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"Creative Accounting" Makes Fed Insolvency Impossible

Tyler Durden's picture


To all who thought that the FASB gives leeway only to banks when fudging their numbers, and boosting their equity capital in ways previously unheard of, we have a surprise. The latest entrant in the "accounting gimmickry" club is none other than the Fed. And since the Fed is not auditable by anyone, it gives itself permission to change and bend the rules in any way it desires. Following on recent speculation that the Fed could in theory have a equity capital deficiency due to its massive asset book, and its tiny equity buffer, both discussed many times previously on Zero Hedge (here and here), the Fed recently announced as part of its January 6 H.4.1 release "an important accounting policy change with the release of its weekly H.4.1 report on January 6 that effectively  prevents it from facing a negative capital position even in the event that it incurs substantial losses." Here is how Bank of America's Priya Misra explains this curious, and most certainly politically-motivated development: "The Fed remits most of its net earnings on a weekly basis. Prior to this accounting change, any unremitted earnings due to the Treasury would accrue in the "Other capital" account, but will now be shown in a separate liability line item called "Interest on Federal Reserve notes due to the Treasury.” As a  result, any future losses the Fed may incur will now show up as a negative liability (negative interest due to Treasury) as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible regardless of the size of the Fed’s balance sheet or how the FOMC chooses to tighten policy." And there you have it: instead of reducing the left side of the balance sheet upon the incurrence of losses, the Fed has decided to fudge the right side. And presto. No more possibility of insolvency ever again. Which only means that the Fed's now ridiculous DV01 of just under $2 billion will in no way prevent the world's biggest hedge fund from taking proactive steps to actually mitigate rate risk, and in fact will likely encourage it to gamble even more with taxpayer capital.

More from Bank of America:

Accounting change prevents a Fed “insolvency” scenario

Mounting concerns about Fed “insolvency” post QE2

The Fed announced an important accounting policy change with the release of its weekly H.4.1 report on January 6 that effectively prevents it from facing a negative capital position even in the event that it incurs substantial losses. The timing of the change is not coincidental, as politicians and market participants alike have expressed concerns since the announcement of QE2 about the possibility of Fed “insolvency” in a scenario where interest rates rise significantly. These concerns have prompted some observers to suggest that the Fed may be unable to tighten policy sufficiently once the economy recovers, since doing so could result in a negative capital situation and the need for a Treasury “recapitalization,” thereby compromising the Fed’s political independence.

Fed required to remit profits to Treasury (not build capital)

Since 1947, the Board of Governors has required that the Reserve Banks remit nearly all net earnings to Treasury. Remittances are roughly equal to income from loans and securities holdings less operating expenses, interest paid on depository institutions’ reserve balances, dividends paid to member banks, and any amount necessary to top up the Fed’s capital. Fed remittances have surged  since late 2008, reflecting its aggressive balance sheet expansion in the context of nearzero term interest rates (Chart 1). The Fed could potentially incur losses, however, if short term rates rose such that the interest paid on bank reserves exceeded the interest income of the System Open Market Account, or SOMA portfolio. Similarly, the Fed could face capital losses if it were to sell securities below their original purchase price (Chart 2). Note that the SOMA portfolio is not marked to market, but is reported on a par-value basis each week, so higher yields would only impact Fed earnings in the context of asset sales.

Accounting change prevents negative Fed capital situation

The Fed remits most of its net earnings on a weekly basis. Prior to this accounting change, any unremitted earnings due to the Treasury would accrue in the "Other capital" account, but will now be shown in a separate liability line item called "Interest on Federal Reserve notes due to the Treasury.” As a result, any future losses the Fed may incur will now show up as a negative liability  (negative interest due to Treasury) as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible regardless of the size of the Fed’s balance sheet or how the FOMC chooses to tighten policy. There will be no change to the current practice of remitting profits to the Treasury on a weekly basis, but the Fed will postpone any remittances if this line item becomes negative. In effect, any losses will be offset against future Fed remittances to the Treasury. In our view, this policy appears  to be a clever solution to the Fed’s inability to provision for potential future losses by retaining earnings today. We expect it to mitigate – though not fully allay – concerns about Fed solvency.

