How Much Has the Fed Lost?

The Federal Reserve has spent over one trillion dollars buying mortgage backed securities, so-called toxic assets.  How much are these assets worth?  It's a simple question but one that is exceedingly difficult to answer not the least because the Fed has resisted being audited in defense of its so-called independence. One might say the Fed's actions have been hidden behind a veil of independence.     

We do know that the Fed purchased many of its mortgage securities from the GSEs, especially Fannie Mae and Freddie Mac.  We also know that these GSEs have cost the taxpayers at least $148 billion so far and may end up costing $400 billion in one "worst case" scenario.  How much larger would the GSE losses have been if the Fed had not taken these mortgages off their books?  The Fed also bought toxic securities from the banks and one imagines that the Fed got the short end of that stick.  How much larger would bank losses have been without these purchases?

The Fed has been a financial empath, it has taken on other people's financial pain and put it on its own books.  But all of this shuffling of losses–perhaps not coincidentally from more to less transparent forms–has obscured the fact that when the shuffling stops it's the taxpayers who are the ultimate empaths, whether they volunteered or not.  The taxpayers deserve more than a shell game, they deserve a proper financial accounting which explains where the losses came from and how much ended up on different books, including those of the Federal Reserve.


the vast, vast majority of the mortgage backed securities the fed owns are backed by prime mortgages. they aren't likely to lose anything. they pay a higher rate of interest than treasury bonds, so they will make money for the fed. (they are a tax.)

to say that the GSEs have cost the treasury (not the fed) $148 billion is not correct in reality; it is an artifact of accounting. the GSEs currently owe the treasury $148 billion as they need to keep a large amount of cash in reserve to satisfy accounting principles. the majority ($100B) of this money hasn't been "spent"; it sits as cash on the GSE balance sheets as a charge against future losses on their current portfolio and guarantee book. meanwhile their portfolio is cash-flow positive as a result of high interest rate spreads. furthermore the GSEs are paying 10% interest on this $148 billion; the amount of interest above the treasury's cost of capital needs to be subtracted from the amount the treasury "lost".

it's probable that the final number will be much less than $148 billion (and in my mind quite possible the number will be $0 after accounting losses have been reversed.)

$148 billion?
it's an amazing amount of money

If the Fed buys securities from the GSEs which the US Government (the Treasury) has guaranteed (for two years), then although it's true that the US Taxpayer is on the hook if the securities go bad, the decision to spend taxpayer dollars on it can't be blamed on the Fed. Blame it on the Treasury. So far nothing insidious has happened. The story changes if the Fed holds those assets after the treasury guarantee expires, but it hasn't yet.

The Federal Reserve Board posts financial statements, information on its balance sheet and details on its credit and liquidity programs here:

The New York Fed also posts a lot of relevant information on its web site; for example, a historical archive of agency MBS purchases ( and reports on the Maiden Lane transactions related to Bear Stearns and AIG (

These disclosures provide a reasonable starting point for independent analysis.

What does it matter? The Fed literally has infinite money at its disposal. The only way it costs anyone money by buying a toxic asset is through inflation (and downstream effects of moral hazard, etc.).

I don't think the Fed has taken the MBSs off the GSEs books. The GSEs still provide the protection on the securities and the losses should show up their balance sheets. There should be no hidden losses.

I'm actually more concerned about the Fed buying mortgage backed securities from private entities rather than GSEs. For GSEs, we're already on the hook. Buying MBSs from private parties is putting yourself on the hook. It is simply protecting private bondholders, and stockholders. What you really want to know is how much of a haircut is the Fed giving and what is it buying and from whom.

Today's FT has an article about Iceland protecting a bank whose default was based on lending to its largest shareholders, persons called the Icelandic oligarchs. In the same paper, Ireland is debating how to deal with one bank and whether to force the bondholders to take a loss.

Meanwhile, in both countries, citizens have had services cut, retirement plans upset--all to fund bank losses.

Yeah, it's austerity alright, but not for the banks.

1. Bank lends $400,000 for a guaranteed mortgage.
2. Mortgagor defaults, the collateral is underwater.
3. The Bank gets paid in full with interest by the guarantor, indirectly the US Treasury.
4. The Treasury needs to get the cash to pay the bank. Since the government is is (perpetual) deficit, it must raise money by issuing debt.
5. The Federal reserve prints new cash and buys the new debt with it - in a policy regime that does so at exactly the rate that the government needs new "financing".
6. Bank sits on the newly created cash as excess reserves (bearing interest! also in newly printed cash!) until economy recovers and there's actually somebody to profitably extend credit towards.
7. In the meantime, the inflationary effect is completely sterilized, though, we'd prefer it to be somewhat less sterilized so that it returns to trend 2% and rates can rise above 0 again, restoring the Fed conventional policy tools room for maneuver.

