Accounting Tweak Could Save Fed From Losses

Nice..so a simple accounting trick turns billions of dollars in losses  
to a liability to the Treasury (i.e. taxpayer).
Stroke of the pen, law of the land, kinda cool!

Who is running this country anyway?!

regards,
-Lance

--------------------

http://www.cnbc.com/id/41198789

Accounting Tweak Could Save Fed From Losses
Published: Friday, 21 Jan 2011 | 4:58 PM ET
Concerns that the Federal Reserve could suffer losses on its massive  
bond holdings may have driven the central bank to adopt a little- 
noticed accounting change with huge implications: it makes insolvency  
much less likely.

The significant shift was tucked quietly into the Fed's weekly report  
on its balance sheet and phrased in such technical terms that it was  
not even reported by financial media when originally announced on Jan.  
6.

But the new rules have slowly begun to catch the attention of market  
analysts. Many are at once surprised that the Fed can set its own  
guidelines, and also relieved that the remote but dangerous  
possibility that the world's most powerful central bank might need to  
ask the U.S. Treasury or its member banks for money is now more likely  
to be averted.

"Could the Fed go broke? The answer to this question was 'Yes,' but is  
now 'No,'" said Raymond Stone, managing director at Stone & McCarthy  
in Princeton, New Jersey. "An accounting methodology change at the  
central bank will allow the Fed to incur losses, even substantial  
losses, without eroding its capital."

The change essentially allows the Fed to denote losses by the various  
regional reserve banks that make up the Fed system as a liability to  
the Treasury rather than a hit to its capital. It would then simply  
direct future profits from Fed operations toward that liability.

This enhances transparency by providing clearer, more frequent,  
snapshots of the central bank's finances, analysts say. The bonus: the  
number can now turn negative without affecting the central bank's  
underlying financial condition.

"Any future losses the Fed may incur will now show up as a negative  
liability as opposed to a reduction in Fed capital, thereby making a  
negative capital situation technically impossible," said Brian  
Smedley, a rates strategist at Bank of America-Merrill Lynch and a  
former New York Fed staffer.

"The timing of the change is not coincidental, as politicians and  
market participants alike have expressed concerns since the  
announcement (of a second round of asset buys) about the possibility  
of Fed 'insolvency' in a scenario where interest rates rise  
significantly," Smedley and his colleague Priya Misra wrote in a  
research note.

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