Monday, March 2, 2009

When The Levee Breaks....

From the Federal Reserve statistical release H.4.1 (2/26/09):

-- The Federal Reserve System holds
in assets for each dollar of capital

-- Their holdings of U.S. Treasury securities have decreased by $238 billion in 1 year

-- Term auction credit totaled $448 billion

-- Commercial Paper Funding Facility has provided $243 billion in liquidity

-- Deposits from depository institutions (The Fed's liability) totaled $701 billion, a $679 billion increase from a year ago

-- Net portfolio holdings of Maiden Lane LLC: $26 billion

-- Net portfolio holdings of Maiden Lane LLC II: $19 billion

-- Net portfolio holdings of Maiden Lane LLC III: $28 billion

Okay, let's comment on the numbers:

Although the leverage ratio has been in the low $50s over the last few months, the Fed balance sheet is still massively leveraged. This range of leverage sunk Merrill Lynch, Lehman Brothers and Bear Stearns. Yes, I get it, the Fed has much deeper pockets. However, is this the amount of stress we want the backstop of our financial system to be under?

The Fed holds fewer Treasury securities, one indicator that their risk profile has increased. In addition, the Fed is exposed to riskier securities that are pledged as collateral for its lending programs. Even though most of these collateralized loans are short term, the market has witnessed AAA rated securities drop to junk in the blink of an eye.

The other winners are the almost $40 billion loan to AIG and the exposure to the Maiden Lane entities. These corporations were set up to house the securitized loans made to JP Morgan (Bear Stearns acquisition) and AIG (II & III). These are assets that are very difficult to price and highly illiquid. As you may remember, they are non-recourse loans as well. The Fed can't go after any other assets of the borrowers if they default on the loans.

The Fed only sports $42 billion in capital...........................

Check the link below for a review of ALL of the Fed programs.

1 comment:

MK said...

The almost $40 billion loan referred to in this post is a part of an earlier AIG assistance package, not the one from this week.