And the full notification in the January 6 H.4.1 release:

The Board's H.4.1 statistical release, "Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks," has been modified to reflect an accounting policy change that will result in a more transparent presentation of each Federal Reserve Bank's capital accounts and distribution of residual earnings to the U.S. Treasury.  Although the accounting policy change does not affect the amount of residual earnings that the Federal Reserve Banks distribute to the U.S. Treasury, it may affect the timing of the distributions.  Consistent with long-standing policy of the Board of Governors, the residual earnings of each Federal Reserve Bank, after providing for the costs of operations, payment of dividends, and the amount necessary to equate surplus with capital paid-in, are distributed weekly to the U.S. Treasury.  The distribution of residual earnings to the U.S. Treasury is made in accordance with the Board of Governor's authority to levy an interest charge on the Federal Reserve Banks based on the amount of each Federal Reserve Bank's outstanding Federal Reserve notes.

Effective January 1, 2011, as a result of the accounting policy change, on a daily basis each Federal Reserve Bank will adjust the balance in its surplus account to equate surplus with capital paid-in and, in addition, will adjust its liability for the distribution of residual earnings to the U.S. Treasury. Previously these adjustments were made only at year-end.  Adjusting the surplus account balance and the liability for the distribution of residual earnings to the U.S. Treasury is consistent with the existing requirement for daily accrual of many other items that appear in the Board's H.4.1 statistical release.  The liability for the distribution of residual earnings to the U.S. Treasury will be reported as "Interest on Federal Reserve notes due to U.S. Treasury" on table 10.  Previously, the amount necessary to equate surplus with capital paid-in and the amount of the liability for the distribution of residual earnings to the U.S. Treasury were included in "Other capital accounts" in table 9 and in "Other capital" in table 10.


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Thu, 01/20/2011 - 10:38 | 889795 nontaxpayer
nontaxpayer's picture

Sure, they can fudge and cook the books and the sheeple will stay uninformed what is going on...but fundos will still apply.

Thu, 01/20/2011 - 11:24 | 889867 Sudden Debt
Sudden Debt's picture

fundos... :)


Goldman just announced a golden ticket to make money by shorting BAC:


Goldman Suggests Buying Calls on Bank of America (BAC)



Sometimes, I just want to create a account on the yahoo message board and give these guys a clue...

But that would just ruin the fun :)

Thu, 01/20/2011 - 11:32 | 889976 SheepDog-One
SheepDog-One's picture

If anyone ever wonders how its possible to pull off this scam day after day, read the Yahoo!Finance message boards and it all becomes totaly clear.

Thu, 01/20/2011 - 12:19 | 890089 Divided States ...
Divided States of America's picture

Fed adopting something like the Repo105's like what LEH did?

Thu, 01/20/2011 - 11:17 | 889923 Turd Ferguson
Turd Ferguson's picture

Last year, I gave you $1350 by Halloween.

Today, I give you $1600 by Memorial Day.

Thu, 01/20/2011 - 11:23 | 889942 Whatta
Whatta's picture

As long as one Ameican is left working (is there still one?), there is hope for repayment.

I still find it way cool that the FED can create play money out of thin air, and then (hopefully) be repaid with actual earned income tax dollars. Whatta racket to own.

Thu, 01/20/2011 - 11:34 | 889980 attst487
attst487's picture

When do we begin repaying ourselves with would-be tax dollars?

Thu, 01/20/2011 - 12:07 | 890058 Whatta
Whatta's picture

shhhhhh. The rest of the world is not supposed to know we have no real GDP any longer. Just a nation of fiat swappers in financial matters.

I spent a few fiats in the past week on some items for the farm... trailer tires - made in Thailand, new metal cut-off disks - made in freakin' Russia, new work shirts - made in Cambodia, new welding mask - made in China. Oh, and my new HP computer was shipped from its assembly point in Mexico.

I think I see the problem.

Thu, 01/20/2011 - 10:40 | 889798 AGoldhamster
AGoldhamster's picture

This is still true - or even more true or confirmed as of NOW:

and as usually the early birds, rats are in london ... while the bagholders aka the sheep keep staring at the DOW ... look at FTSE!

