Fed Balance Sheet Holdings, Excess Reserves Hit New Record; Agency Prepayments Plunge

Tyler Durden's picture

For those confused why gold just hit a new all time high of $1,480, it may have something to with this. In the week ended April 13, the Fed's balance sheet hit a new all time record of $2.65 trillion, primarily due to an increase of $15 billion in Treasury holdings by the Fed (chart 1). Not surprising to those who have read our previous post on the matter, prepayments to the Fed have all but dried out, and for the third time in a row there were no MBS prepayments, which at $937.2 billion have declined by just $12 billion since the beginning of March: so much for magnetization demand arising from QE Lite (chart 2). Excess reserves continue to surge increasing by $29 billion in the last week. The increase at this point is more than just one accounting for the $195 billion SFP program unwind (which finished last month): should the economy really improve and banks start lending, all hell may well break loose. At this point the surge in excess reserves (liabilities) is rapidly overtaking the increase in Fed assets since the beginning of QE2 (chart 3). "Other Fed Assets" hit a fresh new ridiculous total: $125 billion, an increase of $2.5 billion over the prior week (chart 4).  If this number is indeed a form of capitalized POMO commission to the PDs, then America likely has a right to know. Lastly for those still curious, the Fed's asset maturing within 1 year are $143 billion (chart 5). Putting this all together, presents the following picture: in a period during which the Fed's assets increased by $203 billion, GDP increased by about 1.5%, once all revisions are in the books. QE2 ends when Q2 ends. And so far, the economic in this quarter is without doubt starting to turn down. What will happen when there is no incremental monetization once Q3 kicks off, and GDP is about to go negative?

Chart 1: total Fed balance sheet

Chart 2 : weekly MBS/Agency putbacks to the Fed

Chart 3: excess reserves compared to total Fed assets

Chart 4: "Other Fed Assets"

Chart 5: maturity distribution

And a bonus chart, for the monetary purists: the money multiplier has dropped to what is probably the lowest ever.


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I am Jobe's picture

America's greatest minds. Wow, time for some vaseline for the sheeples.

Misean's picture

Nothin' a new bank of HP laserjets can't fix.

tawdzilla's picture

"What will happen when there is no incremental monetization once Q3 kicks off, and GDP is about to go negative?"

Since we can't audit the Fed, nobody really knows except God and Bernanke.

knukles's picture

"....third time in a row there were no MBS prepayments...."

Well I for one sure as shit would like the good doctor Bernak or God to explain away this conundrum. 
There is no fucking way under the sun that in an MBS portfolio that large there are 0, zip, zilch, nada, none, not any, no, not a single fucking penny of prepayments.


It is im-fucking-possible, period, end of conversation.  No house was sold, foreclosed upon, refinanced, no owner died and went to heaven, nobody decided it was a good idea to delever? 


jmc8888's picture

Oh yeah baby, fuck you Federal Reserve, and whatever bankster bailouts/ monetization of fraud you've done that make up your 'balance sheet'.

Glass-Steagall Legislation Introduced into Congress


Glass-Stegall...finally...back in the headlines.

Bye-Bye fraud

gordengeko's picture

On Tuesday night Lyndon LaRouche had stated: "What we have, tomorrow, essentially, is the Glass-Steagall Act is going to be announced, presumably tomorrow; it's going to be filed. The Glass-Steagall Act is going to be a flanking procedure, in which, what're we going to do? You say, 'I dunno if we can get it done.' What you're going do, essentially, is say, 'If we do this, this will rout the enemy! Even threatening to do it, will put the enemy off-balance. If we don't do it, we're finished.'


"So, our object is, to ram this through. And don't tell me why it won't work. If you're going to say, it won't work, that's because you don't work!"

That is great news, short the piss outta these banks start piling on the pressure! This is war bitchez! Told ya we are coming for you

Gold 36000's picture

Where is my top ten banker most wanted list?

If wanted posters of the ten biggest perps go viral then maybe some psycho will take the hint.

Paulson, Dimon, Blankfein, who is that pos running B of A?

Johnny Yuma's picture

Oh, you mean Roger Lattimer (Revenge of the Nerds II) AKA Bryan Moynihan.

Selah's picture


LaRouche was right!

The first time that I heard the phrase "Hyper-inflationary Depression" was from a LaRouche video back in 2007.

EVERYTHING that this nutjob predicted is happening.


