Of The Fed's $120 Billion In "Other Assets" - An $80 Billion Gift To Primary Dealers?

Tyler Durden's picture

Following our latest Fed balance sheet update, where we get another confirmation that for another week the Fed's assets have hit a fresh all time record (Bernanke now owns nearly $200 billion more Treasurys than China), there are two items that we believe deserve far closer scrutiny. The first is the as expected drop in MBS and Agency prepayments, which after seeing an initial surge in activity when rates were low enough to merit prepaying existing mortgages, has now plunged. In fact in the last several weeks the average prepay activity is roughly half of what it was in the September-December period. This is critical as it impacts the amount of debt the Fed can monetize via the QE Lite component of the ongoing monetization procedure. Should this weekly prepayment amount remain constrained, the Fed will have far less of a marginal impact on share prices (which is what POMO ultimately is) then if QE Lite was working at its expected $25-35 billion a month monetization run rate (in addition to the $70-80 billion from QE 2). Yet far more questionable is the recent surge in "Other Federal Reserve Assets" - an observation we have commented on previously, yet which we attributed merely to capitalized accrued interest on the Fed's portfolio. However, following the recent remittance of tens of billions in interest expense from the Fed to the Treasury we now know that is not the case, so we kindly request that the Fed answer the following simple question: just what is the key driver in the growth of this asset category, which in the week ending March 23 hit a fresh all time high of $120.4 billion? In fact, we are rather stunned that nobody before has asked just what "other assets" comprise a line item that is greater than the GDP of about 80% of the world's countries.

Charting the change in the "Other assets" category in time:

Here is how the Fed defines this catch all category:

This item includes other Federal Reserve assets and non-float-related as-of adjustments. In addition to the as-of adjustments, there are many components in this category, including the following major items:

Assets denominated in foreign currencies: Foreign currencies are revalued to reflect movements in market exchange rates each day. If, in the revaluation, the value of the currency increases, then other Federal Reserve assets increase. On the other side of the balance sheet, "Other liabilities and capital" increase because the increase in value of the currency becomes earnings, which are reflected in the earnings category within the capital account. Other liabilities and capital decline in value as the earnings are removed from this category and the U.S. Treasury's general account increases because the funds are remitted to this account at the Reserve Banks.

Since 1963, the Federal Reserve has occasionally agreed to warehouse foreign currency for the Treasury. In such transactions, the Federal Reserve takes the foreign currency from the Treasury in return for dollars provided to the Treasury. The Federal Reserve makes a spot purchase of the currency and protects the value of those currencies purchased by simultaneously selling the same amount of currencies forward at the same price to the Treasury.

When the Federal Reserve warehouses foreign currencies for the Treasury, both "other Federal Reserve assets" and "U.S. Treasury, general account" increase in value at the time of the spot transaction. Both accounts decline when the forward transaction is completed or when currencies are withdrawn from the warehousing arrangement prior to maturity.

Premiums paid on securities bought: This release reports Federal Reserve holdings of securities at face value, not necessarily at market value. If the Federal Reserve pays more than the face value for securities it purchased, the premiums over the face value are amortized as the securities mature. Part of the premium is transferred daily to the earnings category as a "negative earning." As the premium in "Other Federal Reserve assets" is reduced, a simultaneous balancing reduction is made in "Other liabilities and capital." Securities purchased at a premium over face value are accounted for in this way because, at maturity, the Federal Reserve Banks receive only the face amount of the securities, not the amount actually paid.

The premiums paid on securities bought under repurchase agreements, though, are not amortized. These premiums are, in effect, returned to the Federal Reserve Banks when the securities are repurchased by the dealer, since the negotiated price in the original transaction reflects the premiums.

Accrued interest and other accounts receivable: This item represents the daily accumulation of interest earned on U.S. government securities--other than bills--owned by the Federal Reserve or held under repurchase agreements, on loans to depository institutions, and on foreign currency investments. Interest is accrued daily.