And btw would be pretty surprised not to see Gold 133x or silver 27.x or even 26.x - so that Blythe can cover more shorts and shake more trees and get some more physical from the sheep ... btw with sacrificing indexes and munis and profiting nicely from fear again ... duration change: sell off might last into mid of February or so ... btw Harry giving back some? Not?

And have a closer look at brent ... could be rolling over too - eventually.

Guess HUI will see 49x pretty soon ... with 493 being a possible target.

Thu, 01/20/2011 - 10:42 | 889802 Sudden Debt
Sudden Debt's picture

maybe not insolvent but what when the dollar is worthless?



Thu, 01/20/2011 - 10:49 | 889804 plocequ1
plocequ1's picture


Thu, 01/20/2011 - 10:41 | 889807 LongSoupLine
LongSoupLine's picture

where the fuc is Ron Paul?!  Get his ass a chainsaw!

Thu, 01/20/2011 - 10:41 | 889809 Hedgetard55
Hedgetard55's picture

"Negative interest owed to Treasury" means losses owed to FED by Joe Taxpayer. Thank you Hanky Panky Bernanke!

Thu, 01/20/2011 - 10:43 | 889814 Xibalba
Xibalba's picture


Thu, 01/20/2011 - 10:48 | 889815 hedgeless_horseman
hedgeless_horseman's picture fact will likely encourage it to gamble even more with taxpayer capital.

Not exactly accurate, but I get the point.  Taxpayer liabilities might be more accurate, but I am not a CPA, PhD, or CFA.

In actuality, the Fed has very little of my capital, and I hope to keep it that way.

Thu, 01/20/2011 - 10:44 | 889818 101 years and c...
101 years and counting's picture

"any future losses the Fed may incur will now show up as a negative liability (negative interest due to Treasury)"

Translation:  The Fed will pass the losses onto the treasury and let the taxpayers pay for their losses. 

Thu, 01/20/2011 - 10:44 | 889822 SheepDog-One
SheepDog-One's picture

Simply changing a technical definition of a word now means all is well? Give me a break, at some point soon reality steps in and trumps all.

Thu, 01/20/2011 - 11:14 | 889909 Cdad
Cdad's picture


This story is completely logical, and it fits in nicely with all of the fictional earnings reports coming out of criminal syndicate Wall Street banks right now.  I can hardly wait for Blight on America bank's earning report.  Should be sweet fiction reading.

This is what plutocrats do.  Laws and rules are for Average Joe.  Anything to keep the ponzi scheme going.  So put me all in on red!  No, black!  Investing is easy, man.

Thu, 01/20/2011 - 11:34 | 889964 SheepDog-One
SheepDog-One's picture

The only thing I keep wondering about is when they have planned for it not to go on any longer, tightrope walking across the grand canyon is a risky job! 

And like when Rusty was talking to his dad at the hotel after being caught skinny dipping in the pool with Christy Brinkley, 'You believe me dont ya son'? 'Sure dad...but do you think mom will buy it'? 'Good talk Rusty'

So...anyone think the Chinese are buyin it? I dont.

Thu, 01/20/2011 - 12:13 | 890024 Cdad
Cdad's picture


That is what is so sweet about this currently crappy situation.  The only people buying this BS are the criminal syndicate Wall Street bankers themselves!  They are the bag holders [of their own fiction, no less]. 

Average Joe continues to sell the crap out of matter the news.  In a maddening and tortured sort of way [that is taking far too long because of super trading computers], the market is disciplining them.  It is my belief that the tightrope you refer to is shaking already...and criminal syndicate Wall Street bankers are about to start receiving their pink slips soon...falling into the canyon.

Even more sweet, propagandists at the Blow Horn [CNBC] will start receiving their pink slips soon, as well.  

It has been a long and tough slog, brother, but the market is working despite all the forces that are trying to rig the market.  You just wait and watch. 

Get your Whack-a-Mole game together, Dog.

Thu, 01/20/2011 - 11:38 | 889987 attst487
attst487's picture

"Always bet on black." -Wesley Snipes, Passenger 57

Thu, 01/20/2011 - 10:45 | 889824 Cognitive Dissonance
Cognitive Dissonance's picture

This rule change is just another example of manufacturing reality. Don't like the reality you're seeing? Just change the rules. There, all better.