ThirdCoastSurfer's picture

"Fed's asset maturing within 1 year are $143 billion". The fed returned $79 billion in interest payments in 2010.  It's all so fascinatingly complex. So far, the high yields of past years have been helpfully recycled to the Treasury but this too will soon begin to dry up. 

In terms of world GDP in 2010, $143 billion ranks #51, displacing of New Zealand. 

bob_dabolina's picture

What will happen when there is no incremental monetization once Q3 kicks off, and GDP is about to go negative?

Shit yo. Plug GDP digits into Turbo Tax software and have that shit computed...75% of the time, it works everytiiiime ;)

-You Know Who

Cdad's picture

What will happen when there is no incremental magnetization once Q3 kicks off, and GDP is about to go negative?

I don't know the answer to the question...and I'm afraid...very afraid.  Possible answers:  default?  dollar devaluation?  Cannibalism?  banker crime spree?  dogs diggin' cats?  ZOMBIES...that's it isn't it?  

I really don't know, but in any event, I do believe little Miss Euro is about to become a tabloid headline...and I'm comfortable with that, anyway.

Lord have mercy on us....

Global Hunter's picture

"The increase at this point is more than just one accounting for the $195 billion SFP program unwind (which finished last month): should the economy really improve and banks start lending, all hell may well break loose."

Can anybody explain the significance of this and why all hell may break loose? I am equities guy in Canada and I'm scrambling to understand the Fed details and get up to speed for obvious reasons 

cxl9's picture

I think the reasoning goes something like this. The Fed has stuffed the banks full of printed money but for the most part the banks have resisted lending, and creditworthy borrowers are hesitant to borrow. So the money just sits there as reserves, waiting for the happy union of willing lender and willing borrower. Once the economy picks up, presumably the banks will start lending again and people will want to borrow. All of this printed money will enter the economy and you will see some real inflation at that point. Except it won't be wages and housing price inflation, but increases in the price of commodities, food, fuel, all the things you need to survive. Or will it? We shall surely see.


Global Hunter's picture

Thank you for the response you've made it clear, makes perfect sense.

jkruffin's picture

The biggest reason why banks can't lend is because there are no more credit worthy borrowers left.  At least none that want to take a loan at the rates these crooks charge while savings rates are zero.

The middle class has been wiped out, no jobs, foreclosed upon, bankruptcies everywhere, and credit scores demolished.  Who did Benny Bubbles actually think was going to borrow money?  Unless they erase all credit scores and start everyone from scratch at 700, the crap they are trying to do isn't gonna work. Not that it was anyway, but at least it had a chance to start with, but now with the majority of borrowers decimated,  no way Benny's plan can work without a credit score reset and history wipe of all bad loans and bankruptcies.

cxl9's picture

Largely true. Those who are creditworthy have no desire to borrow (and tend to be sensible enough not to take on any more debt), and those who want to borrow are not creditworthy. There really is no one left for the banks to lend to with the expectation of any reasonable risk-adjusted return. This is what debt-saturation looks like. So of course for the time being the banks are making their money on other scams until they can get their debt Ponzi going again.

For some time I have believed that they will need to relax lending standards in some way in order to lure people back into the housing market. With so many people foreclosed out of their homes at some point, eventually they'll need to "forgive" foreclosures when qualifying borrowers for a mortgage. I am already seeing signs of this now: when looking at a possible rental home purchase recently I was told by a mortgage broker that a foreclosure does not necessarily prevent qualification for a mortgage [although this is not applicable to me anyway, the fact that he offered this information unsolicited suggests that there are previously foreclosed borrowers beginning to enter the market].

I doubt a blanket reset to 700 is workable. Better off to just eliminate FICOs entirely, and go back to the old-school loan underwriting methods. A level reset just makes risk pricing all that much more difficult, mixing in the qualified with the unqualifed borrowers. And wasn't that the original problem with subprime housing loans? The banks lent to people who were, quite simply, not qualified to borrow. Of course you could argue that it was all by design, since the banks were backstopped by the taxpayer anyway, but any future return to normal lending practices must be predicated on sensible risk pricing somehow.

I suspect that in the end, a radical transformation of the banking industry will be required. It simply cannot be allowed to continue to siphon off so much wealth from the real, productive economy forever, without leading us all to complete ruin. But that's a whole other discussion. Until that time, buy gold and silver, pay cash for everything, and support peer-to-peer lending.

blunderdog's picture

FICO or "old-school," I don't see any basis for a meaningful long-term credit market when there's no job security for 70% of the labor market.