Reserve Bank premises and operating equipment less allowances for depreciation: This item states the value, at initial cost, of the land and buildings of the Reserve Banks and branches less an allowance for depreciation on buildings, including building-related machinery and equipment. 

If the accrued interest category is not applicable (which we believe may be the case as the value has not had a step down following the remittance of unpaid interest back to the Treasury), the only other possibility is the "Premiums Paid on Securities Purchased" - if indeed this is the marginal variable, then the Fed in essence confirms that since the start of QE1 it has overpaid in POMO operations by roughly $80 billion (the value trended at ~$40 billion pre QE1 and is now a record $120 billion). And one wonders where the Primary Dealers get their bonus money from these days...

Of course, since this is a non-exclusive list, it could very well be the catch all value of ES holdings warehoused at the Fed, that the FRBNY purchases from Citadel whenever the Plunge Protection Team goes active. $80 billion in ES purchases, magnified using HFT reflexive algorithms, can surely push the market up quite nicely...

Alas, this is all purely speculation - without further information and clarification from the Fed, there is simply no way to know. Luckily, we are confident some journalist will ask Ben Bernanke in April during the Chairman's first ever press conference just what this incremental $80 billion in "other assets" truly is.

Next up, here is a chart of the declining prepayments of MBS and Agencies. In essence, QE2+Lite is running at 80% of full power due to the recent spike in interest rates.

Another curious observation is the previously noted surge in the adjusted monetary base, due almost exclusively to the sudden jump in Excess Reserves, predicated by the now completed unwind of the SFP program.

The surge in Excess Reserves (which is at $1.4 trillion) and the AMB should now moderate a bit, although we still expect it to reach $1.7 trillion by the end of QE2, nearly double the amount of currency in circulation.

The change in the key holdings of the Fed's balance sheet since the start of QE2 is presented below: an increase in Treasury holdings, offset by a slowing decline in MBS, Agency securities, as discussed above.

For the convenience of all who claim that the Fed can simply keep the market on edge by being a marginal buyer of rolling Treasurys, we have some bad news. There are only $110 billion in Treasurys on the Fed's balance sheet that mature in under a year (and another $33 billion in MB). This combination will do nothing at all to appease a market which is used to seeing this much monetization in a month, let alone a year.

Last, here is a summary snapshot of the most recently updated Fed balance sheet.

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Buckaroo Banzai's picture

jeepers. Maybe they have a few shares of NFLX, GOOG, PCLN, and AAPL?

Waterfallsparkles's picture

I actually think the Fed does own stocks that will move the Market.  Like Cat, Ibm, Nflx, Goog, Nflx, Aapl. Of course Gs front runs all of their trades and then upgrades the stocks the FED owns.

johnQpublic's picture

possibly idiotic questions i have:

1)does the fed earn any money?

2)does the fed pay taxes?

FOC 1183's picture

Not idiotic, no need to preface.
1. Historically, yes. But if they try to withdraw qe stimulus via selling purchased securities, they will likely report a huge loss which will become a liability of the treasury (I.e. Taxpayer)

2. No

idea_hamster's picture

The answer to this "other" is likely to be just the same as when someone asked who the "other" buyers of USTs were -- the fed named a few entities who would more accurately fall into the articulated categories, and then said "and others."  Total BS that anything short of a full audit will fail to provide clarity on. Audit. Audit. Audit. Oh, and then publish the audit.

johnQpublic's picture

ty FOC1183

thats what i'd thought, but wasnt sure

Augustus's picture

The Federal Reserve Bank is owned by the US Govt.  All profits are Govt. profits.


The Federal Reserve earned a record $81.7 billion in 2010, largely on investments made to help the economy and banks weather the 2007-2009 financial crisis, and turned the bulk of it over to the U.S. Treasury.


crazyjsmith's picture

shallow comment that needs further explanation.

Those profits made are not their profits.  They are profits that belong to taxpayer.

They are more than happy to pass on the billions made in transaction fees to their brothers on the street, how convenient.  But I am far from grateful when they take my money and buy assets at 10 year lows and return the profits back to the rightful owner, the taxpayer.

