The FED 4.3 Trillion dollar time bomb

[Pauls' Revere]

https://www.yahoo.com/finance/news/t...21801977.html#

[sic] The Fed is currently keeping its balance sheet the same size, purchasing new bonds when old ones mature. Should it decide to sell bonds, it would realize huge losses over a short space of time and would likely go into debt with the U.S. Treasury. According to Hall and Reis, it would take the Fed 6 to 10 years to work off the debt and get back in the green.

Bottom line: No matter how you slice it, the Fed payments to Uncle Sam will not only drop off a cliff someday, they could also go negative. That means, the taxpayers would be indirectly on the hook for Federal Reserve operating losses.

The crisis comes when Congress realizes the Fed is paying the government nothing (or next to nothing) while shelling out billions to the banks. Several members of Congress have already been critical of Fed payments to banks, but they’ve largely missed the mark. When the next budget crisis arises without the Fed paying it’s perceived “fair share,” all it would take is a few impassioned speeches to stir the masses and make monetary policy a de facto political animal.

[spudea]

This article is way off. Will the Fed experience some capital losses selling its portfolio, yes but there will also be capital gains on some securities. Additionally the interest payments they've been receiving will offset most of the losses.

Additionally there is nothing forcing the fed to start selling its balance sheet. It can minimize losses by holding the bond portfolio to maturity.

Additionally the interest the FED pays banks for required reserves can be changed at any time, so to suggest the FED will be forced into a negative profit situation is just fantasy thinking.

[Pauls' Revere]

This article is way off. Will the Fed experience some capital losses selling its portfolio, yes but there will also be capital gains on some securities. Additionally the interest payments they've been receiving will offset most of the losses.

Additionally there is nothing forcing the fed to start selling its balance sheet. It can minimize losses by holding the bond portfolio to maturity.

Additionally the interest the FED pays banks for required reserves can be changed at any time, so to suggest the FED will be forced into a negative profit situation is just fantasy thinking.

Good points, how does the gains in securities happen?

So, they hold bonds to maturity and reissue sell/buy into perpetuity?

Thirdly, How can banks balance their books with FED interest payments if those payments are not fixed. I'm guessing those rates are short erm fixed? perhaps 3 months or 6 months?

[Zippyjuan]

This article is way off. Will the Fed experience some capital losses selling its portfolio, yes but there will also be capital gains on some securities. Additionally the interest payments they've been receiving will offset most of the losses.

Additionally there is nothing forcing the fed to start selling its balance sheet. It can minimize losses by holding the bond portfolio to maturity.

Additionally the interest the FED pays banks for required reserves can be changed at any time, so to suggest the FED will be forced into a negative profit situation is just fantasy thinking.

This. The Fed won't suddenly decide to dump all of their holdings. That would be a massive shock to the global (and US) economy which is something they always try to avoid. Letting them mature and gradually not replacing all of them is the most likely way they would reduce their holdings.

[Zippyjuan]

Good points, how does the gains in securities happen?

So, they hold bonds to maturity and reissue sell/buy into perpetuity?

Thirdly, How can banks balance their books with FED interest payments if those payments are not fixed. I'm guessing those rates are short erm fixed? perhaps 3 months or 6 months?

Bonds have a face value- in the case of US Treasuries- usually $10,000- which is what they are worth at maturity. Those get sold at auctions where buyers make an offer of how much they are willing to pay for those bonds- say $9,000. The selling price is the lowest price which allows them to sell all of the bonds they want to get rid of at that auction. When the bond matures (some pay a "coupon" which is a partial payment on the bond interest before maturity), the buyer gets $10,000 for it. In this example, their $9,000 investment yielded them $1,000 or an eleven percent rate of return. This is how the "yield" is calculated.

The Fed buys their bonds in the secondary market- they don't bid on Treasuries. They buy them from a selected list of dealers and pay whatever the market price for the bonds is. As the Fed holdings mature (or they get their coupon payment just like all other Treasury purchasers), they cash them in (which reduces the amount they have) and use that money to buy new bonds- keeping their holdings constant (though with interest added, the amount does slowly increase over time).

[Pauls' Revere]

Bonds have a face value- in the case of US Treasuries- usually $10,000- which is what they are worth at maturity. Those get sold at auctions where buyers make an offer of how much they are willing to pay for those bonds- say $9,000. The selling price is the lowest price which allows them to sell all of the bonds they want to get rid of at that auction. When the bond matures (some pay a "coupon" which is a partial payment on the bond interest before maturity), the buyer gets $10,000 for it. In this example, their $9,000 investment yielded them $1,000 or an eleven percent rate of return. This is how the "yield" is calculated.

The Fed buys their bonds in the secondary market- they don't bid on Treasuries. They buy them from a selected list of dealers and pay whatever the market price for the bonds is. As the Fed holdings mature (or they get their coupon payment just like all other Treasury purchasers), they cash them in (which reduces the amount they have) and use that money to buy new bonds- keeping their holdings constant (though with interest added, the amount does slowly increase over time).