Absinthe Minded's picture

   " Until that time, buy gold and silver, pay cash for everything, and support peer-to-peer lending. "


Smartest economic advice anybody could ever follow. I will add don't buy anything new unless you absolutely have to. The way I see it why contribute to an economy that only rewards the people in the boardrooms. Fuckem all.

Bleeping Fed's picture

Another theory is that the Fed is attempting to stuff so many dollars (which translate into unsterilized yuan) into the black hole that is China that they ignite a hyperinflationary fission/fusion reaction.

Korrath's picture

These last 2 weeks have felt like a slow build up of tension; the calm before the storm.  Just wish the damn thing would break already so we could all get on with this shit...

deacon_blues's picture

And I quote the great Ghetto Boys, "If it's going down, let's get this shit over with!" (My Mind Playing tricks on Me)

knukles's picture

It already has broken.  We are in it.  Now.  It is not about to happen.  Look around yourself.  Everything that can go wrong, everything that can be stolen, every war that can be fought, every social-economic-political stress that can be emerging is fucking happening in the here and now.  Not yesterday like a resentment, not tomorrow like a plea for something which we don't even deserve.  No judgement or victimization, it just is what it is.  Just let it go and see what's there.  You don't need a weekend retreat, a counseling session or a 12 step meeting.  Wake up. Natural disasters of Biblical proportions, monies losing their value at the behest of the central banks, politicians world wide charged with protecting the system, raping it...... 
The list is endless.

Welcome to the decline and fall of the modern era. 

"We have front row seats for this theatre of mass destruction..." 

We're already here, yet.                             

King_of_simpletons's picture

Shit has hit the fans. These are just stench that follow.

Darth Silver's picture

I am picking a Up a little scepticism here.

I am Jobe's picture

Drag the bitches and hang em high and reinstate the Glass Stegal. Go after every bankers and hedge fund managers homes and wealth. Let them work for a living at Mickey Dees. No more sugar coating crap for the bitchez.

bob_dabolina's picture

$dxy, euro, gbp, cad and; /si, /gc /cl, /ng, /es all up tonight


new paradigm

Caviar Emptor's picture

This is another aspect of Biflation: assets underlying MBS are still declining. Banks won;t lend on deflating collateral and borrowers won't borrow either. Interest rates are meaningless in this topsy turvy world because they ought to be negative. And yet with the fear of inflation down the road they should also be higher. And the same set of bizarre issues surround Treasuries: deflation allows for nearly zero interest and yet as the dollar declines those who lend money to the Treasury are being repaid in devalued dollars. 

The big picture is this: the Fed needs to continue to expand the balance sheet as more and more loans become impaired by deflation, but then by massacring the dollar they are also putting the value of the paper through the meat grinder. And a vicious cycle has taken hold: the more real estate and the economy deflate, the more they have to inflate by destroying the dollar value of the loans and derivatives.

Gold to $5,000. The lunatics are in charge of the asylum. 

TruthInSunshine's picture

I will stir up the hornet nest, again, but excess reserves are dead weight. I will stir up the hornet nest because facts are facts, and facts trump bullshit.

Excess reserves aren't wanted, aren't desirable, and do nothing. They aren't inflationary, either, as they actually drain interest from the Fed that it'd rather not have to pay, no matter how low the freight, and they certainly will not find homes in terms of qualified buyers investing in productive assets/capital, on well-securitized loans (those borrowers are rarified in the extreme).

Here is the thread on ZH and my related post where the issue of excess reserves was discussed a week or so ago:



by TruthInSunshine
on Thu, 03/31/2011 - 23:18

One of the writers on Zero Hedge should take the time to explain the mechanics of how the Federal Reserve's actions, especially of the past 20 months or so, have been inflationary.

Before anyone leaps to thrash me for committing the sin of defending Federal Reserve Policy, please note that I am not. By contrast, I believe that the Fed's policies have genuinely sparked a rush into speculation in everything from equities to commodities (though I attribute this far more to ZIRP than any other aspect of Fed policy), which has actually stoked inflation and inflationary expectations going forward, and that at this time in American Economic History, this inflation is incredibly destructive from a household balance sheet perspective (since wages are sticky, unemployment is very high, organic economic growth is weak, yet the cost of living is rising at a pace that is damaging to household wealth).

However, it's one thing to insinuate that The Federal Reserve is directly increasing the money supply, with said excess money causing inflation, and an entirely different thing to show the mechanism as to how this is happening, and how it increases the rate of inflation, proving it by elemental facts.