TruthInSunshine's picture

First, great catch, ZeroHedge.

Anyone doubting the fundamental worth of an outlet like ZeroHedge in a sea of listless, often lazy, and even corrupted (by bias or 'other' factors) Main Stream Media and Academic (Paul Krugman, can you hear me?) resources should consider this article, as but one example. Where else is this being reported?

Second, with respect to this:

Next up, here is a chart of the declining prepayments of MBS and Agencies. In essence, QE2+Lite is running at 80% of full power due to the recent spike in interest rates.

Again, outstanding. And this is why QE has failed, and why additional QE is counter-productive and harmful. Interest rates will continue to spike, and it's more than interesting that Bernanke proclaimed lowering interest rates as one of the goals, if not the biggest goal, of the implementation of Quantitative Easing at its inception!

nkktwotwozero's picture

Krugman cannot hear you above the brilliance of his (not actually) Noble Prize.



DavidC's picture

It's not a Noble Prize, it's a Nobel Prize.


traderjoe's picture

I read an interesting speech by G. Edward Griffin (author of The Creature from Jekyll Island). IMHO, it's a nice summary of the the creation and true purposes of the privately-held Fed. I found particularly interesting his explanation of how inflation works for the benefit of bankers and government and how banks actually want low interest rates (it spurs demand for credit/loans, where they earn interest on money they create from thin air. It's about a 30 minute read, but a good summary in my opinion.



equity_momo's picture

Great link , thankyou. Been meaning to buy that book for a while too.

Reese Bobby's picture

Great analysis.  I fear it is now the minority of people on ZH who would take the time to read this, but some will.  I read a lot and this is the best summary of the crime that is a Central Bank controlled fractional reserve, fiat currency system.  Thanks.


My only criticism might be the author failed to provide the solution to our condition after suggesting he had one?

Vint Slugs's picture

I don't know if your concluding question is rhetorical, wanting an answer from the author, or wanting one from ZH readers.  In the case of the last, at least one answer is first of all to abolish the fractional banking system and to institute a 100% (paper) reserve banking  system; second to establish a 100% gold coin monetary standard; and third to open the U.S. Mint to the unlimited coinage of gold.

dcb's picture

you mean there is  a real person out there that hasn't figured QE is all about making money from the banks, or building up their stock prices (LOL)

I knew from the start that the stated goals of QE weren't the real goals. after all it does the opposite of the claimed effects. They aren't stupid, and have done it twice. therefore it can't be the real goal. figure out how the banks make money from it and you will figure out the reason for QE.


the trick is to throw enough money at the insolvent institutions so they can cover up that they are insolvent and therefore the feds huge regulatory failure won't be investigated and the cover up is maintained.


I would gues they aren't stocks, futures give much more bang for the buck, and I think move the market more. not sure how it works though, as I have been unable to find out how futures work from any source for over a year, and the efffects they have on the market.

Reese Bobby's picture

I think there are a lot of real people out there, including you, who can't put together a simple, concise and damning summary of the private Federal Reserve scam.  Ron Paul is our Congressional champion and he can't string it together?  Read more, talk less...

cranky-old-geezer's picture

... and how banks actually want low interest rates (it spurs demand for credit/loans, where they earn interest on money they create from thin air.

Creating money from thin air is counterfeiting, plain and simple.

Yes, fractional reserve banking operates by fraud and counterfeiting.

AssFire's picture

And they continue to lie that the "household sector" buying these bonds..


 Ya right and Osama is still alive and we shold fear him.

fbrothers's picture

Ponzi is alive and well. They are unable to be creative.

FunkyMonkeyBoy's picture

The biggest scam the world has ever seen. Buying huge amounts of real assets using nothing but self-printed notes and/or adding extra zeros to an account. All government sponsored, they are one-in-the-same-criminal-beast.

In a saine world, people would be on the streets heading towards their nearest government building to find some one to hang from the nearest lamp post... but, here we are, and it ain't happening, and it ain't going to happen.