The reason the insanity can continue longer than anyone can believe is because we are viewing the insanity with a static set of rules. Silly rabbit, insanity and insane institutions can change the rules at any time. 

Thu, 01/20/2011 - 10:48 | 889836 SheepDog-One
SheepDog-One's picture

Yep CD but theres no spinning a world famine, and gas to $4 then $5 and higher. The FED can claim anything it wants but the country is shut down just the same.

Thu, 01/20/2011 - 10:49 | 889841 DaveyJones
DaveyJones's picture

we don't call it famine, we call it fashionably thin

Thu, 01/20/2011 - 10:51 | 889846 SheepDog-One
SheepDog-One's picture

When do the fashionably thin start shooting?

Thu, 01/20/2011 - 10:53 | 889854 DaveyJones
DaveyJones's picture

we don't call it shooting, we call it a point of order

Thu, 01/20/2011 - 11:20 | 889933 SheepDog-One
SheepDog-One's picture


Thu, 01/20/2011 - 10:52 | 889848 Cognitive Dissonance
Cognitive Dissonance's picture

Agreed. I didn't say the insanity wouldn't end, only that it has and will continue longer than most could believe possible.

Thu, 01/20/2011 - 10:54 | 889855 jus_lite_reading
jus_lite_reading's picture

Correction- is has continued longer than even the best Enron account could have imagined...

Kalifornia here we come!

Thu, 01/20/2011 - 14:37 | 890559 hbjork1
hbjork1's picture

Discussion of the "change in government" in Sudan on the NPR DR show this morning. 

20% of the people live on less than $2/day.   Out of work numbers, 50% to 70% depending upon age group.  What did ZH say about the dear departed?  How many tons of gold?   

Recently, it seems we have an unusually large number of congresspeople saying that they do not plan to run again. 

The next round of elections could be verrrrry interesting. 

Thu, 01/20/2011 - 12:08 | 890062 6 String
6 String's picture

ZH needs a new acronym. I vote for:


Translated: "They will change the rules" or "They will change the fucking rules."

....Because we've officially seen enough evidence of this to know the fascist elites will.

*Remember the overnight you can't short financials rule during the financial collapse?

*Remember the change the accounting rules for total legerdemain?

Every market is totally rigged. My prediciton, within four short years--and probably much sooner--when the silver paper contracts default on the COMEX, our governement will simply change the fucking rules. They will in followig order:

*Set a fixed price for silver redemption (one that is highly unfavorable for the speculative "hoarders").

*For those that don't turn in their silver at the said fixed price, a VAT (Value Added Tax) will be assigned on any further transactions beyond the fixed price to the tune of an 80% capital gains tax rate.

And they will do this, of course, for the good of the country because the evil hoarders ruined the real market: the physical, for industrial use.

The will do this-TWCTFR--because they can. There is no safe haven except far off grid, sustainable living, in a fully protected compound.  


Thu, 01/20/2011 - 10:46 | 889828 DaveyJones
DaveyJones's picture

creative accounting makes as many things possible as impossible

Thu, 01/20/2011 - 10:47 | 889832 I think I need ...
I think I need to buy a gun's picture

How can they be insolvent when they can revalue their gold to whatever price they want?

Gold capitulation day....China's Hu " The dollar system is a thing of the past"

Everything finally rolled over. Can anyone say new monetary system or gold revaluation?

Thu, 01/20/2011 - 10:48 | 889833 stoneman sacked
stoneman sacked's picture

As one accountant famously said "Profit is just an opinion"

Thu, 01/20/2011 - 10:48 | 889834 Rider
Rider's picture

Freaking unbeliebabled no one cares about the accounting crimes.

The corruption is so rooted you think is part of the same tree.

Thu, 01/20/2011 - 10:49 | 889838 plocequ1
plocequ1's picture

Well, There it is. Rally on. Time for me to move north where the Moose and Antelope play

Thu, 01/20/2011 - 10:50 | 889843 SheepDog-One
SheepDog-One's picture

Yea yea...change the terms, pull the wool over the american sheeples eyes and all....but the real question is- 'Ya think the Chinese are buyin it'??

