Wednesday, February 2, 2011

Banks Get Theirs First

Fed chief to taxpayer: "Sucker!"

"Fed Accounting? Is the Problem Solved?"
--Bob Eisenbeis, Cumberland Advisors


"That small accounting change means that the Treasury – and hence the taxpayer – is now in a first-loss position should the Fed become book-value insolvent as the result of potential losses that might be incurred on asset sales as part of its efforts to absorb the excess reserves previously injected into the financial system...

In normal times, a 6% dividend is paid to member banks out of the surplus account, which is then replenished by retained earnings. Under the new proposal, if earnings are insufficient to cover the 6% payment, dividends can and will still be paid. The accounting change permits the Fed to cover the shortfall by increasing the size of the negative liability account to the Treasury and thereby enables the Fed to maintain the equality of the Fed’s surplus account with its paid-in capital. The Treasury will effectively fund current dividend payments by reducing the amount that it will receive from the Fed out of future earnings."

Complete analysis viewable here.

No comments: