Sunday, January 23, 2011

Fed "Transparency" In Action

Here's how the Fed announced its new program dealing with losses from bad paper in its system, by eliminating those losses on the the capital sector of the Fed's balance sheet. The Fed will instead book them as a "negative liability" (Note: Unless you are Bradley Manning locked up in solitary confinement with limited human contact or a professional Fed watcher, I would not recommend attempting to decipher the below. Do note, though, that the Fed has balls to put into the first paragraph that this is all done to create more transparency.)

From the Fed'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.

Effective January 1, 2011, as a result of the accounting policy change, on a daily basis each Federal Reserve Bank will adjust the balance in its surplus account to equate surplus with capital paid-in and, in addition, will adjust its liability for the distribution of residual earnings to the U.S. Treasury. Previously these adjustments were made only at year-end. Adjusting the surplus account balance and the liability for the distribution of residual earnings to the U.S. Treasury is consistent with the existing requirement for daily accrual of many other items that appear in the Board's H.4.1 statistical release. The liability for the distribution of residual earnings to the U.S. Treasury will be reported as "Interest on Federal Reserve notes due to U.S. Treasury" on table 10. Previously, the amount necessary to equate surplus with capital paid-in and the amount of the liability for the distribution of residual earnings to the U.S. Treasury were included in "Other capital accounts" in table 9 and in "Other capital" in table 10
And here's the kicker, in footnote 15:
15. Represents the estimated weekly remittances to U.S Treasury as interest on Federal Reserve notes or, in those cases where the Reserve Bank's net earnings are not sufficient to equate surplus to capital paid-in, the deferred asset for interest on Federal Reserve notes. The amount of any deferred asset, which is presented as a negative amount in this line, represents the amount of the Federal Reserve Bank's earnings that must be retained before remittances to the U.S. Treasury resume. The amounts on this line are calculated in accordance with Board of Governors policy, which requires the Federal Reserve Banks to remit residual earnings to the U.S. Treasury as interest on Federal Reserve notes after providing for the costs of operations, payment of dividends, and the amount necessary to equate surplus with capital paid-in.
Further note: The Federal Reserve Banks of Philadelphia, Cleveland, Richmond and Minneapolis are already booking these "negative liabilities".

(A special shout out to TanGeng for bringing this to my attention)

2 comments:

  1. Wenzel,

    While EPJ's own Bob English is neither Bradley Manning nor a "professional" Fed watcher (what is that, like every 'don't fight the Fed!' analyst on Wall Street?), I am sure he'll have both the patience and the mental dexterity to sort through this nonsense and provide us with an interesting interpretation as well as additional context.

    I, for one, am looking forward to it.

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  2. I thought you might get a kick out of the transparency line. I know I did when I after I finished reading those two paragraphs and then found the all-important footnote at the end. But in a way, it is giving adding transparency into the Fed's accounting practices. We just might not like what we see.

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