Thu, 01/20/2011 - 10:51 | 889844 London Banker
London Banker's picture

The Fed remits 85 percent of interest received on US Treasuries back to the Treasury under a long standing arrangement (1960s or so).  The amounts weren't significant until monetization of the debt under QE2.  Now that the Fed is holding trillions in Treasuries, the amounts of interest are enough to warrant breaking them out as a specific liability.  This accounting change seems to make sense to me.  As interest rates rise, and QE3 looms, the amounts could become quite large.  It's worth having a separate entry to make the flows clear.

Thu, 01/20/2011 - 11:09 | 889890 QQQBall
QQQBall's picture

Flows clearer? Not a CPA, but it seems you could reduce interest payments due to the Treasury by the amount of "negative interest". This would effectively have the Treasury eat the losses on the Fed's books?

Thu, 01/20/2011 - 11:20 | 889926 unununium
unununium's picture

Precisely.  It will be a long time before the Fed ever remits anything to Treasury again.  Like never.

But this accounting change did not create that problem.  It just changed the name of the capital shortfall account.

Thu, 01/20/2011 - 11:25 | 889953 Greenhead
Greenhead's picture

So they shoveled out tons of good paper to buy/exchange trash at par and now the trash gets written down and accounted for in the money due the Treasury account.  How else would the taxpayers eat the loss?? 

Thu, 01/20/2011 - 11:31 | 889973 QQQBall
QQQBall's picture

Flows clearer? Not a CPA, but it seems you could reduce interest payments due to the Treasury by the amount of "negative interest". This would effectively have the Treasury eat the losses on the Fed's books?

Thu, 01/20/2011 - 10:51 | 889845 youngman
youngman's picture

What this shows is that in some boardroom..and with some committiee...they are discussing the end game..the failure..and how they can hide it....

Thu, 01/20/2011 - 10:59 | 889864 hedgeless_horseman
hedgeless_horseman's picture

Raising rates?  Sure.

End game?  Not so sure. 

The Fed's and the .gov's ability to scare the pants off 99% of America on a whim enables them to do whatever the fuck they want, and they know it.  We stepped down the slippery slope of Fascism long ago, and they are far better at it than the old school.  Act accordingly.

Thu, 01/20/2011 - 11:27 | 889960 TruthInSunshine
TruthInSunshine's picture

Ya' know, that reminds me of the times when the market was down 5% to 10% in one day, way back when in 2008, when Congress initially voted down a blank check for Paulson & TARP...

...ahhh....good times. And totally NOT manipulated events, either.

Thu, 01/20/2011 - 12:01 | 890044 JW n FL
JW n FL's picture

please stick to the official story...

Thu, 01/20/2011 - 10:52 | 889847 jus_lite_reading
jus_lite_reading's picture

Actually, I said it first- this a PONZI so well concieved, so buttoned down, the Fed can never be technically "insolvent," thanks to creative Enron style accounting. That being said, your money is worth only as much as OTHER nations think it to be- big guns keep the US safe. But what keeps the EU safe? Answer- nothing.

Alas, the EU is already imploding before your very eyes...

Thu, 01/20/2011 - 10:55 | 889856 Cursive
Cursive's picture

So the FRB, a private consotium of 12 member banks, is ultimately backstopped by - wait for it - US taxpayers.

Thu, 01/20/2011 - 11:01 | 889871 hedgeless_horseman
hedgeless_horseman's picture

Welcome to the party.  You will want a drink.

Thu, 01/20/2011 - 12:14 | 890079 Cursive
Cursive's picture


I've had a front row seat at the party for quite a while. My above comment was meant merely to concisely explain the real reason behind the "accounting change."

Thu, 01/20/2011 - 12:41 | 890157 hedgeless_horseman
hedgeless_horseman's picture

No offense.  I have enjoyed your concise comments.  It's just sometimes it seems like there are not too many people that want to attend these parties, with all the talk about dollars being taxpayer liabilities, rather than assets.  Now, about that drink? 

Thu, 01/20/2011 - 15:47 | 890780 hbjork1
hbjork1's picture


Thanks for your post. 

