Pure ‘effin magic …

In past blog entries, we have decried the use of “accounting tricks” to turn losses into profits where none actually exist or artificially re-value underwater assets to improve a financial institution’s balance sheet. Now we are hearing that a similar trick is being used in connection with the Federal Reserve.

In the guise of increasing transparency, it appears that the Federal Reserve is tweaking its accounting methodology in a manner that will allow the Federal Reserve to incur significant losses without appearing as a hit to its capital.

Basically, losses would be carried by the regional Federal Reserve Banks as a liability to the United States Treasury. The Federal Reserve’s own balance sheet would remain unimpaired and the Fed would satisfy their obligations to the Treasury with future profits.

Since the Federal Reserve is a private corporation, owned and operated by its member banks, this accounting change is another malodorous example of insiders manipulating the system for their personal gain. It appears that the primary purpose of the maneuver is to insure that the Fed cannot be ruled insolvent, no matter what its real losses or capital impairment might be.

To illustrate the language of the change …

“The Board's H.4.1 statistical release, ‘Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks,’ has been modified to reflect an accounting policy change that will result in a more transparent presentation of each Federal Reserve Bank's capital accounts and distribution of residual earnings to the U.S. Treasury. Although the accounting policy change does not affect the amount of residual earnings that the Federal Reserve Banks distribute to the U.S. Treasury, it may affect the timing of the distributions. Consistent with long-standing policy of the Board of Governors, the residual earnings of each Federal Reserve Bank, after providing for the costs of operations, payment of dividends, and the amount necessary to equate surplus with capital paid-in, are distributed weekly to the U.S. Treasury. The distribution of residual earnings to the U.S. Treasury is made in accordance with the Board of Governor's authority to levy an interest charge on the Federal Reserve Banks based on the amount of each Federal Reserve Bank's outstanding Federal Reserve notes.” <Source>

Disclose and dissemble …

Many financial gurus overlooked the real meaning of what the Federal Reserve was disclosing. And if anyone should question their actions, they need only point to the public document and claim it was there in black and white for all who cared to see.

One of the methods that the government used to permit predatory lending, usurious credit card rates, exorbitant bank fees and other egregious behavior. Because, it’s all there in a disclosure for anyone to read.

On January 30, 2011 – new borrowers will be facing a new “truth in lending” disclosure document. One said to be simpler and easier to use. The new disclosure replaces part of the old disclosure which, at least, made some semblance of sense to the average consumer. And in October, there will be another tweak to the disclosure system. And I dare not mention that the newly-created CFPB (Consumer Financial Protection Bureau) that is working on a new set of disclosures that will replace other older disclosures. All in the guise of simplifying the process for the consumer. Or telling it like it is: simply lying.

Bottom line …

The system is not broken, it is corrupt. Corrupted by Congress and succeeding Administrations who have ignored prudent lending practices and honest enforcement efforts in order to politically pander to the financial community. Disadvantaging consumers in favor of the financial special interests in exchange for campaign contributions, voter support, media attention and employment and lucrative investments for themselves and their cronies after public life.

It appears that the Federal Reserve is rewarding greed, fraud, malfeasance and stupidity by allowing technically insolvent financial institutions to borrow money at near zero interest rates (technically zero to one-quarter of one-percent) to recapitalize their balance sheets by lending this money through credit cards that return up to 30% at a time when senior citizens on a fixed retirement are only getting 1-2% on their life’s savings.

It appears that Fannie Mae and Freddie Mac are still paying the legal bills to defend their former executives who cooked the books to generate tens-of-millions in bonus money. With the SEC and other enforcement agencies allowing an administrative punishment – a mere slap on the wrist – instead of putting these people in jail. That’s $160 million of the taxpayer’s money to defend against civil suits by those who defrauded honest investors.

Why, may you ask, is Barney Frank and Maxine Waters still in office after assuring the public that Fannie Mae and Freddie Mac were sound, well-capitalized enterprises months before they were placed in conservatorship?

Yes, the system is corrupt and we need to act now. We need to convince the Republican Party that their only hope for survival is to put forth a fiscally and socially conservative platform and nominate honest brokers to serve we the people.

Before it is too late and the system collapses under its own corrupt weight – something pre-ordained by the socialists who work towards this goal each and every day.

-- steve

Reference Links …

Accounting standards or mis-accounting standards?

HAS THE ACCOUNTING PROFESSION BETRAYED AMERICA?

Can you trust the accounting profession? (Updated)

Slaying the Structured Investment Vehicle Monster with the double-edged sword of transparency

Financial Crisis: The Pretense of Knowledge