Fed Balance Sheet Decaying

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.

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