My New Accounting Trick and Its Impact on CAPS
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.
-----------------------------------------------------------------------------------------------------------------------------------------------
More from Robert Wenzel - one of the best econ blogs around.
David in Qatar
RSS Headlines
Fool UK