This is the type of thing that drives me crazy with some of Marc Faber's proclamations, also. He says Bernanke keeps printing and will always print, but when one looks at the best evidence available, Bernanke is not actually printing...he's utilizing the Federal Reserve's Balance Sheet to absorb as much as 70% newly issued treasuries, which does have the effect of bringing down yields on treasuries at the margin (as rates would presumably have to head higher to attract buyers other than the Primary Dealers - who know in advance the Federal Reserve will purchase these treasuries from them).

One could make an argument that the government would be more constrained in its ability to deficit spend if it did not have an entity such as the Federal Reserve guaranteeing a 'take down' of as much as 70% of newly issued treasuries at auction, as more market oriented participants at such auctions would demand higher yields before buying these same debt issuances, but I'm not convinced that this is necessarily true, either.

As far as the charts above are concerned, there were critical changes made to the policy of dealing with "excess reserves" in 2008, via Section 128 of The Economic Stabilization Act of 2008, and I won't argue whether these "excess reserves" are or are not inflationary when they are at high levels, because there really is good faith debate about that (I guess someone here could sucker me into that debate if they tried hard enough, though I am somewhat agnostic on the issue, since the amount is de minimis compared to the overall economy and total money supply), but I will hasten to add that these "excess reserves" are very volatile, and as one example, they stood at 800 billion at the end of 2009 but shrunk to 600 billion a mere 2 weeks later.

Again, I do not wish to defend the calamity that I believe Federal Reserve Monetary Policy has become.

I think credible attacks on Federal Reserve Policy should focus on its demonstrable error, which in the case of inflation, inflationary expectations and malinvestment of capital (leading to speculative bubbles and so forth), is far more attributable to Zero Interest Rate Policy (or close to it) than "excess reserves."

By focusing on the wrong lever of any alleged cause, when attempting to demonstrate correlation, one may lose credibility before they ultimately settle on a much more logically appropriate causative factor.

"Excess reserves" as a catalyst of inflation or inflationary expectations is a far weaker causative corollary than ZIRP, IMO.

The rate of change of excess reserves from month to month or quarter to quarter (or even YoY) is necessarily somewhat moot if my assertion above is factually correct.

To the degree it matters, I am extremely bearish on the economy mainly due to the lack of job growth or wage growth (in fact, I would argue we are going to see a re-acceleration of job losses by Q3 of this year).

Those pundits obsessed with the dismal state of the housing markets should recaliber their energies and engage in discussion about the sad state of job creation and wage growth in the U.S., as housing is merely a derivative of these factors, and not a means and ends unto itself.

That Bernanke is still maintaining ZIRP, and at least not setting the table for rate hikes in the near future, given that ZIRP is NOT an effective monetary policy tool at this time, but rather, ZIRP is very likely to cause a further retrenchment by consumers when it comes to discretionary purchases, which will slow the economy much further (negating any arguable beneficial effects, on balance, and by a wide margin), is a real cause for concern.

JPG101's picture

Interesting and well put idea. Thanks
We're still in a lot of trouble though!
Are physical assets just another bubble waiting to pop? If so cash is cheap or is it nothing has value?
The only thing I'm pretty certain of is that tech companies with pe ratios of 100 who have no moat and no physical assets in the ground are expensive...
So what does have value?

onarga74's picture

What has value?  I think Bernie may have some insight....say 3 meals a day and being too old to play bare naked hopscotch with a hot poker.

jkruffin's picture

Okay then, PHEW!!!!  So tell us what the difference is between printing and just adding as many zero's to your balance sheet as you want?  There is no difference, the result is the same. There are many ways to kill a man, but no matter how you do it, the result is the same.

knukles's picture

Try the quantity theory of money for a start.

X. Kurt OSis's picture

That has nothing to do with excess reserves. Banks can have more reserves whenever they want. That's the problem with fiat. If there we no reserves, the banks could still create all the money they want. Reserves don't themselves create money or money velocity.

X. Kurt OSis's picture

Junk away people but this is spot on. Except for one thing, the Fed doesn't pay interest on reserves. That's one of the shiny new policy tools the Bernank invented and told Congress would work as a means to slow money velocity if that ever became a problem, even though its never been used as a policy tool before.

Otherwise, this is correct. The Fed can create reserves completely out of thin air and it CAN drain excess reserves in 15 minutes. ZIRP and QE are the problem policies. It can't raise interest rates in 15 minutes and it can't put QE into reverse.

