Who’s Watching the Fed’s Back?

Interest Rate and Real Estate Analyst Mike Larson poses some critical questions in his latest article about the Fed’s balance sheet: “The Federal Reserve is watching the backs of U.S. banks.  But… “Who’s watching the Fed’s back? Is the Fed our next troubled bank?”, Larson asks.

From Money and Markets: …All of this garbage paper that’s going bad — the troubled residential mortgage backed securities (RMBS), the commercial mortgage backed securities (CMBS), the asset backed securities (ABS), the Fannie Mae bonds, the corporate loans, and so on — hasn’t just gone “Poof.”

Instead, more and more of it has been landing on the Fed’s doorstep — either through direct ownership or as collateral against Fed loans that keep getting rolled over.

The result? The Fed’s once pristine balance sheet is starting to look more and more like the balance sheet of a troubled financial institution.
…
* The quality of the balance sheet of the U.S. central bank is deteriorating.

* The Fed is now heavily burdened by the same kind of crappy paper that has been hammering private U.S. banks for several quarters.

* And the Fed banks are holding total capital of just $45.7 billion against the sum total of $2.19 trillion in assets, meaning the Fed is leveraging its capital 48-to-1. That compares to only 27-to-1 two years ago.

When you consider the quality of the Fed’s balance sheet ; one can understand  Larson’s motives for arguing his point.

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