- Did Something Blow A Hole In The FedRes’ Balance Sheet?
by Dave Kranzler, http://investmentresearchdynamics.com/
[Note: A reader alerted me to this – LINK – which explains the $19 billion drop in Capital Surplus. Congress passed a law requiring all surplus capital at the Fed in excess of $10 billion to be transferred to the Treasury as part of the Highway Bill passed in early December. But does not change the thesis for the banking system underlying the analysis below: the banking system is starting to collapse again from billions in defaulting loans – loans that banks refuse to write down in value, just like they refused to mark down the value of the collapsing mortgage derivatives trusts in 2008 per “The Big Short.” It also calls into question the credibility of a Federal Reserve that is allowed and enabled to operate with just .8% book capital – $39 billion in book capital against $4.442 trillion in liabilities covered by just $4.482 trillion in “assets.” Finally, it calls into question the legitimacy of a Federal Government that continues to pass legislation for spending programs for which it has an increasingly diminished ability to fund. The analysis below is a snapshot of the collapsing U.S. and financial, economic and political system.]
The basis for this analysis is a video published today by Mike Maloney titled, Is A Financial Crisis Being Covered Up? My hats off to Mike for finding this data from the Fed because I would not have otherwise been looking for it. To help think about the analysis below, keep in mind that the Fed’s balance sheet is an aggregation of all of the Regional Fed balance sheets, which themselves are an aggregation of the banks that are members of each Regional Fed. (Click on image to enlarge, chart top of post)
On December 23, 2015 the Federal Reserve’s Capital Account plunged by 65% – $19 billion – when the Surplus Capital Account dropped by that amount. The Capital Account (CA) represents the capital required to be paid in (“Paid-In Capital) to the Fed when a bank becomes a member of the Federal Reserve system. Think of the CA as the “book value” of the Fed – assets minus liabilities. The Surplus Capital represents “retained earnings” and the Fed is required to maintain Surplus Capital equal to 100% of Paid-In Capital. This requirement is set by the Board of Governors. Currently, Fed interest earnings in excess of the required Surplus Capital and net of expenses is then transferred to the Treasury in the form of a dividend.
The 65% plunge in the Fed’s Total Capital Account, accounted for by the $19.4 billion drop in Surplus Capital, took the Surplus Capital account down to only 25% of Paid-In Capital (Total Capital minus Surplus Capital = Paid-In Capital). This points to a large scale financial crisis that had to be addressed by allowing some of the Fed member banks to withdraw an amount of Surplus Capital well in excess of the amount required by the Fed’s Board of Governors. Perhaps that might explain the Fed’s unscheduled “expedited, closed meeting” that took place on November 23.