Wednesday, June 8, 2011

Fed Leverage

The less we say about it the better
Make it up as we go along
--Talking Heads

Since 2007, assets on the Federal Reserve's balance sheet have expanded from $850 billion to $2.8 trillion. At the end of April, the Fed reported assets of $2.695 trillion against capital of $53 billion.

That's a 50:1 leverage ratio. Bears Stearns and Lehman were leveraged about 30x before they imploded.

At 50x leverage, prices need only go against you by 2% before equity is wiped out.

Of course, the Fed does not have to worry about insolvency risk. That risk has been transferred to us.

no positions

1 comment:

dgeorge12358 said...

In my view, however, the greatest external benefits of the Fed's supervisory activities are those related to the institution's role in preventing and managing financial crises.

~Ben Bernanke, "Central Banking and Bank Supervision in the United States." – Speech given at the Allied Social Science Association Annual Meeting, Chicago, January 5, 2007.