implications: it makes insolvency much less likely.

United States Federal Reserve
Tetra Images | Getty Images
United States Federal Reserve

The significant shift was tucked quietly into the Fed's weekly report on its balance sheet and phrased in such technical terms that it was not even reported by financial media when originally announced on Jan. 6.

But the new rules have slowly begun to catch the attention of market analysts. Many are at once surprised that the Fed can set its own guidelines, and also relieved that the remote but dangerous possibility that the world's most powerful central bank might need to ask the U.S. Treasury or its member banks for money is now more likely to be averted.

"Could the Fed go broke? The answer to this question was 'Yes,' but is now 'No,'" said Raymond Stone, managing director at Stone & McCarthy in Princeton, New Jersey. "An accounting methodology change at the central bank will allow the Fed to incur losses, even substantial losses, without eroding its capital."

The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability.

This enhances transparency by providing clearer, more frequent, snapshots of the central bank's finances, analysts say. The bonus: the number can now turn negative without affecting the central bank's underlying financial condition.

"Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible," said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer.

Travlin's picture
Travlin
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Re: Accounting Tweak Could Save Fed From Losses

Good catch Goes.

goes211 wrote:

The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital.

So now the taxpayers will be on the hook to formally "bail-out" the Fed.  Lovely.

Let's see if I've got this straight.  The Fed creates so much money, out of thin air, that it drives interest rates to zero.  And uses this money to buy all the Treasuries the US Government must issue  to cover the deficit.  But if interest rates rise and the Fed becomes insolvent that loss is transferred to the US Government -- which issues more Treasuries to pay for this debt, which gets bought by the Fed ...

Is this the financial equivalent of a perpetual motion machine?

Chris called it again.  Don't Worry' They'll Just Change the Rules.  http://www.peakprosperity.com/martensonreport/dont-worry-theyll-just-cha...

Travlin 

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Travlin
Status: Diamond Member (Offline)
Joined: Apr 15 2010
Posts: 1322
Re: Accounting Tweak Could Save Fed From Losses

This issue really needs more attention and discussion.  This makes "heads I win, tails you lose" official and legal, instead of an emergency response to "save the system".  It removes the last fig leaf from accountability and moral hazard.  It says the USA is now openly owned by the mega banks.

Please consider this issue and share your thoughts.

Travlin 

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