Federal Reserve Needs Bailout Money

Looks like the Federal Reserve underestimated their own depression and bought distressed assets way too early and paid way too much. Now they need bailout money. Seems the mortgages the Fed seized from BSC, using nothing but counterfeit paper, have depreciated further. How could that possibly happen?!?

“The numbers basically confirm that Treasury is going to have to take some TARP money and reimburse the Fed,” said Whalen, whose financial-services research company analyzes banks for investors. “It is essentially up to the Treasury to get the Fed out of this.” - Bloomberg (click here)

Surprise, surprise, AIG is on the hook for at least $27B of the Fed's $74B sucking black hole. Same article:

"AIG Counterparties

Maiden Lane II contains almost $11 billion of outstanding subprime mortgage-backed securities from the AIG transaction that the Fed said lost $180 million so far. The fund also contains $6.2 billion of Alt/A adjustable-rate mortgage-backed securities that the report said has $936 million of unrealized losses. The Fed values $11.4 billion of assets in Maiden Lane II with mathematical modeling, the same methods used by banks and AIG itself.

About 19 percent of the mortgage-backed securities are rated speculative grade, or BB+ at Standard & Poor’s, according to the Fed. About 40 percent are given the top rating of AAA.

Maiden Lane III has lost $2.6 billion after being created Oct. 31 to buy collateralized debt obligations from AIG counterparties, according to the Fed. CDOs in this unit include three parts of a high-grade asset-backed security known as TRIAX 2006-2A, totaling about $3.2 billion. Maiden Lane III also has two parts of a commercial mortgage-backed CDO called MAX 2007-1 A-1 with a face value totaling $7.5 billion. The fair value of those two is less than half that much, or $3.3 billion, according to the central bank.

A third of the amount outstanding in the Maiden Lane III CDOs are speculative grade, or deemed by ratings companies as having a greater chance of default. Another 27 percent are rated AA+ to AA-, the second-highest tier of S&P’s scale, the Fed said in its report. All but $155 million of the $26.8 billion in CDOs are classified as Level 3 assets, or those valued with mathematical models instead of market prices."

Translation: Banks are still self-valuing subprime junk portfolios at a $180M discount per $11B!

Gee, I wonder why AIG was deemed too big to fail by royalty snatching your money? This all sounds a bit familiar:

"Mr. Chairman, we have in this country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve banks. The Federal Reserve Board, a Government board, has cheated the Government of the United States out of enough money to pay the national debt. The depredations and the iniquities of the Federal Reserve Board and the Federal Reserve banks acting together have cost this country enough money to pay the national debt several times over.

This evil institution has impoverished and ruined the people of the United States, has bankrupted itself, and has practically bankrupted our Government. It has done this through defects of the law under which it operates, through the maladministration of that law by the Federal Reserve Board, and through the corrupt practices of the moneyed vultures who control it."

- Louis McFadden, Chairman of the House Banking Committee, June 10, 1932