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.
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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.
ReplyDelete~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.