Source FRB: Federal Reserve
The problem with the Feds acting as back stop for the junk paper dealers is that now almost half of the Fed vault is full of junk. In just the past 12 months, Fed holdings have slipped from 92% AAA treasuries to just 57% AAA with the remaining 33% a varied assortment of “mystery meats.”
This begs the question: how much junk can the Feds absorb without sacrificing their own financial credibility?
It’s not as if the problems have now been solved. Today the Bank of International Settlements warned of continued banking woes:
“Strains in money markets will probably stay “severe well into the future'' as banks struggle to raise cash and credit-market losses deepen.”
“The reluctance of banks to lend to each other for fear one may collapse may slow a recovery in developed countries, the bank said. Banks have suffered $387 billion in losses and write-downs since the start of 2007.” It is likely that there are many more billions of losses to come.
Meanwhile on June 11 the U.S. Securities and Exchange Commission may recommend that Moody's Investors Service, Standard & Poor's and Fitch Ratings be prohibited from advising investment banks on how to earn top rankings for asset- backed securities:
“They basically sold ratings to the highest bidder without any regard to the performance of the rated securities,'' Mason, a former U.S. Treasury Department economist who's now chair of the banking department at Louisiana State University's E.J. Ourso College of Business, said in an interview. “The agencies did not know how to rate these instruments.''
And now in a stroke of further genius the investment banks have swapped these wrongly rated instruments on to the Federal Reserve… In the end tax payers are left holding the empty calories of all the junk that made the financial firms such fat, although fleeting, profits.
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