From my friend Skeet Wootten, and it should give all of us pause and concern: The Fed is currently one of the most leveraged banks in the world. It has equity capital of just 55 billion US Dollars and total assets of 3.575 billion US Dollars - a leverage of 65 to 1. Rising rates could very quickly lead to negative equity for the Fed. For example, the current duration of outstanding government bonds is a little bit over 6 years. The Fed currently holds roughly 2 trillion US Dollars of government bonds. Given the rise in interest rates since May of 90 basis points, the loss in market value of this bond portfolio alone amounts to 108 billion US Dollars. Thus, if the Fed were forced to mark its asset portfolio to current markets, it would have to show negative equity and be declared bankrupt if it were a private business. -- Katharina Pistor (Professor of Econ/Finance at Columbia)
Posted on: Wed, 13 Nov 2013 16:49:43 +0000
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