by Mike Larson
The Federal Reserve is watching the backs of U.S. banks. But sometimes I wonder, "Who's watching the Fed's back? Is the Fed our next troubled bank?"
You see, all of this garbage paper that's going bad — the troubled residential mortgage backed securities (RMBS), the commercial mortgage backed securities (CMBS), the asset backed securities (ABS), the Fannie Mae bonds, the corporate loans, and so on — hasn't just gone "Poof."
Instead, more and more of it has been landing on the Fed's doorstep — either through direct ownership or as collateral against Fed loans that keep getting rolled over.
The result? The Fed's once pristine balance sheet is starting to look more and more like the balance sheet of a troubled financial institution.
From AAA to Something Else Entirely
What do I mean? Well, take a look at this April 26, 2007, Federal Reserve Statistical Release. Table 2, the Consolidated Statement of Condition of All Federal Reserve Banks, shows the breakdown of the Fed's assets back then.
You'll see that the Fed banks listed total assets of $883.5 billion at the time. The lion's share of those assets — $787.1 billion, or 89 percent — were "AAA" quality U.S. Treasury bills, notes, and bonds. There were a few other assorted line items (gold, bank premises, etc.) … but that's about it.
Now compare that two-year old balance sheet, to this multi-headed hydra of a balance sheet that came out a few days ago. The equivalent table (number 9) shows that total Fed assets have exploded to $2.19 TRILLION. And those plain-vanilla, risk-free Treasuries? They make up just $526.1 billion, or 24 percent, of Fed assets!
The Fed now also owns more than $355 billion of mortgage backed securities and $61 billion in debt issued by Fannie Mae, Freddie Mac, and Ginnie Mae. Term auction credit comes to $455.8 billion. Those are short-term loans against just about anything and everything — from auto loans and credit card receivables to Brady Bonds and CMBS.
The Fed is also holding $238 billion in commercial paper as part of an October 2008 program to help corporations fund short-term debt obligations.