The Tale of the Mighty Federal Reserve System - Guardians of the US Economy, the Epic Powerful Invisible Force Keeping America Safe
You’ll leave this read, knowing how the guardians of the US economy work
Gather round, Sifters, and hear the tale of the mighty Federal Reserve System - the guardians of the US economy, the epic powerful invisible force
Good morning, you’re in for an epic treat today, you’ll leave this read, knowing how the guardians of the US economy works from a low level to a high level explanation. The Federal Reserve was recently audited, here is what else we learn from the report.
Source: https://www.federalreserve.gov/aboutthefed/files/combinedfinstmt2022.pdf
In the land of the free and the home of the brave, there is a powerful force that quietly operates behind the scenes to keep the economy stable and the financial system sound.
This force is known as the Federal Reserve System, and it is responsible for managing the money in the United States. From small businesses to large corporations, from the richest of the rich to the poorest of the poor, the Federal Reserve touches the lives of every American. But how does this mysterious institution actually work?
In this epic tale, we will dive deep into the inner workings of the Federal Reserve System and discover how it keeps the wheels of the American economy turning.
Scroll down to the bottom for the members extras section, full BART summary.
Counting the Money: What the Federal Reserve System's Financial Statements Audit Tells Us
The Federal Reserve System, the central bank of the United States, plays a vital role in promoting the effective operation of the U.S. economy and the public interest. The Federal Reserve System is like a helper for the United States economy. It helps make sure everything runs smoothly and works well for everyone.
According to Payment Systems, the name of the auditing company, the Reserve Banks' combined financial statements are prepared in conformity with the accounting principles established by the Board of Governors of the Federal Reserve System. Payment Systems are the people who check the money for the banks and say that the banks follow the rules for how to keep track of their money after they check them out.
The financial statements reveal that as of December 31, 2022, Federal Reserve notes outstanding netted $2,258,961 while the System Open Market Account Note 5 securities sold under agreements to repurchase totaled $2,889,555. Some papers that are worth money and belong to the government added up to $2,258,961. But some other papers that the government sold to other people and promised to buy back later added up to $2,889,555.
The Reserve Banks are chartered by the federal government and possess a unique set of governmental, corporate, and central bank characteristics. The Reserve Banks are special banks that are made by the government. They have a mix of government, business, and bank things going on.
They perform a variety of services and operations, including conducting monetary policy, establishing policy regarding domestic open market operations, and overseeing these operations. These special banks do many jobs, like making rules about how money works, doing things with money in the US, and checking to make sure everything goes well.
The Federal Reserve Bank of New York (FRBNY) holds the resulting securities and agreements in a portfolio known as the System Open Market Account (SOMA). The Federal Reserve Bank of New York has some important papers that belong to the government. They keep these papers safe in a special place called the System Open Market Account.
The Reserve Banks also provide certain services to foreign official and international account holders, primarily by the FRBNY. The special bank in New York helps people from other countries with their money. They do things like keep their money safe and help them send and receive money to and from the United States.
The Main Street Lending Program (MSLP) was established to support lending to small and medium-sized businesses and non-profit organizations that were in sound financial condition before the onset of the coronavirus pandemic. It was made to help them keep getting loans.
The Treasury, using funds appropriated to the Exchange Stabilization Fund (ESF) through the Coronavirus Aid Relief and Economic Security (CARES) Act, made an equity investment in Main Street. Their special power to buy pieces of loans stopped on January 8, 2021. The people who give money (called Treasury) used some special money they got from the government (called ESF) to help the Main Street program.
The Reserve Banks are separate legal entities that collaborate on the delivery of certain services to achieve greater efficiency and effectiveness. The Board of Governors has developed specialized accounting principles and practices that it considers appropriate for the nature and function of a central bank. The special banks work together to do things better and faster. The main boss people made special rules for how the banks should keep track of their money because they do special jobs.
Although the application of fair value measurements to the securities holdings may result in values substantially greater or less than their carrying values, these unrealized changes in value have no direct effect on the quantity of reserves. The Reserve Banks do not present a Combined Statement of Cash Flows as required by GAAP because the liquidity and cash position of the Reserve Banks are not a primary concern.
The Reserve Banks are the managing member, and the Treasury is the preferred equity member of the LLCs. Significant accounts and accounting policies are explained below. The Reserve Banks evaluate the VIEs design capital. Sometimes, the value of the papers the banks have can go up or down a lot, but it doesn't change how much money the banks have. The banks don't show how much money they have on a special paper like they are supposed to because it's not super important. The banks are in charge of some special groups and the government is in charge of some of the money for those groups. The banks check how much money is needed for those groups.
How the Federal Reserve System Manages Money in the US to Keep it Growing Steadily Onward
The Federal Reserve System operates with a focus on maintaining a surplus within the aggregate surplus limitation, while also funding the Bureau of Consumer Financial Protection through a fixed percentage of total operating expenses. These are the people in charge of money in the United States want to make sure they have extra money just in case. They also give some money to a group that helps people.
The Reserve Banks collateralize primary, secondary, and seasonal loans to reduce credit risk, and established the Primary Dealer Credit Facility (PDCF) in March 2020 to provide funding to primary dealers in exchange for collateral. The Reserve Banks keep some special things that are valuable, and when they give loans to people, they ask for those valuable things as a promise that the loan will be paid back. They also created a special program to give money to some special banks who help other people with money, but they also ask for valuable things as a promise for the money they gave.