Keeping the comment rational significantly clairfies the debate (or discussion). 

Thu, 01/20/2011 - 11:02 | 889859 Dr. Porkchop
Dr. Porkchop's picture

They should start printing dollar notes like this:



*add zeros as necessary

E unum plurbus (after one, print many)

Thu, 01/20/2011 - 10:58 | 889860 Lone Mad Minute...
Lone Mad Minute Medic's picture

Let's toss some water on it and see what happens.

Thu, 01/20/2011 - 11:02 | 889868 plocequ1
plocequ1's picture

So now what? Do we buy or short stocks?

Thu, 01/20/2011 - 11:01 | 889873 Xibalba
Xibalba's picture


Thu, 01/20/2011 - 11:08 | 889874 poor fella
poor fella's picture

People can stay broke, unemployed, and living in the streets (irrational) longer than it takes the Fed to re-inflate the next bubble with corporate and banker welfare...

Or so it seemed until today; the end of either race looks bad.

BTDs    -    in PMs

Thu, 01/20/2011 - 11:02 | 889875 rlouis
rlouis's picture

Fed motto: Debt is good

Upcoming suggestion to Treasury: Change the dollar to read "In Debt We Trust"

Thu, 01/20/2011 - 15:19 | 890683 TruthInSunshine
TruthInSunshine's picture

Ben Bernank's Bellybusting Burgers:

2.7 Trillion Served. 13 Trillion+ Collateralized.

Thu, 01/20/2011 - 11:03 | 889876 poor fella
poor fella's picture


Thu, 01/20/2011 - 11:05 | 889881 MiningJunkie
MiningJunkie's picture

Copper is the only bubble out there - how many more vacant buildings will the Chinese construct?

Buy the HKD.T (short copper ETF) at C$9.20 for a move to $15.00. 

Thu, 01/20/2011 - 11:07 | 889888 buzzsaw99
buzzsaw99's picture

I will not sit here and listen to you badmouth the united states of america, Gentlemen!

Thu, 01/20/2011 - 11:13 | 889905 Catullus
Catullus's picture

Even if the Fed had negative equity, it wouldn't matter. Was someone going to make a claim against the Fed? Your Federal Reserve Notes are backed by precisely nothing.

What this does mean is that if and as the bonds on the Fed's books fall in price, the amount remitted back to the Treasury Department falls as well. So the situation could compound for the US Treasury department of their debt falling in price, interest rates going up and decreasing revenues from falling Fed "profit" remittances. Hence, the treasury purchases by the Fed will go on forever. The treasury can simply not allow the Fed to stop purchasing their debt via the POMO actions. They have cornered themselves into permanent money printing.

Thu, 01/20/2011 - 15:03 | 890610 Rusty_Shackleford
Rusty_Shackleford's picture

"The individual is handicapped by coming face to face with a conspiracy so monstrous he cannot believe it exists." - J. Edgar Hoover



"Instead, only try to realize the truth: there is no money"

Thu, 01/20/2011 - 11:35 | 889907 TruthInSunshine
TruthInSunshine's picture

Where can I get me some "prevents me from facing a negative capital position even in the event that I incur substantial losses" love?

In separate news, Bernanke is not "printing money," and he's "100% confident he can stomp out inflation [if it ever appears, because we have too low inflation according to The Bernank] in 15 minutes."


Greenspan: The Federal Reserve Is Above The Law & Answers to No One
Thu, 01/20/2011 - 11:24 | 889908 unununium
unununium's picture

So now when US companies take losses, I presume they can record it as their shareholders owing them money?

Oh wait I forgot, Treasury does not own the Fed. 

Can they record it as their patsy benefactor owing them money?

Thu, 01/20/2011 - 11:24 | 889949 SheepDog-One
SheepDog-One's picture

Brilliant! Any company earnings that come in bad from now on simply means the shareholders owe them more money!

Thu, 01/20/2011 - 11:16 | 889916 Lone Mad Minute...
Lone Mad Minute Medic's picture

"I assure you, Mrs. Buttle, the Ministry is very scrupulous about following up and eradicating any error. If you have any complaints which you'd like to make, I'd be more than happy to send you the appropriate forms."



