Friday, January 28, 2011

Fed Changes Rules to Prevent its own Losses

It is quite amazing how the financial elite rigs the game.  "Heads I win, Tails you lose" kind-of-thing.  Facing mounting catastrophic losses on its capital balance, the Fed simply changes the rules to book the losses elsewhere. 
"Elsewhere" is, of course, on the public, meaning, me and you.  Yup, the Fed Reserve, a private entity, representing mainly foreign banks, with complete immunity to public inspection or control, gets to transfer its losses to the American government's balance sheet.    
The circle is complete.  Profits are kept private, while losses are made public.  The government is now officially a financial subsidiary to the banks, the final absolute guarantor of assured profits.   Remarkable, really. 
Accounting Tweak Could Save Fed From Losses

"Could the Fed go broke? The answer to this question was 'Yes,' but is now 'No,'" said Raymond Stone, managing director at Stone & McCarthy in Princeton, New Jersey. "An accounting methodology change at the central bank will allow the Fed to incur losses, even substantial losses, without eroding its capital."

The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability.

"Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible," said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer.

"The timing of the change is not coincidental, as politicians and market participants alike have expressed concerns since the announcement (of a second round of asset buys) about the possibility of Fed 'insolvency' in a scenario where interest rates rise significantly," Smedley and his colleague Priya Misra wrote in a research note.

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