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Fed to GSEs – Put it on the Balance Sheet!
The June Federal Reserve Quarterly
Mortgages Outstanding report contains some interesting information.
I’m not quite sure what to make of it.
Consider these two slides from the June report on 1st Q mortgage
outstandings.
The Federal Reserve has reclassified $4.4 trillion of IOU’s. They have
taken them out of the category “Mortgage Pools and Trusts” and put them
on the individual Agency’s balance sheet(s).
Now consider the March 2010 reports from both Fannie and Freddie. They
don’t show the shift in assets from “Guaranteed” to “On the books”.
Some thoughts on this.
-This is not a small matter. $4.4 trillion of bookkeeping is involved.
This is more than 40% of all individual mortgages. This is a major
reclassification.
-In this case I would side with the Fed. All of these dubious assets
should be on someone’s balance sheet. But I am stumped as to why the
Fed did this without FHFA adjusting its book too.
-The Fed thinks this should be on the Agency’s balance sheets. We all
know that Treasury owns the GSEs at this point. That being the case
shouldn’t the debts of the Agencies be on the Federal balance sheet?
This would put us $3T or so over the debt limit and bankrupt the
government on paper. I find it odd that the Fed is pushing this at this
time. It works against them.
-This is just an accounting adjustment. But these things do matter. The
terms of the Conservatorship require that the GSEs keep their balance
sheets below $900 billion. So this accounting adjustment would throw the
legal status of the GSEs into question. They would be in material
covenant default on the Senior Preferred (Treasury Basura Preff) if this
adjustment takes place. Given that all of the other securities of the
Agencies are “cross defaulted” this raises the question as to the legal
status of all of the publicly traded debt securities of the Agencies. I
know Washington did not mean that to happen. But then again, stuff does
tend to happen.
-The Fed owns $1.2 Trillion of the former “Trust Securities”. Maybe the
Fed feels better knowing that these are direct obligations of the GSE’s.
I am not sure that makes them more collectible. But in a bankruptcy a
senior claim will have a better chance than a subordinated guaranty. In
that sense the reclassification puts the Fed in a better creditor
position. But really this is all the same pocket, so why would that
matter?
-I don’t think that the Fed makes $4 trillion changes in accounting
without substantial internal discussion as to the implications.
Therefore this is quite deliberate and we should not ignore the
significance of it. I’m still wondering what the significance is. I’ll
ask the Fed and the FHFA. If they respond, I'll let you know.
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Kudos!
Newbie question here - it really isn't the same pocket, is it? The agencies are agencies and the Fed is a collection of private (as in non-govt) banks, yes?
I think technically yes. But the Fed is a quasi-government body...it exists for the benefit not only of the bank masters, but also the federal government. The balance sheets of the Fed and the Treasury are effectively joined at the hip...they probably have a couple of Excel spreadsheets that are crossreferenced. :-)
Watch what the Fed does since the Treasury is ultimately responsible for the Fed's actions. Income/Expenses/Profits/Losses are all finally tallied on the Treasury books.
It's all about the slick trick, the quick fix and the gimmick.
Or if you prefer, the stacked deck and the fast shuffle.
Reality ceased to mean anything to the powers that be a long time ago, during the Carter administration.
If they ever stop finageling the pieces of paper it means the jig is up and the party is over.
Let's play out the inflation scenario. The average U.S. citizen is in debt at least $7k (if you have student loans or mortgage much much more than $7k). So here comes major inflation, even hyperinflation. OK, all the debt is worthless and you can pay it off in a single paycheck (paychecks still happening?), right?
So now anyone holding cash is screwed, assets can just be marked up to a few billion for a 3,2 with a 2 car garage.
How does it unravel back to sanity? People still go to work, no? People still buy food and now keep warm burning their dollars right?
I'm just looking for the storyline of how this plays out once the hyperinflation hits. I know someone will say "gold bitchez" in this thread. Yes, gold will buy you a zillion dollars worth of products, or be good for bartering.
