In a historic and unprecedented move, the Treasury is trying to push a $700 billion plan to absorb toxic mortgages and other assets (or liabilities if you want to call them) from financial institutions to save the U.S. financial system. This is considered by many to be the “Mother of All Bailouts”. This may help the banks, but the billions in bad mortgage debt simply do not disappear, it is merely transferred from “them” to the taxpayers (you”). It seems unfair, but the alternative in allowing the non-performing assets sit on these banks’ balance sheets seems far worse. Already, we have seen the largest financial institutions fail or get bailed or bought out including Bear Sterns, Lehman Brothers (NYSE: LEH [1]), Fannie Mae (NYSE: FNM [2]), Freddie Mac (NYSE: FRE [3]), American International Group ((NYSE: AIG [4]) and Merrill Lynch (NYSE: MER [5]).

However, if you look at the total amount of taxpayers dollars going into stabilizing the financial crisis this year, we’re talking nearly $2 trillion! Here’s the breakdown:

•  $700 Billion – Treasury to purchase toxic mortgages and other non-performing assets from financial institutions.
•  $50 Billion – To guarantee principal in money market mutual funds.
•  $10 Billion+ – Treasury purchases of mortgage-backed securities (MBS) in September. More to come.
•  $144 Billion – In additional MBS purchases by FNM and FRE. Limit $850 billion. FNM’s portfolio currently holds $758.1 billion and FRE holds $798.2 billion.
•  $85 Billion – AIG bridge loan giving the Fed a 79.9% controlling stake in the firm.
•  $87 Billion – Repayments to JP Morgan (JPM) for providing financing to underpin trades with the now bankrupt Lehman Brothers. In response to the Fed & Treasury’s stand against providing public funds to consummate a deal.
•  $200 Billion – $100 billion capital infusion for FNM and FRE by the Treasury.
•  $300 Billion – Provided to the FHA to refinance failing mortgages into new, reduced principal loans with a federal guarantee as part of the housing bill. • $4 Billion – Provided to local communities to purchase and repair abandoned homes due to foreclosure.
•  $29 Billion – Financing for JPM’s takeover of Bear Sterns. The Fed takes $30 billion in non-performing assets as collateral.
•  $200 Billion – Currently outstanding loans to banks through the Fed’s Term Auction Facility. Recently updated to allow loans of 84 days in addition to the original 28-days.

Total: At least $1.8 trillion!

From Interfuidity:

The Fed's "balance sheet constraint" is not a hard limit. The Fed can circumvent it. But that doesn't mean that the size of the Fed's balance sheet is not important. Consider this: “The easiest would be to ask Treasury to issue more debt than it needs to fund government operations. As investors pay for the bonds, their cash moves from bank reserve accounts at the Fed to Treasury accounts at the Fed. The Treasury would allow the money to remain there, rather than disbursing it or shifting it to commercial banks who, unlike the Fed, pay interest. Because the shift of cash out of reserve accounts leads to a shortage of reserves, it puts upward pressure on the federal funds rate. To offset that, the Fed would enter the open market and purchase Treasuries (or some other asset), replenishing banks’ reserve accounts. The net result is that the Fed’s assets and liabilities have both grown but reserves and the federal funds rate are unaffected. This wouldn’t cost Treasury anything so long as it doesn’t bump up against the statutory debt limit. The loss of interest on its cash deposits at the Fed would be roughly offset by the additional income the Fed pays Treasury each year from the interest on its bond holdings.”

It's only true that this operation doesn't cost the Treasury anything if what the Fed buys with the excess cash pays as much as the Treasury's cost of borrowing, and there is no loss of principal. But if the Fed uses the cash (directly or indirectly) to buy or lend against market-shunned securities, then the Treasury is only made whole if those securities perform, or the loans against them are repaid. If the market is irrationally shunning these securities, then the Treasury will eventually break even. But if the securities turn out to be worth less than what the Fed lends or pays, taxpayers might be forced to eat the loss.

For the most recent update on the Fed’s Consolidated Statement of Condition of All Federal Reserve Banks, visit: http://tinyurl.com/fohhe [6].

www.weeklyta.blogspot.com [7]