Thu, 01/20/2011 - 11:17 | 889924 johny2
johny2's picture

And here it is....A couple of days ago , Bill Gross said dollar and USA are going down, giving a clear sign of dollar rally. Every time this guy goes and talks down dollar its a sign he wants to buy some. 

And the Ponzi scheme he talks about is prolonged for a whule, with price of PM going down.

I am looking to buy some old silver anyway, and diversify out of paper...


Thu, 01/20/2011 - 11:23 | 889943 SheepDog-One
SheepDog-One's picture

In short, isnt this just watching the FED playing tiddlywinks with itself and changing the rules as it sees fit? I dont think the Chinese are buyin it.

Thu, 01/20/2011 - 11:26 | 889957 Miramanee
Miramanee's picture


When there are no operational constraints to money creation, "insolvency" is a word that has no meaning. Insolvency, per se, will only occur when a critical mass of Americans refuse to pursue dollars, because they no longer believe that they need those dollars in order to service their federal tax obligations. OR, when the world isolates the dollar to the extent that it no longer is part of the basket of currencies that comprise IMF SDRs.

Thu, 01/20/2011 - 11:33 | 889978 RobotTrader
RobotTrader's picture

Heh, I warned you guys.....

1)  The Fed will never be audited

2)  JPM will not lose on its short position in PM's

3)  JPM will outperform most stocks in the XLF

4)  Never bet against the house

Thu, 01/20/2011 - 11:35 | 889982 SheepDog-One
SheepDog-One's picture

Piss off.

Thu, 01/20/2011 - 11:58 | 890032 JW n FL
JW n FL's picture
by RobotTrader
on Thu, 01/20/2011 - 10:33

Heh, I warned you guys.....

Never bet against the house


Thu, 01/20/2011 - 13:55 | 890433 Ned Zeppelin
Ned Zeppelin's picture

RT is right, for now anyway. This is very clear. Don't let belief get in the way of the truth.  Trade on what is, not on what should be. 

A hard rain is gonna fall, but not anytime soon if the felons in charge have their way, and who's stopping them?  No one.

"See how we are " - X

Thu, 01/20/2011 - 11:41 | 889993 DarkAgeAhead
DarkAgeAhead's picture

It'll be an ecological disaster that breaks the Fed and through history with other empires, it will be.

Same for China in the future.

Thu, 01/20/2011 - 11:59 | 890041 JW n FL
JW n FL's picture

Acts of God? will over throw the goobermint? really? no... seriously? like what? the 200 year storm in kalifornia?

Thu, 01/20/2011 - 11:56 | 890028 JW n FL
JW n FL's picture

Free Bernie Madoff BITCHEZ!!!!!!!

Free Him NOW!!!

Thu, 01/20/2011 - 12:59 | 890240 Rainman
Rainman's picture

...and free Wesley Snipes too !! Amerika's Nelson Mandella !!

Thu, 01/20/2011 - 11:57 | 890035 Bill Lumbergh
Bill Lumbergh's picture

If these bureaucrats can use creative accounting then I can convert to the Monopoly Method whereby selective liabilities are either written down or eliminated completely thereby increasing my equity...of course I will document fully in my balance sheet footnotes to ensure I am in complete FASB compliance.

Thu, 01/20/2011 - 12:09 | 890064 VaJim
VaJim's picture

There are 2 definitions of 'insolvency' found in legal and accounting literature.  The first definition is assets versus liabilities and, more specifically, in US Bankruptcy Code it is the situation that exists when "...assets, at fair value, are less than liabilities".  So, accounting only masks the problem as we know.  The Fed will become insolvent as, and if, rates rise.

But the second definition, also found in the USBC, will unmask the asset insolvency fraud.  And the Fed isn't there as yet.   That definition is the inability or refusal to pay one's debts as they mature.  So, when cash flow goes negative, the Fed is insolvent.  At that point, if they continue to issue debt to pay maturing debts, that's classic Ponzi IMO.

Thu, 01/20/2011 - 12:24 | 890103 johnnymustardseed
johnnymustardseed's picture




Thu, 01/20/2011 - 13:50 | 890415 Ned Zeppelin
Ned Zeppelin's picture

Awesome quote.

