The Real Issue With "Bad Assets" (Fed Part II)

Let's dispel another myth.

The "Fed is a bunch of Jooish Bankers trying to bankrupt the world and steal all the money" crowd has really gotten cranked up at me with my last Ticker post.

One particular nutball, who has called me several times with his number marked "Private", refused to have an honest debate and instead played "lead the dog" games for 30 minutes until I got tired of him and told him not to call again under pain of being referred as a harassing caller across interstate lines (a federal offense); this resulted in two email tirades (both addresses which I have now blocked, thanks much.)

The problem with these goofs (and there are a lot of them out there) is that the very actions of The Fed belie the truth, and since that doesn't comport with their anti-semitic worldview of a "Jooish Banking Conspiracy" they twist reality around until it resembles a Gordian knot.

Ever wonder why everyone is so hellbent and determined to find a way to do a "Bad Bank"?  Why not either charter up 10 new banks with $10 billion each ($100 billion out of TARP II) or spread the money around as excess capital to the 50 strongest (proved via full examination) regional banks currently around, then tell the existing "big dogs" to go twist with their "assets"?

Do you really think this is about protecting the Warburg and Rothchild descendants?

Nonsense; the math says they can't be protected.  The losses are there and will eventually come to the forefront.  It is inescapable.

It is about recognition of losses and who takes them.

Now let's think here guys - if this was about The Fed being a private Jooish Cabal then they simply would not care.  Remember, they can create any amount of currency they want to cover this, right?  So says the conspiracy theorists.

The facts are a bit simpler.

Under the law The Fed's profits and losses are Treasury's.  That is, their excess capital gets remitted to Treasury, and of course if they take a loss it will flow through as well.

This is where the problem is, and why they want a "bad bank", er, a "bagholder bank", and The Fed wants it on Treasury's book.

It is not that these "assets" are about to imminently become worthless.  They aren't.  They will ultimately be proved to be worth little (in some cases nothing) but today they're cash-flowing just fine.

So what's the problem?  If you're a big "Jooish Conspiracy" you take the cash flow for as long as you possibly can, right?  After all, this is the greedy money-grubbing thieves guild, yes?

The truth is this: Bernanke's authority to play repository under the alphabet soup crap is limited.  He knows this.  He has relied on his "exigent circumstance" clause to be able to lend not only to his member banks under ordinary monetary operations but also to damn near anyone and anything else so long as "unusual and exigent circumstances" exist.

If that clause ever becomes inoperative he will be forced to disgorge those "assets" back into the market.  It is entirely possible, indeed probable, that when that happens the loss will be forced to be recognized - and will instantly land not on his head, but on Treasury due to the fact that both profits and losses flow through to Treasury.

This is a major problem because Bernanke has asserted time and time again before Congress that there would be no losses!  Yet we now know that Bear Stearns' "assets" are depreciating at a rapid rate, among others.

Ben knows this, and he also knows that if this translates into the hundreds of billions of other garbage that he is holding, and disgorgement is forced, he will be lynched (figuratively at least) by Congress when hundreds of billions in unrecognized losses are forced up the pipe and into Treasury's current deficit.

Thus the panic; if Treasury sets forth an official facility then the charade can continue, perhaps for years, until the cash flow deficit becomes impossible to ignore and the declaration of capital loss is forced by non-performance.  If these "assets" are formally placed into a rundown repository under the FDIC (or some other arm of the government) then Bernanke is relieved of the risk of forced disgorgement and recognition of losses which will inure immediately to Treasury.

Irrespective of what we do - with the "assets" at The Fed, formally in a "bad bank", or back into the system forcing bank failures, the losses are Treasury's.  Treasury will be forced to back the FDIC up to the full limit of deposit insurance, so even if these "assets" are forced back uphill to the issuer Treasury will wind up eating it.

The reason that everyone is having a fit about getting this issue "resolved" is yet more evidence that the alleged "cabal" is nonsense; the real risk here is the sudden recognition of loss by Treasury, not where the loss will ultimately fall.

The failure here is in Congress, not The Fed.  Those of you who are hellbent and determined to rant and rave about "Jooish Banking Conspiracies" are wasting your time and effort for the following reasons:

1. But for Congress spending more than the government receives in taxes there would be no bond issues for the banks to profit from.  The idea that these "conspirators" make huge profits "inherently" off our government (and ourselves) is a load of dog poo.  There's nothing inherent about spending more than you make; that's a CHOICE.  Congress can stop that any time they'd like.  Of course that comes with choices too - like, for example, repudiating the Ponzi Schemes of our fathers, such as Social Security and Medicare.  The Truth is that actually focusing on where the problem lies is much harder than convincing someone to go along with a nutball conspiracy theory, because the former means giving up the right to suckle the public teat.
2. The net profits of The Fed System (all of it) are remitted to Treasury.  Period.  You can argue over the lavish salaries and bloated staff (justifiably so) but not the fact of where the net profits go.  Nor can you argue with who holds the capital stock and why, or that you have the right to (indirect) personal ownership by buying the common or preferred stock in the institutions that hold Fed membership.  (Of course doing so over the last year has resulted in huge losses; heh, that's the risk, right?)
3. CONGRESS has refused to enforce the law with regards to the limits of Fed power, which has become especially apparent over the last eighteen months.  This is not The Fed's failing, it is a failure of CONGRESS to act as they are empowered and required to.  The Fed's power to lend does not extend to taking equity ownership yet Congress is the one that must put teeth into the statute so that The FBI can bring indictments.  There is no point in alleging an offense where there is no penalty provided for violations!

There's yet another Ticker in the pipeline on Fractional Reserve Lending and the choices that those who rant about it never want to admit or discuss.  With luck I'll get that one out into view over the next few days.....

In the meantime, here's something more for you to think about.