Thursday, February 22, 2024

Now That the Fed is Technically Insolvent...

Click here to read the original Cautious Optimism Facebook post with comments

The Atlanta Fed

The attached Law & Liberty article on the Fed’s financials is a bit wonkish, but in a nutshell the Fed has run such huge operating losses over the last 18 months that it has burned through its capital reserves and now has negative capital.

Fed watchers have published suggestions that the Fed recapitalize by calling on member banks for a new capital infusion and even proposing the U.S. Treasury buy new shares in the Fed (i.e. a partial nationalization).

And just what would happen to a normal private bank that burned through its entire capital base?

For one, no bank would ever be allowed to lose so much money that its capital position reaches zero to begin with, let alone turns negative.

If any commercial bank’s capital reserves fall below 6% of its risk-weighted assets (known commonly as its Tier 1 Risk-Based Capital Ratio) then regulators—such as the FDIC, OCC, and ironically the Fed itself—will typically order its management to take “corrective actions,” meaning raise more capital by selling new shares to investors or selling off assets for cash such as branch offices, a nonbanking division like wealth management or insurance, or its investment stake(s) in other companies.

If a commercial bank’s capital falls further to below 4% of risk-weighted assets the regulators will usually move in and shut it down or more commonly take it over and search for a stronger firm to buy it. They don’t want the bank’s sudden failure, particularly a larger bank’s failure, to present a risk to the financial system.

Yet the Fed, being the adult in the room that supposedly keeps all the irresponsible children banks in line, doesn’t have to abide by the same rules.

Furthermore, the Fed doesn’t even recognize its accumulated losses as losses but instead as an asset(!) As of 3Q2023 the Fed’s $100+ billion in accumulated losses are recorded on its balance sheet as “Deferred asset—remittances to the Treasury.” 

(see link at bottom of article to view this "asset" in the Fed’s financial statements)

If any private banker attempted to record huge losses, or any losses at all for that matter, in this manner he would first face independent auditors who refuse to sanction his financial statements and report a failing grade to his shareholders. 

Then regulators such as the Fed would move in and literally remove that banker from the CEO’s office and Board of Directors.

He would then be banned for life from working at any other bank, after which he would likely face criminal fraud charges and prison time.

But as the privileged exclusive steward of the Treasury's deposits, Congressionally-bestowed monopoly issuer of paper currency and bank reserves, and strangely enough commercial bank regulator the Fed is held to a different standard.

To see the Fed’s $105 billion in accumulated losses reported as an “asset”go to the below URL, then page 2. Near the bottom of the “assets” section see “Deferred asset-remittances to the Treasury.”

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