|
The Fed's dirty little $2 trillion secret
Posted Nov 10th 2008 12:42PM by Peter Cohan
Filed under: JPMorgan Chase (JPM), Federal Reserve, Financial Crisis
The Federal Reserve has lent out $2 trillion worth of your money -- but it refuses to say who got it or on what terms. We already know that $29 billion worth went to JPMorgan Chase (NYSE: JPM) -- to shift the worst junk on Bear Stearns' balance sheet to the Fed's back in March. And it's safe to assume that the $2 trillion the Fed lent out is being exchanged for similarly junky assets.
Why is the Fed keeping this information secret? I can only guess at three reasons. Is such secrecy appropriate for the U.S., which is supposedly a democracy? I don't think so. My guess is that the Fed is keeping all this secret because it believes that such secrecy will keep the world from losing whatever shred of confidence it still has in the global financial system. That's because the loan recipients probably include every major financial institution.
The second reason may be that the Fed does not want us to know just how much risk it has taken on. But it should be pretty obvious that the Fed's balance sheet, which used to have $800 billion in relatively safe Treasury securities, is now weighted down with all the toxic waste that banks took on to boost executives bonuses during the last several years. And the key question is how big a loss that the Fed will end up taking on these assets.
The final reason for the secrecy may be a reluctance to give the market useful insights into what the Fed thinks these assets are really worth. Such pricing information would likely lead to far bigger asset write-downs. And the bigger write-downs would require an increase in the amount that the financial institutions would need to raise in order to comply with minimum capital requirements.
Ultimately, the truth will come out. Perhaps, the current administration wants his successor to reveal the Fed's dirty little secret.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in JPMorgan securities.
|
Favorites
Digg
Del.icio.us
Furl
Magnolia
StumbleUpon
Google
Yahoo MyWeb