Thanks!

[Bossobass]

Zippy is stoned. Hold the MBS to maturity???? Really???? Face Value???

You couldn't write this $#@! if you worked for Jerry Seinfeld.

I've mentioned this before but Zippy, of course, believes Dorothy will never get back to Kansas if we all don't just close our eyes and click our heels while listening to Yellin's latest speech.

The FED is holding the less-than-zero-dollars-worth, useless, $#@!-covered trillions in MBS that they paid 105 cents on the dollar for and refusing to mark them to market so that their insolvent, unbalanced sheet can continue to appear balanced because…

The MBS are the mountain of material evidence in the largest fraud in the history of earth, committed by the banks that own the FED. THAT'S why they locked them in the FED vaults and will take the entire world down in flames before they agree to any audit that might cast any light on that evidence.

They inserted the right to pay interest on the excess reserves that they forced on their owner's banks simply to balance the fake assets side of the balance sheet, where the reserves have grown with FED "assets" purchases and have remained ever since.

Bernanke promised to wind down the balance sheet back in 2009 in an Op-Ed piece:

Congress granted us authority last fall to pay interest on balances held by banks at the Fed. Currently, we pay banks an interest rate of 0.25%. When the time comes to tighten policy, we can raise the rate paid on reserve balances as we increase our target for the federal funds rate.

When the time comes to tighten monetary policy, we must either eliminate these large reserve balances or, if they remain, neutralize any potential undesired effects on the economy.

Instead, as we all now know, the FED has dramatically INCREASED that balance sheet since then.

There will be no wind down. There will be no lending of the excess reserves. Even though the 10 year statute of limitations for criminal behavior has expired, the civil liability never will. The state of the US economy is irrelevant to the criminals who perpetrated the crime and moved to protect themselves by using the FED as a shield. They still scheme using other people's money, raking huge salaries and bonuses… with impunity.

[Zippyjuan]

Perhaps you can enlighten us on how mortgage backed securities work and why they cannot mature.

Bernanke promised to wind down the balance sheet back in 2009 in an Op-Ed piece:

Congress granted us authority last fall to pay interest on balances held by banks at the Fed. Currently, we pay banks an interest rate of 0.25%. When the time comes to tighten policy, we can raise the rate paid on reserve balances as we increase our target for the federal funds rate.

When the time comes to tighten monetary policy, we must either eliminate these large reserve balances or, if they remain, neutralize any potential undesired effects on the economy.

Is it time to tighten monetary policy and sell their holdings? Does he say when they should start to tighten monetary policy? Do you think they should sell everything at once? Right now? What do you think they should do and when?

[devil21]

Perhaps you can enlighten us on how mortgage backed securities work and why they cannot mature.

MBS don't mature like normal bonds. The "maturity" of the MBS means the promised amount has already been paid to the holder over the life of the bond instead of a lump payment on the date of maturity like most other bond types. If the underlying loans are defaulted trash and non-performing, where are those monthly payments coming from? It's not like the Fed was buying genuinely high graded paper. The Fed took the trash (and the evidence of fraud, as boss stated) off the member bank's books and applied a fairy tale value to them.

[Zippyjuan]

What percentage of mortgages are being defaulted on? Only defaulted loans become worthless (and they still have some value as long as payments are being made).

http://www.corelogic.com/blog/author...x#.V1B5upErKUk

There will always be some amount of delinquency in the mortgage market, but what is an acceptable level? At its worst during the housing crisis, the serious delinquency (SDQ)1 rate was 8.6 percent in February 2010. Recently, CoreLogic reported that there were 1.6 million SDQ mortgages in the U.S.—a rate of 4.2 percent of all active mortgages. Overall, the SDQ rate is on the decline, and a look beneath the surface shows that while loans originated from 2004 to 2008 drove the SDQ rate higher, loans originated in the past four years are among the most pristine loans made in the past 15 years.

The bonds are comprised of many loans- some bonds are actually comprised of other bonds. If four (or even eight percent- the peak) percent are bad, you can still make money off the remaining 96% (92% at the worst time). The mortgage backed securities are not "worthless".

When the Fed started buying MBS, there was great uncertainty what percent of a given security was good and what was at risk so the market dried up- buyers could not accurately calculate the risk of any given bond. That is why they were considered "valueless". More accurate would have been "unvaluable"- their true worth was unknown. Turns out they were less risky than first thought.

You are right they don't hit "maturity" where you get the whole value back at once like Treasury notes do. The bond is paid off in installments which reduce the value of the bond- if you got say a ten percent payment, a $10,000 bond would now be worth $9,000. If the Fed kept those payments, the vale of their MBS holdings would go down. Instead, they are currently using those payments to buy more securities to keep the value of their holdings constant. If they want to reduce their holdings, they could of course sell of bonds, or simply decide not to use the payments to buy more bonds.