My guess is small time operations come back in a big way, which is better once it permeates. It seems that what we are headed for isn't doomsday but a rebirth.
Please enlighten me as to the worst case (gangs going around shooting random people for food, cats and dogs living together), I think a lot of readers are unsure of the real answer here.
That's what I really really hope, but I'm afraid things will get much worse before they get better. The political class will make life more and more difficult for the little guy until the little guy can't take any more. I don't think we're to that point yet.
Best case, the inflation takes place steadily and not too fast and the US ends up with the dollar= the Italian lire ( the monetary equivalent to the subatomic particle) or possibly the Mexican Peso.
Other third world countries have inflation all the time and they still celebrate Mardi Gras. Nothing to worry about.
Google Dimitri Orlov and read everything he has to say about what will happen.
Start here, note spelling: http://en.wikipedia.org/wiki/Dmitry_Orlov
Orlov told interviewer McGrath that in recent months financial professionals have begun to make up more of his audience, joining "back-to-the-land types," "peak oilers," and those sometimes derisively called “doomers."
Nice find and even nicer of you to share... Thanks, JW
There's considerable debate and questioning about what the end game will be - and when. Of course, it could always get "The Road" bad (so sh*tty people just kill themselves to get it over with), and gold won't matter at all. Or it could just be Depression bad. Hyperinflation v. deflation is a big debate. A collapse of a currency (IMHO) is effect both.
I would say there are a few constants: (1) have guns, bullets (even if just to trade), food, water, water filtration, supplies, and some things to barter with (wine, liquor, batteries, etc.) - imagine stores are no longer open and you can't buy anything for awhile; (2) community - get to know people so that they will defend you after you help them; (3) prepare for it, but don't obsess about it, you'll drive yourself mad; (4) don't talk to people about it unless asked or you think people might be open - most people don't want to hear it, and will just pretend you are nuts. I'm sure there are others, you can find lots of websites dedicated to survivalism.
Try The Survival Podcast http://www.thesurvivalpodcast.com/
Good podcast and online community covering all sorts of prepper topics. He's an economic novice but has a good gut feel for it.
(Login problem so duplicated below. Sorry)
If you are referring to the book, I thought some of the writing in "The Road" was absolutely poetic and luminous. Some of the passages begged to be read out loud. I did not see the movie, and can only guess it did not translate well, but you should read more from the author, Cormac McCarthy, any of the Border Trilogy. I would think the author's worldview would be quite appealing to the average ZHer. Low tolerance for fools and bullshit. And what a gift for the language.
In your analysis, you are assuming that hyperinflation expands in a linear path. That is not correct. Go back and look at the situation of the Weimar Republic after World War I. Hyperinflation began and the price of bread increase geometrically by the hour. Wages in all sectors did not increase at the same rate, so for some the standard of living dwindled and they suffered. In addition with inflation it becomes all-consuming when it's related to entitlement programs. So you would be saddling 80 percent of our budget (medicare, medicaid, and social security) with a steepening cost curve.
I hope others discuss this issue, it would be great to share some ideas and information.
Bruce,
Great find. Was the change because they took an impairment and redemption of bonds for FNMA and FHLMC? That is a lot of money to move in such a short period of time. Where did the liquidity come from?
No liquidity required. Just an accounting adjustment. No big deal. What's another 4 trillion?
Bruce,
This is a terrific discovery. Let's see if any of the lapdog press is awake enough to follow suit. I doubt it. Thanks for the work you post here. I really appreciate it!
"Striker,
When this is all over I'd like to buy you a beer."
I find that the more about this little stuff, and how screwed we are, the worse I trade.
Baltic Index down 30 (?) days in a row - sell! Oops, no, buy!
traderjoe,
I'd argue that it's not you, it's the schizophrenic moves in the market on low volumes.
May personal credit decreases $9.1 bn against a $2.3 bn forecast, April adjusted from an increase of $1 bn to a decrease of $14.9 bn, and the Dow goes UP nearly 100 points, there's something not right there!
Unless we're missing something! Calm before the storm?
DavidC
Rally tomorrow...yeah!