Sunday, May 29, 2022

The Fed viz Lehman

In June 2008 Lehman Brothers announced a loss of $2.8 billion and went bankrupt shortly thereafter. The vast majority of its losses came from its mortgage securities portfolio which it had to write down by $5.8 billion, ie mark the securities to market and take a charge to earnings.

In late May 2022 the Fed released its financial statement for 1Q22 from which we infer that it is carrying at least $330 billion in unrealized losses in its portfolio, mostly from its mortgage securities. That is to say, it has not (yet) marked them to market. Even worse, interest rates have gone higher since and bond prices fallen further.  Some analysts calculate that unrealized losses have now reached $400 billion or more.

Does the Fed have to mark to market? Not really…. Unless, that is, it starts selling bonds from its portfolio to the open market. And guess what?  That’s exactly what it has to do, in order to carry out Quantitative Tightening - which it has to, in order to combat soaring inflation. 

Let’s think about it…. The Fed currently has losses 100 times bigger than Lehman. And that’s the lender of last resort? The issuer of currency? Really? 

Hello, anyone read The Emperor’s New Clothes recently?

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