My latest theory is that QE2 Lite is not stimulus. I've posted this here before but the absolute size of the Fed's balance sheet isn't relevant, its the aggregate change in its balance sheet. Moreover, if the Fed reinvested its holdings with direct TSY auction participation QE2 lite would actually be reducing liquidity (tightening).

The Fed generally conducts market operations through the PD's because it wants the cash proceeds to go straight into the banking system which, as the theory goes, gets into the "real" economy faster. By "real" economy, the obviously mean stock prices and PD commission capture accounts.

At any rate, my hypothesis is QE2 lite is not stimulus, as a marginal buyer rolling over its holdings it can't manipulate market rates (as opposed to overwhelming markets through direct QE) and depending on how it turns over its portfolio, it may not have even a marginal impact on liquidity (depending on how the Fed executes its purchases).

This is a theory so anyone who wants to debate, feel free to criticize.

TruthInSunshine's picture

Kurt, you are indeed correct.

QE is simply having Bernanke substitute artificial demand for treasuries in order to keep interest rates significantly lower than where they'd be had free market buyers been relied upon to absorb government deficit spending.

Now that a good chunk of that additional money used to purchase artificially low yielding treasury paper is locked up and booked on the Fed's balance sheet, its base value has a far greater chance of depreciating rather than appreciating, and it throws off relatively little cash on an interest stream basis.

X. Kurt OSis's picture

That would be why rates moved higher after QE2 was announced (about 30 basis points out the long end).  QE2 was smaller than the first round of QE so rate of change in the Fed's balance sheet declined. 

A decline of $400 billion in net new purchases caused a 30 bps move higher.  If that relationship is linear, then the end of QE2 is likely to cause a 50-60 basis point move higher in the long end, which is basically what interest rates did do from October 2010 to today. 

Interest rates have the end of QE2 priced in already and the effect of rolling over its portfolio would be de minimus.

Put differently, each $500 billion worth of incremental purchases by the fed is worth around 40 to 50 basis points in longer term interest rates, at least, that's what implied in terms of the market impact of what's happened so far.  Bernanke says each $100B is the equivalent of 25 bps of policy and thats probably about right (call it a 4 or 5 to 1 move in terms of short rates versus long rates).



ss123's picture


Does this mean we're fucked?


AldousHuxley's picture

When zionists leave US for Israel, that's when you know America is toast.



Gold 36000's picture

I almost like you, if only for your dislike of zionists.

AldousHuxley's picture

There are good and bad Jews just like any other group, and zionism had its place in time...establishment of Israel as a nation state.

BUT today's zionism is like affirmative action for Obama's kids or feminists asking for lifetime of alimony in no-fault state after she cheated on him. It is used by certain men for benefit for themselves.

I should ask, what will zionism do for you? better job? better future for your children?




Gold 36000's picture

Is it deflation now? Wasn't everyone last week screaming hyperinflation is coming at the end of qe2? I heard it all the way down here.

Korrath's picture

Anyone else think it’s possible we get a controlled-demolition style crash in equities shortly, followed up by an announcement that the Fed must "reluctantly" resume pumping liquidity into the system, and keeping credit cheap?  

They could blame the fact that they need to continue both policies on any number of black swans ( Japan, ME, Euro ), which would give them all the political cover they need to keep QE2 going into QE3…as well as keeping interest rates as close to zero as possible. 

I guess I'm just having a hard time seeing how they can possibly justify deliberately destroying all value of the US dollar, if they just barrel forward from QE2 to QE3.  The shit-storm of pain a failed US dollar would cause across the country…well, that’s the kind of thing that could even wake up a comatose population like America.  Are they really ready to risk stirring up a pitch-fork-and-torches style mob?

baby_BLYTHE's picture

good question. I want to know when the "End Game" is going to happen, I hate feeling like I am putting my life on hold waiting to see the other end of this before I make any major decisions

Bill DeBurgh's picture

My very first Internet query regarding the early stages of the great housing bubble, sometime in 2003, led me to LaRouches site. On his site was a logical thesis on the formation of the housing bubble.

No one else was talking about the bubble in 2003.

jonnyy40's picture

 Larouche is a c@nt . All his shills are c@nts.

DoctoRx's picture

Tyler:  By 1.5% GDP growth, if you are taking the downgraded annualized growth rate, then you are being far too kind.  For that Fed asset enhancement, GDP would have risen 0.4% in the quarter.  Pitiful and essentially zero when accounting for population growth and normal productivity gains.  Pushing on a string, anyone?

mynhair's picture

'should the economy improve, and banks start lending'

Never fear!  The Libs are here!