Go back to bed America, your government is in control.


Waterfallsparkles's picture

You know I never really thought about it that way.  Yet, if you think about all of the Mortgages they have purchased that pay interest with Money created out of thin air.  Wow.  Makes you think.

Yet, the Money they use is a Debt to all Americans.  So, they buy Mortgages with 0 Dollars (or dollars they print) to get Mortgage backed assets and charge the American people for the cost.

Brillant.  They impoverish the Amercan people buying assets that make them money and charge the Debt for those assets to the American People while keeping the assets and the interest on those assets.

OMG, the light bulb just went off.  For every asset they buy they create Debt to the American People and keep the asset and its interest for themselves.

Yen Cross's picture

I like your Ideas. Just Quit PISSING on your self! Move ahead. I see all!

TorchFire's picture

The bernank had best be reading the sports pages....that's likely to be the only question he will get.  Works for the other puppet so why not for bastard bernank?

The Axe's picture

WOW,,,great job ZH and Tyler...How do you guys find this stuff and figure this shit out? outstanding..  Could it be suborinated notes from TBTF firms. ???

augie's picture

I'm a 25 y/o undergrad finance major at st johns. can someone explain to me

where " the last several weeks the average prepay activity is roughly half of what it was in the September-December period." that information is available, and also either

explain, or give me a linke to how and why, "This is critical as it impacts the amount of debt the Fed can monetize via the QE Lite component of the ongoing monetization procedure."

I may be ignorant, but I'd really like to be able to make a clear case against the

fed when my economic history professor tries to defend it.

Careless Whisper's picture

you're obviously way smarter than your professor, so why are you wasting your money sitting in his class?


Monetary Lapse of Reason's picture

Augie,  QE "lite" is the bond buying that flows from the interest and principle (pay offs) from all the assets sitting on the FED balance sheet.. which I call the magic free money machine.  Some will argue technically that these asset purchases are not adding to base money (as does the QEII printed money monetization).. but this is semantics in my opinion.  In a non-QE world, FED balance sheet incoming should flow back to the treasury and reduce our freaking debt, not be used to create non-exogenous US debt demand. 


Less FED balance sheet income (due to less roll over, or whatever cause) means less ammo for QE lite.  Simple. 


augie's picture

Who is paying the interst on all this paper? i the fed paying themselves? Thanks for the explination. Sorry it took me so long to respond. 

Dr. Porkchop's picture

I hope your professor is one who is at least open to discuss things, even if he/she may not agree. If not, it will be a good life lesson. A lot of companies like to say they want creative thinkers, but what managers really want are yes men who will stroke their ego by agreeing with everything. If your lucky, once in a blue moon, you get one who actually is good at managing people.

traderjoe's picture

Agreed. I would counsel against trying to challenge a PhD economics professor some of their long-held beliefs. That level of education is really tantamount to indoctrination. It's also very likely that the professor benefits on some level from the existence of the Fed, i.e. studies, consulting, etc., etc. More likely then not, you would be simply pissing into the wind.

From the article/speech I linked at the beginning of the thread:

"These fellows were not stupid. You have to give them credit. They didn't get to be where they were by being country bumpkins. They understood politics, they understood mass psychology and they played their cards exceedingly well. Meanwhile these same individuals out of their own pockets were paying the price for the costs of bringing up what they called grassroots study clubs all over the country. They sponsored these clubs and they held public meetings and printed brochures and pamphlets extolling the virtues of the Federal Reserve System. They gave large amounts of money to some of the better known universities in America; they created newly formed departments of economics with that money; they hand picked their own people to be the professors to head up those departments and then those professors with all of their academic credentials gave speeches and wrote scholarly essays extolling the virtues of the Federal Reserve System."

