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The Federal Reserve (a private bank) is broke
From: David Farber <dave () farber net>
Date: Fri, 26 Sep 2008 09:36:09 -0400
Begin forwarded message:
From: Tobin Maginnis <ptm () pix cs olemiss edu>
Date: September 26, 2008 9:12:22 AM EDT
To: dave () farber net
Subject: The Federal Reserve (a private bank) is broke
The Federal Reserve bank is illiquid. That is the fear and urgency
factors we are seeing at work on Capital Hill, and its the reason no one
will discuss why the bailout is needed.
1) As of two weeks ago, the Fed had lent out more than $600 billion of
its $800 billion total reserve Treasuries.
2) In return, the Federal Reserve bank accepted Mortgage Backed
Securities (MBS) as collateral for these loans. Unfortunately, these
MBSs have been shown, in other sales, to worth about $0.10 on the
3) In the last two weeks the Federal Reserve bank has increased its
“other loans” to the financial system by around $230 billion (from
$23.56b to $262.34b).
4) The Fed also increased its “other assets” (took in more MBSs) by
about $80b (from $98.67b to $183.89b).
5) Increased the securities it lends out to dealers by $60b (from
$117.3b to $190.5b);
Thus, if we subtract the $370 billion given out in the last two weeks
from the Federal Reserve balance of $200 billion, that leaves a
approximate balance of *negative $170 billion*. There is a simple term
for this condition: the Federal Reserve (a private bank) is broke.
The $700 billion Paulson Plan will allow Wall Street banks to buy back
the MBS (at inflated "mark-to-maturity" prices) held by the Fed thereby
return Treasury notes to the Federal Reserve. This process allows
capitalization of the Wall Street firms and banks, giving them some
breathing room to stay in business. Everyone wins except the poor
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- The Federal Reserve (a private bank) is broke David Farber (Sep 26)