Federal Reserve Holding Massive Amounts of Toxic Assets Turns Into Trillion Dollar House of Cards

August 21st, 2009


The US Federal Reserve under Ben Bernanke has, according to their own figures released today and reported by the Wall Street Journal again put its “assets” over $2 trillion. This is twice what it was one year ago, in major and risky break from policy.

As a former finance executive and author, this data really terrifies me on several levels:

First of all, the Fed has bought $610 billion in mortgage backed securities from elite banks in the past six months, including $67 billion worth in the last week alone. It’s these same toxic assets that have killed many smaller banks this year, including just today Guaranty Bank of Texas. This was the financial paper, similar to a bond, that Wall Street created by combining thousands of low quality mortgages, the majority being from California, Florida, Arizona, and Nevada. Somehow Wall Street got rating agencies like Standard & Poor’s to give AAA ratings to this junk paper and proceeded to sell it to banks, investors, mutual funds, etc. This scam funded the last two years of the housing price bubble and greatly enriched Wall Street. Now the banks who for some reason have not been able to dump these toxic assets on the Fed are being forced to write them down to their real value, assuming a 40% loss or more on the face value based on the real mortgage default rates. The Fed is playing an interesting trick though and valuing these bonds at face value! Meaning those “assets” of $610 billion are really worth probably just over half that.

Secondly, the Fed is also holding literally hundreds of billions of dollars in Bear Sterns, AIG, loans to banks, as assets at face value, assuming everything is hunky dory. Plus, a new one now over $111 billion unclear “government agency debt” that did not exist six months ago!

Thirdly, Why is the Fed being allowed to ignore the real value of these assets? Ignoring proper accounting standards will eventually come home to roost as mortgage holders continue to default as a lot of this paper becomes worthless. These real losses mean our $2 trillion deficit this is realistically hundreds of billions of dollars worse, but that fact is being swept under the rug. Any business operating this way would be bankrupt and under police investigation.

Fourthly, when are people responsible for the whole mortgage and mortgage based financial paper scam going to be brought to justice? These hundreds of billions of losses make Madoff look like small potatoes (he also deserves no mercy).

Finally, where is a full and open accounting of why these actions are taking place, where this money is to do it really coming from, being used, and the plan for minimizing losses? The Federal Reserve in nominally independent from the government, but in the end is the taxpayer who carries the burden.

The other loss that is harder to gauge, but is just as real, is the Fed trying to sweep these issues under the rug has turned itself from one of the world’s most prominent government financial institutions into something more akin to a banana republic bank. Instead of focusing on making the USA great again, yet another costly distraction pushing us towards decline.

Todd Lipscomb

Founder of MadeinUSAForever.com, a source for products made in the USA.

Posted in Uncategorized

Friday, August 21st, 2009 at 6:48 amand is filed under Uncategorized.

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