Thu, 01/20/2011 - 12:42 | 890169 Pez
Pez's picture

some calls it "creative accounting" I calls it a sling blade. mmmahuh

Thu, 01/20/2011 - 12:44 | 890178 Fearless Rick
Fearless Rick's picture

Prepare your tax returns using the Fed playbook.

AGI = -$45,000.

OK, now kick back all my withheld tax, FICA and Medicare payments.

That should show 'em.

Thu, 01/20/2011 - 13:10 | 890288 Alex Ljungberg
Alex Ljungberg's picture

I go back to what I said:

Common sense would tell you that the losses already embedded in the Fed's balance sheet from the toxic assets it's acquired exceed the cumulative "profits" it has returned to the Treasury since its inception in 1913.

Common sense would also tell you that when (not if) interest rates revert to their historical mean, those embedded losses are only going to grow exponentially.

Surely, Chairman Bernanke knows this.  And you don't need an audit to see it.  There can be no plausible deniability on anyone’s part.

Thu, 01/20/2011 - 13:51 | 890421 Ned Zeppelin
Ned Zeppelin's picture

Different lipstick and makeup on the same, grotesque pig.

Thu, 01/20/2011 - 14:15 | 890436 DrLamer
DrLamer's picture

I think this accounting trick is provided not for one, but for several different reasons.

I think the word "insolvency" is not applicable (Tell me how can be "insolvent" money issuing computer mouse, clicking any digits on a monitor? That is You guys, are insolvent. Me? Taking care about the US people for last couple years as of now I have got soft currency eq. $3.00 left in my pocket, so technically I am not insolvent).

First, this is a trick to avoid flip-flop game with the "profit-loss" weekly re-distribution.

That means the volume of simply INTEREST on Treasure obligations is now comparable to own capital of FED.

Second, for a possible audit of FED, this will clearly prevent a game around it "insolvency".

Third, this accounting trick means that digital-money-pumping-waves are so huge, that even the old accounting principles FED-Treasure now should be changed.

BTW, the accounting in banks is *reversal* to normal company's accounting - because manageable "assets" on the left  side of a balance sheet are actually *liabilities* (money on checking accounts).

This fact is hidden from the public (and even from bank's own analysts) by special conversion  of bank's balance before publishing.

I have just checked the FED balance sheet from earlier ZH publications, and I clearly see that FED now is not a normal bank (managing other's people money on customers' accounts), or central bank (issuing cash money), but rather a ... collecting agency.

Thu, 01/20/2011 - 14:42 | 890570 Thomas Crown
Thomas Crown's picture

what exactly do they mean by "diversity"???

"The Federal Reserve has set up offices -- mandated by the Dodd-Frank Act -- to promote diversity and inclusion at the Fed and all 12 Federal Reserve Banks, the agency said this week. The Fed’s Office of Diversity and Inclusion also will develop standards to assess diversity practices at entities the agency regulates."

Thu, 01/20/2011 - 15:09 | 890638 DrLamer
DrLamer's picture

From the Notes of Debates in the Federal Convention of 1787 by James Madison

"...Mr. Govr. MORRIS moved to strike out "and emit bills on the credit of the U. States"-If the United States had credit such bills would be unnecessary: if they had not, unjust & useless.


Mr. ELSEWORTH thought this a favorable moment to shut and bar the door against paper money. The mischiefs of the various experiments which had been made, were now fresh in the public mind and had excited the disgust of all the respectable part of America. By witholding the power from the new Governt. more friends of influence would be gained to it than by almost any thing else. Paper money can in no case be necessary. Give the Government credit, and other resources will offer. The power may do harm, never good...."

and so on.


The Holy Spirit (from Trinity) was there, for sure.

Thu, 01/20/2011 - 15:16 | 890672 PulauHantu29
PulauHantu29's picture

"Why Steal Less, when you can Steal More."

Wall Street Mantra, 2011

Thu, 01/20/2011 - 19:56 | 891788 Element
Element's picture

book-keeping is so 2008

bk is the new rich - by decree


Fri, 01/21/2011 - 03:01 | 892610 drwells
drwells's picture

Enron, WAMU, and now the Fed.

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