The Fed's Bear Stearn's Book Cooking
Bloomberg's Jonathan Weil examines the Fed's Book Cooking
Imagine an accounting system where a bank never had to recognize losses on any securities it holds, as long as it continues holding them.
Imagine if there were no rules specifying when a bank must bring an Enron-style special-purpose entity onto its own balance sheet.
Flip through the footnotes to the Fed's latest annual report, and you'll come across an open secret.
The Fed doesn't follow normal accounting rules, as promulgated by any of the major standard-setting boards.
Rather, the Fed writes its own, in a document called the Financial Accounting Manual for Federal Reserve Banks.
If you ever wanted to design an accounting regime to help a bank cook its books, the Fed's would be perfect.
Under its rescue plan, the Fed next week is scheduled to lend $29 billion to a Delaware limited-liability company
that will hold a portfolio of illiquid Bear Stearns assets, which Bear Stearns valued at $30 billion on March 14.
The portfolio consists mainly of mortgage-backed securities and other mortgage-related assets.
To put that in perspective, the Fed's total capital was $40.4 billion as of June 11.
JPMorgan, which completed its purchase of Bear Stearns this month, will lend the Delaware entity $1 billion and absorb the first $1 billion of any losses.
The Fed is on the hook for the rest. Given the Fed's lack of book keeping rules, how will it account for this?
Fed spokesman David Skidmore: "The Federal Reserve's accounting policies do not currently contemplate transactions
like the planned credit extension related to the acquisition of Bear Stearns by JPMorgan Chase."
Good disclosure is no cure for bad accounting. And talk about a confidence killer:
The last thing our financial markets need now is the knowledge that the world's most powerful central bank is fudging its figures.
The Nattering One muses... like we said before, the Fed is painted into a corner and has one bullet left in its holster, after that its a massive helicopter drop.
Imagine an accounting system where a bank never had to recognize losses on any securities it holds, as long as it continues holding them.
Imagine if there were no rules specifying when a bank must bring an Enron-style special-purpose entity onto its own balance sheet.
Flip through the footnotes to the Fed's latest annual report, and you'll come across an open secret.
The Fed doesn't follow normal accounting rules, as promulgated by any of the major standard-setting boards.
Rather, the Fed writes its own, in a document called the Financial Accounting Manual for Federal Reserve Banks.
If you ever wanted to design an accounting regime to help a bank cook its books, the Fed's would be perfect.
Under its rescue plan, the Fed next week is scheduled to lend $29 billion to a Delaware limited-liability company
that will hold a portfolio of illiquid Bear Stearns assets, which Bear Stearns valued at $30 billion on March 14.
The portfolio consists mainly of mortgage-backed securities and other mortgage-related assets.
To put that in perspective, the Fed's total capital was $40.4 billion as of June 11.
JPMorgan, which completed its purchase of Bear Stearns this month, will lend the Delaware entity $1 billion and absorb the first $1 billion of any losses.
The Fed is on the hook for the rest. Given the Fed's lack of book keeping rules, how will it account for this?
Fed spokesman David Skidmore: "The Federal Reserve's accounting policies do not currently contemplate transactions
like the planned credit extension related to the acquisition of Bear Stearns by JPMorgan Chase."
Good disclosure is no cure for bad accounting. And talk about a confidence killer:
The last thing our financial markets need now is the knowledge that the world's most powerful central bank is fudging its figures.
The Nattering One muses... like we said before, the Fed is painted into a corner and has one bullet left in its holster, after that its a massive helicopter drop.
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