The Federal Reserve rankled markets this week, and gave Citibank a failing grade. The Fed performed “stress tests” to see if the banks would be solvent during a recession or market collapse. The fact that they publicly outed Citi speaks volumes, since there can be no doubt in the public consciousness about the security of the banking system.
If banks used “mark to market” accounting, most would already be insolvent. They have billions of bad loans and mortgages on the books, and somehow they don’t have to report these.
As the article below states, if the Federal Reserve itself used “mark to market” accounting, it would itself be insolvent. The Fed’s balance sheet is now $4.3 trillion, most of which are treasuries and mortgage-back securities. An uptick in interest rates reduces the value of this collateral, and the Fed is insolvent.
If you look at your money, it says “Federal Reserve Note”, it’s an IOU from the Federal Reserve. If the Fed is insolvent, what exactly is that paper IOU worth? We stand on the precipice of collapse, but nobody seems to notice or care. If you have money in a bank, especially a “too big to fail” bank, good luck getting it out.
Fed Stress Tests “Rattle Banks Around The World”
Yesterday, the Federal Reserve’s stress tests led to jitters in financial markets and in the words of the Financial Times “rattled banks around the world.” Citigroup’s share price was hammered and fell 5.4%
The aftershock of the stress tests was felt beyond U.S. shores for the first time. The U.S. subsidiaries of Royal Bank of Scotland, Santander and HSBC all failed on “qualitative” grounds, which includes failing to project losses rigorously when contemplating a severe recession or market meltdown.
The Fed said that the banks management practices or capital cushions are not robust enough to withstand a severe economic downturn. Not surprisingly, the banks themselves accused the stress tests as being “opaque”.
Twenty five other banks took part in the Fed’s annual “stress test” and received a green light for their planned dividend payouts and share repurchases. Bank of America and Goldman Sachs initially fell short of minimum capital requirements. However, they met the standards after reducing their planned dividend payments and share buybacks over the past week.
The banks now have 90 days to address the weaknesses and risks identified by the Fed and resubmit their dividend and share buyback plans.
The Fed’s decision was part of the annual checkup it requires of banks with more than $50 billion in assets. Banks must now undergo tests to ensure they can endure shocks like those that upended the banking system and led to the massive government bailouts in the 2008 financial crisis.
In what the Fed sees as the extreme scenario, the test assumed a rise in the 6.7% unemployment rate to 11.2%, a 50% drop in stock prices and a decline in home prices to 2001 levels. All of which appear a strong possibility given debt burdened state of the tapped out U.S. consumer and the poor fundamentals of the U.S. economy.
Indeed real levels of unemployment in the U.S. are likely well over 11% already.
It is important to note that if the Federal Reserve’s assets were marked to market, it itself is insolvent.
The Fed’s balance sheet has ballooned to $4.3 trillion from $800 million in the past five years as the central bank has electronically created trillions of dollars in order to buy their own government bonds and mortgage-related bonds in a radical and indeed reckless attempt to kick the can down the road and prevent a systemic event or a recession or depression.
The Federal Reserve is likely to suffer significant losses on its Treasury holdings once interest rates rise from historic lows. Indeed, the researchers at the San Francisco Fed have recently called for “stress tests” on the Fed itself and it’s assets and income, an echo of the central bank’s annual exercise for the nation’s largest banks.
Everything dealing with TBTF banks and the FED is bullshit! Smoke and mirrors to the nth degree. Unless a citizen has physical possession of gold, silver, ammo, &tc and the means to protect said REAL stuff, his/her net worth is effectively zero.
The FED insolvent??? How does a bank that can create “money” at will go bust? Who thinks this “report” has anything to do with the solvency of Citi? Have you been living under a rock for the past 5 years??? there is nothing from this government that is truthful…no entity is going to upset the “economic recovery” meme…
Something else entirely is happening.
Failure to understand how money works means every other thought about the economy is wrong because money, and particularly who and how it’s created, is fundamental. When I see real issues of monetary policy discussed then I’ll take you seriously.
m111ark,
Maybe you put scare quotes around “money” because the ability to create Federal Reserve Notes at will is not money, properly understood. Money, by definition, is a store of value. Pieces of paper with ink on them doesn’t qualify. It is currency. Nothing more.
If you doubt the claim, ask yourself if the central banks in Zimbabwe, the former Yugoslavia, or the Weimar Republic are still solvent. They had printing presses too.
m111ark
A bank that creates money can’t be insolvent? Hilarious. Steve debunks your ridiculous philosophy in two seconds. I’m guessing Paul Krugman is your acolyte? When your balance sheet turns negative, you are insolvent, sorry. When your liabilities are more than your assets, you are insolvent, sorry. The dollar is, once again, IOU’s of the Federal Reserve. Simply printing more money causes, eventually, a crisis in faith in that currency, and it collapses. Thanks for your comment, please try again.
Federal reserve note otherwise known as:
Federal
Reserve
Account
Unit of
Debt
And The Plan Is What?
Written by Bill Holter
on March 27 2014
http://blog.milesfranklin.com/and-the-plan-is-what
Tit for tat “sanctions” so far. We bar a dozen or so high level Russians from entering the U.S., Russia retaliates with the same. Canada puts their 2 cents (Canadian) in and bars another dozen or so Russians and Russia does the same to Canada. Like I said, so far it’s been tit for tat.
But wait, have you heard that Russia is setting up their own “payments” system? They are obviously doing this so their businesses are not disrupted, money and goods will still flow. It might be a pretty good bet that “dollars” will not even enter this equation once they get it up and running. Will this be a disaster to the dollar? No, probably not but as I’ve mentioned before it does serve as an example for others who might get this “bright idea.”
Russian companies are also making plans to redirect their sales of metals eastward and away from the U.S. if sanctions begin to bite. The most important being metals of platinum and palladium for their catalytic properties. Looking into this just a little deeper you will find that Russia is the largest producer of palladium…which they may not be accepting dollars or “American Express” for shortly.
But here is where the tit for tat starts to get really foolish. The G-8 (G-7 +Russia) meeting scheduled for June seems to be in the process of being cancelled. Cancelled because the meeting was scheduled …yes you guessed it…in Sochi, Russia. To top this off, President Obama is lobbying not only for a cancellation of this meeting but “kicking” Russia out altogether. Really? All because a small portion of a traditionally Russian nation “democratically voted” to be re annexed with its motherland? This seems to me like “schoolyard stuff.” No, better yet, this is like our president sneering and saying, “We’re not going to let Ivanoff play in any of our reindeer games!”
I’m sorry to say but if we are taking this position, the Chinese may have a little bit to say about it. Clearly Mr. Putin has made the Chinese aware of his planned moves ahead of time…and received the OK. This did not take the Chinese by surprise (though our responses may have). We are “beholden” to China as they were gracious enough to lend us as much as we needed to borrow…until the end of 2011. They lent us enough rope to hang ourselves and then just stopped which is why the Federal Reserve now buys (monetizes) 70% of our own debt. But, they didn’t “stop” until they had acquired enough of our debt to become our largest creditor!
For anyone who has not thought this all the way through, when you become someone’s largest creditor there is “power” involved. The old saying that if you owe $100,000 then the bank owns you but if you owe $10 million you own the bank does not hold true when discussing international “sovereign” debt. Especially when the debtor is also privileged with the issuance of the reserve currency…and this is the rub.
By pushing Mr. Putin we are accelerating the game’s outcome, it is like we on our own are accelerating the clock. We are daring our foes to go off of the dollar standard. In fact, we will with sanctions that make it very difficult for Russia to use dollars even if they wanted to. Which of course leads to “what is China’s position?”
Do you see the question that follows this? “Who” exactly gets hurt the worst? No, actually let me re phrase this, “who” has the most need for dollars to be used? Russia or the U.S.? Can Russia survive and do business without the use of dollars? If the dollar all of a sudden just vanished, would Russia economically implode? Then ask the same questions of the U.S. How will we trade…for anything? We have a $500 billion trade deficit to start with; will those goods still continue to “flow” into our ports? What exactly will we pay in exchange for goods coming in? IOU’s?
And this is the problem; we have been paying with IOU’s for years now. In fact, I have termed it the “never pay model.” Can we be foolish enough to not understand that our trading partners are already not happy with our IOU’s…yet we want to tell another nation “you can’t use them?” It is clear that this is not a “U.S. vs. Russia” problem. The G-20 has stepped up to the plate and is making them known. They don’t like the “veto power” of the U.S. or China and want all 20 nations to have more equal power and voting rights. A very good take on this was penned by Paul Mylchreest.
This is a dangerous situation for the U.S. as the 20 nations will meet April 10 to discuss. The U.S. has still not amended legislation pertaining to the IMF which has this date, April 10th as a deadline. The danger is that enough of these countries will come to similar views and decide to begin sidestepping the dollar. Were Russia’s new “SWIFT” system to get up and running, the use of SWIFT and dollars may become unnecessary.
When I say “unnecessary” you should understand that the world is not happy with our antics. They are not happy with the way we bullied other nations. They don’t really know where we stand anymore on various issues as in one nation we will back one side yet they are our foes in another and different nation or conflict. They surely do not enjoy the NSA spying on them (Mrs. Merkel has said as much and she now seems more sympathetic to Mr. Putin rather than Mr. Obama).
A response to the U.S. “isolating itself” was seen yesterday when Mr. Obama gave a speech in Hague, Netherlands. Zero Hedge provided a clip (http://www.zerohedge.com/news/2014-03-26/what-happens-if-us-president-stops-speaking-and-nobody-claps) which is less than 2 minutes in length. Has this ever happened anywhere to any sitting U.S. president? Ever? You must ask yourself why or how something like this could have happened. Even if your politics are extreme far left, this is a very scary response and illustrates global opinion of our actions.
Fed “fail?” Don’t be so sure. When it seems a system is failing, look at what it does well, and consider that this may have been its purpose all along.
For example, we are tempted to think our schools are failing because they don’t produce literate, thoughtful young adults with critical thinking skills. What they accomplish, though, is to produce malleable low-level workers who function well in large, hierarchical, bureaucratic organizations, such as government or big corporations. Maybe you were wrong in assuming what the purpose was.
If you want these systems to do something else, they need to be redesigned.
What does the Fed do well? What does it accomplish? That is the purpose for which it was designed.
The Fed is designed to enrich it’s shareholders and owners, peripheral banksters, and those that get the free money carry trade. It’s also designed to impoverish the masses through inflation (the silent tax). Since the Fed came into existence the dollar has been devaluated by 95%, a dollar from back then is worth 5 cents now. But we sure do have a lot of billionaires.