If Only FTX could use the Fed's Accounting

The Federal Reserve continues to lose money, $77.6 billion last year according to the Wall Street Journal. The previous year the nation’s central bank lost $114.3 billion. And, there is no end in sight. The Fed is paying 4.4% on $3.4 trillion in reserves while earning only 2.6% on it’s securities portfolio: This a side effect of ZIRP. Two years ago Thomas L. Hogan wrote in The Hill, “The Fed is bankrupt”. As of January 6th the Fed’s “net worth” was negative $173.5 billion. Yet, the Fed paid out over $1 billion in dividends to its member banks last year. There was no mention of the central bank’s insolvency during last week’s Q & A with Fed Chair Jerome Powell.

Hogan explains, “What does the Fed do when its liabilities exceed its assets? It doesn’t go into legal bankruptcy like a private company would. Instead, it creates fictitious accounts on the assets side of its balance sheet, known as ‘deferred assets,’ to offset its increasing liabilities.”

Imagine Sam Bankman-Fried, who sits in jail for the bankruptcy of FTX. Unless Bankman-Fried receives a pardon from the President, he is scheduled for a 25-year stay in jail on a fraud conviction. But, it appears FTX creditors will be made whole plus interest. Wired.com reported late last year,

In this case, though, the administrators of the FTX estate were able to recover billions of dollars by liquidating investments made by the exchange’s venture capital arm, FTX Ventures, and its sister company, Alameda Research, along with other assets. A rise in the price of cryptocurrencies in the period since FTX filed for bankruptcy, meanwhile, raised the value of the coins left in exchange coffers.

Under the plan, government bodies in the United States—including the Internal Revenue Service and the Commodities and Futures Trading Commission—have agreed to suspend high-value claims against FTX until creditors had been repaid (although the IRS will receive a $200 million upfront payment as part of the settlement).

Even FTX equity holders are expected to be repaid at least a portion of their investment.   

Joel Khalili wrote,

FTX filed for bankruptcy in November 2022 after running out of funds to process customer withdrawals. Billions of dollars’ worth of FTX customer deposits were missing. The money, a jury later found, had been swept into a sibling company and spent on high-risk trading, venture bets, debt repayments, personal loans, political donations, luxury real estate, and other illegitimate dealings.

Despite the unadvised buying binge of bonds at tiny rates during COVID and general mismanagement of the central bank’s balance sheet, Jay Powell doesn’t have to worry that he will end up in the same jackpot as Bankman-Fried. He’s able to use, as Jim Grant calls it, “DIY accounting,” to create deferred assets to accumulate losses until the Fed’s fortunes turn around.  

“They are getting closer and closer to break-even as time goes by,” Seth Carpenter, who is chief global economist at Morgan Stanley and who previously worked at the Fed and the Treasury told the WSJ. “It’s difficult for me to see a scenario where they don’t get back to making a net profit, but it could take a couple of years.”

That’s all any entity that goes bankrupt wants…a couple more years.