The Fed Has Negative Capital Using GAAP Accounting – Pam Martens and Russ Martens 4/11/24


The Fed’s unprecedented experiments with years of ZIRP (Zero Interest Rate Policy) and QE (Quantitative Easing), where it bought up trillions of dollars of low-yielding U.S. Treasuries and agency Mortgage-Backed Securities (MBS) and quietly parked them on its balance sheet, are now posing a threat to the Fed’s flexibility in conducting monetary policy.  (Since 2008, the Fed’s concept of conducting monetary policy has come to enshrine serial Wall Street mega bank bailouts as a regular part of its monetary policy. Large and growing cash losses at the Fed may seriously crimp such future bailouts.)

As of last Wednesday, according to Fed data, the Fed was sitting on $6.97 trillion of debt instruments it had predominantly purchased at very low fixed rates of interest. Because the interest rate (coupon) is fixed for these past purchases, when new bonds are issued in the marketplace at higher interest rates, they become more attractive and the current market value of the low-yielding fixed-rate bonds fall. U.S. Treasuries and agency MBS guarantee principal at maturity but if the securities have to be sold prior to maturity they will be sold at their current market value. This is what triggered the death spiral at Silicon Valley Bank in March of last year.

Silicon Valley Bank announced that it had sold a $21 billion bond portfolio (that was yielding less than 2 percent when current interest rates on notes and bonds were twice that amount). It reported a $1.8 billion after-tax loss on the bond sale. Losses negatively impact capital. The hit to capital panicked the very large amount of uninsured depositors at the bank (those holding more than the $250,000 the FDIC insures per depositor, per bank) and triggered an unprecedented bank run in terms of speed and scope. According to a report from the Fed, Silicon Valley Bank had deposit outflows of $40 billion on March 9, and another $100 billion of deposits queued up to leave on March 10 – which together would have been 85 percent of the bank’s deposit base. The FDIC had to step in as receiver and take over the failed bank.

Compared to the Fed, Silicon Valley Bank was a minnow. At the time of its failure in March 2023, Silicon Valley Bank had $212 billion in assets. As of last Wednesday, the Fed had $7.4 trillion in assets. Just one of the Fed’s 12 regional Fed banks, the New York Fed, is 18 times the size of Silicon Valley Bank.

According to the Fed’s latest asset breakdown, as of April 3 the New York Fed, which is by far the largest of the Fed’s regional banks, has $3.88 trillion in assets and $2.77 trillion in deposits….

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