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My New Accounting Trick and Its Impact on CAPS

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January 21, 2011 – Comments (7)

There have been some whispers on CAPS that my portfolio has not been performing well, even some hints that major losses are coming my way. In order to ease your concerns, I am implementing a new accounting protocol to reduce my risk and allay any investor fears. The insolvency of whereaminow's portfolio is no longer any concern.

The deatails are extremely technical, so I won't bother you with them right now. Basically how this works is that the worst of my holdings will have any future losses assigned to another account. When I return to profitability, I will use those profits to pay down the loser account.  So the new accounting protocol will obviously improve my overall portfolio performance.  There is no need for any further concern.

Now, if you were perhaps just a bit inquisitive you might ask what/where/who is this "other" account.  It's the US Treasury. Every loss I take gets put on the Treasury's tab, and then I just promise to pay it back later.  I didn't even need the government's or the taxpayer's approval for this since they told me it was ok back in 1913.

Sounds crazy right?

The FED is actually doing this!!!!

From Robert Wenzel's blog:

Reuters has a very hot story out tonight on an accounting change the Fed snuck into a regularl weekly report. It will move off its balance sheet any bad debt the Fed may have purchased from Goldman Sachs, or anybody else for that matter. Here's Reuters via CNBC (My emphasis):

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.

But they are averting asking the Treasury for money in the future by an accounting gimmick that will simply dump the debt off its own balance sheet and onto that of the Treasury.

......Bottom line: We all knew the Fed was going to have to do some kind of monkey business to deal with all the junk securities it purchased, here it is: Negative liabilities. Yes, only at your local Fed.

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More from Robert Wenzel - one of the best econ blogs around.

David in Qatar

7 Comments – Post Your Own

#1) On January 21, 2011 at 11:54 PM, wolfhounds (29.07) wrote:

Whew, and I was certain you were talking about bank earnings. Has anyone noticed that very large portions of loan loss reserves established during financial meltdown have been "removed" the last 2 quarters from most banks earnings. One notable exception is USB which only removed $25m. As investors, and hopeully Fools, are we to blankly accept the notion that large portions of foreclosures, credit card losses and car loans have been reversed. Not if home prices are still falling in the hardest hit areas.

So why be surprised that the Fed and Treasury are playing accounting games. It's simply a continuation numbmindedness at the SEC and, Fannie Mae. The best part is, that by reducing loan loss reserves, banks increase capital. Guess who will soon bless their request to restore dividends? Wish ordinary taxpayers could play this game.

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#2) On January 22, 2011 at 12:08 AM, whereaminow (< 20) wrote:

wolfhounds,

Not if home prices are still falling in the hardest hit areas.

Exactly. Didn't residential home prices nationwide just hit a record for consecutive months of price drops?  Things that make you go hmmmm.

Wish ordinary taxpayers could play this game.

Yep, game goes like this. My creditors get nervous. I tell you to assume my liabilities on your balance sheet.  Creditors no longer nervous. 

Now, what makes the Fed think this will actually work?  It's like they think everyone else is an idiot (they may have a point though.)

Creditors ask me, "David, what happened to all those liabilities?"

Me: "I passed them off to wolfhounds, so they are no longer liabilities."

Creditor: "Do you have to pay wolfhounds back?"

Me: "Yes. And I will when I return to profitability!"

Creditor: "Then they are still liabilities."

Me: "No they're not!"

David in Qatar

 

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#3) On January 22, 2011 at 12:14 AM, wolfhounds (29.07) wrote:

HaHaHa, excellent, David.

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#4) On January 22, 2011 at 1:48 AM, FleaBagger (29.09) wrote:

Good point, David. Also, good point tryuhuyguy: we can indeed shop online.

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#5) On January 22, 2011 at 7:13 AM, dbjella (< 20) wrote:

I can't understand how "market analysis" are uptight about this when ol Ben stated in the 60 minutes interview that if any of the member bank's reserves were to low he would just add a zero.

Now if the Fed buys debt aka toxic assets from some other institution like Fanny, Freddy, the US treasury.... with nefarious money from the member bank's reserves, then who cares about losses?  The money used in the purchase was fake to begin with. 

The real questions are there repercussions if money is created? Used in the manner?  Who is impacted? Can it be measured? 

Bears 12 Packers 10

The North Central shall rise again :) 

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#6) On January 22, 2011 at 8:08 AM, whereaminow (< 20) wrote:

dbjella,

The money used in the purchase was fake to begin with. 

Absolutely true. It's really pointless all the silly manipulations they go through. It must be hard to constantly convince yourself that what you are doing isn't fraud simply because you impose a level of difficulty on your own machinations.

David in Qatar

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#7) On January 22, 2011 at 10:44 AM, whereaminow (< 20) wrote:

dbjella,

And one more thing. I'm too nervous about this game on Sunday to say a word about it!  I get WAAAAAY too emotionally invested in Da Bears!

David in Qatar 

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