by Larry Levin
Are your pesky investors demanding that you beat earnings expectations? Are those same investors expecting you to make a profit on your real estate portfolio? Having difficulties in these trying times? No need to worry friend; if something is hampering your success because of an “outdated” silly notion like honest accounting – just change it.
In a recent report from Bank of America we read:
Accounting change prevents a Fed “insolvency” scenario
Mounting concerns about Fed “insolvency” post QE2
The Fed announced an important accounting policy change with the release of its weekly H.4.1 report on January 6 that effectively prevents it from facing a negative capital position even in the event that it incurs substantial losses. The timing of the change is not coincidental, as politicians and market participants alike have expressed concerns since the announcement of QE2 about the possibility of Fed “insolvency” in a scenario where interest rates rise significantly. These concerns have prompted some observers to suggest that the Fed may be unable to tighten policy sufficiently once the economy recovers, since doing so could result in a negative capital situation and the need for a Treasury “recapitalization,” thereby compromising the Fed’s political independence.
Fed required to remit profits to Treasury (not build capital)
Since 1947, the Board of Governors has required that the Reserve Banks remit nearly all net earnings to Treasury. Remittances are roughly equal to income from loans and securities holdings less operating expenses, interest paid on depository institutions’ reserve balances, dividends paid to member banks, and any amount necessary to top up the Fed’s capital. Fed remittances have surged since late 2008, reflecting its aggressive balance sheet expansion in the context of near zero term interest rates (Chart 1). The Fed could potentially incur losses, however, if short term rates rose such that the interest paid on bank reserves exceeded the interest income of the System Open Market Account, or SOMA portfolio. Similarly, the Fed could face capital losses if it were to sell securities below their original purchase price (Chart 2). Note that the SOMA portfolio is not marked to market, but is reported on a par-value basis each week, so higher yields would only impact Fed earnings in the context of asset sales.
Accounting change prevents negative Fed capital situation
The Fed remits most of its net earnings on a weekly basis. Prior to this accounting change, any unremitted earnings due to the Treasury would accrue in the "Other capital" account, but will now be shown in a separate liability line item called "Interest on Federal Reserve notes due to the Treasury.” As a result, any future losses the Fed may incur will now show up as a negative liability (negative interest due to Treasury) as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible regardless of the size of the Fed’s balance sheet or how the FOMC chooses to tighten policy. There will be no change to the current practice of remitting profits to the Treasury on a weekly basis, but the Fed will postpone any remittances if this line item becomes negative. In effect, any losses will be offset against future Fed remittances to the Treasury. In our view, this policy appears to be a clever solution to the Fed’s inability to provision for potential future losses by retaining earnings today. We expect it to mitigate – though not fully allay – concerns about Fed solvency.
Presto-chango…the Fed is now not allowed to lose an anything ever again.
Does this make a potentially disastrous situation better, or is this the biggest can being kicked down the road? Moreover, doesn’t it make you think that, without the possibility of losing money, the Fed will be even more reckless with the value of your money?
Greenspan was a piker compared to the lunatic in charge of the Fed today. Then again, Zimbabwe-Ben learned it all from EZ-Al.
Are your pesky investors demanding that you beat earnings expectations? Are those same investors expecting you to make a profit on your real estate portfolio? Having difficulties in these trying times? No need to worry friend; if something is hampering your success because of an “outdated” silly notion like honest accounting – just change it.
- GAAP accounting got you down? Just change it – use non-GAAP accounting.
- Non-GAAP accounting got you down? Just change it – use Pro Forma (aka, make-it-up-as-you-go-along) accounting.
- Mark-to-market accounting for housing hampering your bonus? Just change it – get Congress to force FASB to suspend it in favor of “Mark-to-Unicorn” accounting.
- Going to report a huge EPS loss? Just change it – turn all recurring losses into “one time charges.”
- Are you the Chairman of Federal Reserve and worried about the MASSIVE potential losses you may experience by guaranteeing everything on Fraud Street? Just change it – change the accounting procedure and make the Treasury eat the losses.
In a recent report from Bank of America we read:
Accounting change prevents a Fed “insolvency” scenario
Mounting concerns about Fed “insolvency” post QE2
The Fed announced an important accounting policy change with the release of its weekly H.4.1 report on January 6 that effectively prevents it from facing a negative capital position even in the event that it incurs substantial losses. The timing of the change is not coincidental, as politicians and market participants alike have expressed concerns since the announcement of QE2 about the possibility of Fed “insolvency” in a scenario where interest rates rise significantly. These concerns have prompted some observers to suggest that the Fed may be unable to tighten policy sufficiently once the economy recovers, since doing so could result in a negative capital situation and the need for a Treasury “recapitalization,” thereby compromising the Fed’s political independence.
Fed required to remit profits to Treasury (not build capital)
Since 1947, the Board of Governors has required that the Reserve Banks remit nearly all net earnings to Treasury. Remittances are roughly equal to income from loans and securities holdings less operating expenses, interest paid on depository institutions’ reserve balances, dividends paid to member banks, and any amount necessary to top up the Fed’s capital. Fed remittances have surged since late 2008, reflecting its aggressive balance sheet expansion in the context of near zero term interest rates (Chart 1). The Fed could potentially incur losses, however, if short term rates rose such that the interest paid on bank reserves exceeded the interest income of the System Open Market Account, or SOMA portfolio. Similarly, the Fed could face capital losses if it were to sell securities below their original purchase price (Chart 2). Note that the SOMA portfolio is not marked to market, but is reported on a par-value basis each week, so higher yields would only impact Fed earnings in the context of asset sales.
Accounting change prevents negative Fed capital situation
The Fed remits most of its net earnings on a weekly basis. Prior to this accounting change, any unremitted earnings due to the Treasury would accrue in the "Other capital" account, but will now be shown in a separate liability line item called "Interest on Federal Reserve notes due to the Treasury.” As a result, any future losses the Fed may incur will now show up as a negative liability (negative interest due to Treasury) as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible regardless of the size of the Fed’s balance sheet or how the FOMC chooses to tighten policy. There will be no change to the current practice of remitting profits to the Treasury on a weekly basis, but the Fed will postpone any remittances if this line item becomes negative. In effect, any losses will be offset against future Fed remittances to the Treasury. In our view, this policy appears to be a clever solution to the Fed’s inability to provision for potential future losses by retaining earnings today. We expect it to mitigate – though not fully allay – concerns about Fed solvency.
Presto-chango…the Fed is now not allowed to lose an anything ever again.
Does this make a potentially disastrous situation better, or is this the biggest can being kicked down the road? Moreover, doesn’t it make you think that, without the possibility of losing money, the Fed will be even more reckless with the value of your money?
Greenspan was a piker compared to the lunatic in charge of the Fed today. Then again, Zimbabwe-Ben learned it all from EZ-Al.
Trade Date: 1/24/11
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