The net effect is this. The banks were allowed to issue at least some mortgages absolutely nominally guaranteed to be paid off either in old cash or newly printed cash. You might expect them to incorporate an inflation-risk into their analysis, however, newly-printed cash can only be paid in an economic environment where inflation is not a realistic worry. There is no nominal risk - it's a surefire bet, and you might as well shoot for the moon.

When the dust settles, how about FHA, Fannie, Freddie, Ginnie, and all the rest just go away and the government gets out of the loan guarantee business? I'd vote for almost anyone, regardless of their other crazy opinions, so long as they credibly promised to accomplish that - audit or no audit.

Simplistic comments bashing the Fed.

AT is channeling Ru Paul today.

Sashay sashay.

in addition to MBS, the Fed also has a lot of garbage on its books inherited from bear & AIG, that they were forced to reveal by that bloomberg suit - here's the link: , (but dont expect me to explain it...for most of this, i just act as a record keeper)...there's an attempt to do that on the alephblog for couple weeks in april:
in the week ending mar 13, zero hedge alleges the Fed's insolvent...

The ongoing troubles at the GSEs are no secret: it is public knowledge that Fannie had a 5.38% delinquency rate at December, while Freddie just passed the 4% threshold in January; both continue to rise rapidly each month. The fact that the mortgage-bond spread has just hit a record tight is merely an ongoing artifact of the Fed's endless meddling in the mortgage market, with the sole purpose of keeping rates artificially low, and preventing banks from being forced to take massive writedowns on their entire loan book. This is all well known. What, however, seems to have escaped public attention is what the impact of these delinquencies is on the one largest holder of Mortgage Backed Securities, the Federal Reserve. What also seems to have escaped the public is that the Fed is now the world's largest bank, with total assets near $2.3 trillion. We provide a weekly update of the Fed's balance sheet and while we briefly note the liability side, our, and everyone else's, attention, is traditionally focused on the asset side. Yet a more detailed look at the liability side reveals something very troubling...

Interesting logic Kevin. Would you also say Bush, et al, saved the economy after the 2001 recession. Seems to me the take away from these recessions is that economies tend to rebound from downward adjustments.

This post confuses a couple of things

The Fed is not taking mortgages off of the GSEs books. The Fed is buying GSE packaged mortgages. GSE packaged mortgages are officially for the next few years and unofficially since the 1960s guaranteed by the US Treasury. There is no default risk.

The Fed did not take "toxic" assets as collateral for its injections financial institutions.

Where the Fed losses will be, if there are any, is

(1) Through Maiden Lane which was the Feds vehicle for bailing out Bear

(2) Through ordinary interest rate risk. Should the Fed succeed and growth restarts then interest rates will rise. However, some of the debt they are holding is longer dated. This will cause a mark-to-market loss.

Even though there is no loss in terms of revenue streams, there is a loss in the value of the bonds as interest rates rise.

I don't read marginal revolution very much, so when I saw this I thought, oh they're outsourcing the work to some undergrad. But it turns out that this is a real life economist writing?

The Fed has posted a profit on the "toxic assets" so far. There wasn't a market for them when the Fed bought them so they got a very good deal. The Treasury, not the Fed, will post a loss on the GSE's. Most of the information you're looking for is on the Fed web site. The Fed is already audited regularly. By an external firm.

Also, if there is a single fact that is well-established by macroeconomics, it is that central bank independence is very good for the economy. Sure, let there be more transparency - but it seems to me that the Ron Paul types don't just want transparency, they want populist influence on central bank behavior (or, just get rid of them).

How do people write posts like this with a straight face?


The charge of the Fed is (1) "full" employment and (2) "stable" prices. They interpret that to mean (1) who knows what and (2) 2-3% inflation. There job isn't to create money. In fact, they created too much money. Default doesn't actually destroy money. Maybe it destroys the demand for money growth, but the money already went out the door to the people fortunate or clever enough to sell before the collapse in asset prices.

If there is a large group of people criticizing the Fed, maybe they are cranks. Or, maybe they have legitimate gripes. Here, AEP posits that the very inflation target fed the asset bubbles.

what is this ? "The Fed also bought toxic securities from the banks and one imagines that"

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