KickIce's picture

I'm betting his pension depends on the inflated markets.

augie's picture

Perhaps you are right. I just watch all these 20-21 year olds in my classes on facebook, or their cell phones and it pisses me off because their apathy is what allows all this Malarkey to continue. I tried to ask my finance 1100 professor how the POMO markets operate to maybe open a discussion that would spark some interst in my class mates, and she looked at me like i had three heads and said "what is POMO". I guess i shoulda taken out some student loans and gone to a better school.

Reese Bobby's picture

I believe the answer is higher rates = less refi activity.  Normal amortization conitues on schedule.  However I am not sure of this answer.  Good luck.

Reese Bobby's picture

If there is an answer to the kid's question in these links why don't you share it?

TemporalFlashback's picture

When prepayments decrease, there will be less CF to use towards USTs.

TD is measuring prepayments as the weekly reduction in MBS/Agencies (see footnote to graph 2 above). The numbers that TD uses as inputs can be found on the second link that I posted previously.

For a better explanation see paragraph 4 here:


augie's picture

Thank you for the links. Your explanation makes perfect sense.

cranky-old-geezer's picture

I'd really like to be able to make a clear case against the fed when my economic history professor tries to defend it.

Forget it.  Not worth the effort.  He beleves what he wants to believe. You'll never change his thinking. 

Your grade is based on how well you parrot back what he believes.  Doesn't mean you have to believe it.

Atomizer's picture

Shhhhhhhhh. Be vewy qwiet about this

The Fed’s bubblicious AIG turnaround


jimijon's picture

Was that translated or such. I couldn't even get past the first paragraph the grammar was that bad.

Atomizer's picture


I realise that the best spin doctor can lose patients on the operating table.

Edit: Felt it was necessary to help a prole find the correct tab.


The Federal Reserve has received a formal offer from American International Group, Inc. (AIG) to purchase the assets in Maiden Lane II, LLC (MLII). The Fed has been aware of AIG's interest in those assets for some time. Any decision on a possible disposition of these assets will be made in a way that maximizes the proceeds to the taxpayer and that is consistent with the goal of fostering financial stability.


Jack Gutt
(212) 720-6142
(646) 720-6142

Jeffrey Smith
(212) 720-6139
(646) 720-6139

themosmitsos's picture

Tyler, are you sure it cant be the FX side, involving the €500B Swaps Extended to ECB over the summer?

Tyler Durden's picture

All FX swap lines have been unused for the past 3 weeks (see H.4.1). Additionally, as per the description, the FX variance occurs on a forward swap contract with the Treasury and has nothing to do with liquidity swaps, which are assets denominated in USD and thus not subject to FX adjustments (if the Fed was receiving foreign currencies it would be a different story).

themosmitsos's picture

Thank you, and I understand the forward swap w/TSY. I'm simply suggesting perhaps they are/were receving foreign currencies as part of the liquidity swaps--somehow, although I know that's not how it's normally done. Just saying, the numbers fit :)

themosmitsos's picture

Also, thanks for the link. A very simple, rudimentary observation: "Other holdings" Starts rocking as soon as the CP facility kicks in.

SwingForce's picture

From the week of March 4, 2009 to Aug 12, 2009 holdings doubled from $42 to $82 billion. That's when bank stocks like JPM, GS and PNC doubled+. Then they slid the third week of August into options expiration, so did Other Assets down to $60b. Within 3 weeks it was back over $80b again . These are bank stock holdings, didn't you hear The Bears say in part 2 that The Fed bought stocks in Banks?

You can pick up the scent again after The Benbernank's speech at Jackson Hole, bank stocks and Other Assets both put in a bottom 8/25/2010 and ran up into February 2011. Other Assets climbed from $90b to $120b the week BEFORE the BKX topped. OA dropped to $113b 2/16/11 and has been rising ever since despite all stocks falling until 3/16/11. I'll guess that new funds were brought in after 2/16 but not deployed until 3/16, is this the PPT's account? Some banks allowed to pay dividends again 3/17 announced in WSJ. When did that weird email come in to Tyler about a huge purchase of ES? Sounds like somebody's betting the farm in Connecticut that (somebody else) will be jamming this market much higher, wow.