The Federal Open Market Committee (FOMC) directed the Federal Reserve Bank of New York (FRBNY) to roll over all principal payments of Treasury securities and to reinvest payments of agency debt and residential mortgage-backed securities (RMBS) into RMBS. The FOMC, which is a group of important people who work with the Federal Reserve Bank, told the FRBNY to keep the money they get from the government safe and use it to buy some special papers that help people buy homes.
The estimated weighted average life of the federal agency and government-sponsored enterprise (GSE) RMBS and commercial MBS differs from the stated maturity due to scheduled payments and prepayment assumptions. The FRBNY also holds foreign currency deposits with foreign central banks and the Bank for International Settlements, and invests in foreign securities. The papers the bank has that belong to the government and companies may take longer or shorter to pay back than expected because of how much they pay and how fast they pay it. The bank also keeps some money from other countries and buys things from other countries.
Insights into the Global Financial Landscape: The Federal Reserve's Balancing Act with Foreign Investments and Troubled Debt Restructurings
The Federal Reserve Banks of France, Germany, the Netherlands, and Japan have all issued government debt instruments that are held in the System Open Market Account (SOMA). These banks in other countries like France, Germany, the Netherlands, and Japan gave the US Federal Reserve some special papers that say they owe money to their government.
However, due to negative interest rates in certain foreign currency-denominated investments, the interest income on these investments has been negative in recent years. Sometimes, the money the bank gets from other countries is not enough and the bank has to pay extra money to keep the money safe.
As of December 31, 2021, the accrued interest receivable on foreign currency-denominated investments was $48 million. The SOMA also holds foreign currency under U.S. dollar liquidity swaps, with a total of $412 million as of December 31, 2022. The bank has some money that they lent to other countries and they are waiting for those countries to give them back some more money. They also have some money from other countries that they can use if they need it.
The fair value of SOMA security holdings can vary greatly from the recorded value at any given time. The fair value of Treasury securities and GSE debt securities is determined using pricing services based on indicative quotes from various market participants. The Federal Reserve has some things that are worth different amounts of money depending on what other people think they are worth. They use special tools to figure out how much those things are worth, but sometimes what they think they are worth is different from what other people think they are worth.
The Federal Reserve Board announced plans in June 2021 to wind down the Commercial Paper Funding Facility (CCF) portfolio, with sales concluding in August 2021. In other words on June 2021, the people who take care of money in the United States said that they want to stop using a special program called the Commercial Paper Funding Facility (CCF). They finished selling everything they had in the program in August 2021.
The CCF returned the Treasury's equity investment of $37.5 billion and earnings since inception of $480 million in 2021. At December 31, 2022, the maturity distribution of the SOMA's holdings in LLCs was as follows: within 15 days ($447 million), 16 days to 90 days ($100 million), 91 days to 1 year ($547 million), over 1 year to 5 years ($13.276 billion), and non-specified term ($46 million). The CCF program gave back the government's money that they invested and some extra money they made in 2021. As of December 31, 2022, the bank had different amounts of money saved for different lengths of time, ranging from less than 15 days to over 1 year.
The SOMA's investments held by the Main Street Lending Program (MLF) are subject to review each reporting period to identify indications of possible credit impairment. As of December 31, 2022, no assets were impaired or restructured, and no allowance for credit impairment was required. The bank has some special money that it gave to help some people and it checks every so often to make sure they are still okay and not having trouble paying back the loan. As of December 31, 2022, the bank checked and saw that everyone was still doing okay and no extra money was needed.
The LLC realized principal and interest losses of $79.9 million and $16.8 million for charge-offs during the years ended December 31, 2022, and 2021, respectively. Troubled Debt Restructurings may be approved, but unrealized gains and losses are not reported in the Combined Statements of Operations. So the LLC lost some money ($79.9 million in 2022 and $16.8 million in 2021), but sometimes they might change the rules to help people pay back their loans, and we don't count the money that might be gained or lost from these changes until they actually happen.
Federal Reserve Banks' Multi-Billion Investments and Legal Battles Lead to Tightened Lending Rules & How They Invest Executives Retirement
The Federal Reserve Banks have assigned a lending value reduced by a margin to collateral associated with loans in order to determine the maximum amount that the Term Asset-Backed Securities Loan Facility (TALF II) can lend. he Federal Reserve Banks have some special papers that people give them to borrow money. They have to make sure they don't give too much money away, so they check how much the special papers are worth and only give a little less than that.
The estimated fair value for loan participations, recorded at the cost of purchase plus capitalized interest less any principal pay downs, is approximately $10.8 billion and $13.8 billion as of December 31, 2022 and 2021, respectively. The bank bought some loans from other people, and it's keeping track of how much it thinks they're worth. As of December 31, 2022, they think the loans are worth around $10.8 billion, and last year, in 2021, they thought they were worth around $13.8 billion.
Short-term investments are subject to minimal interest rate and credit risk, as these are primarily short-term government-guaranteed investments.Under the Municipal Liquidity Facility (MLF), credit-related risk arises from losses due to an inability of a particular issuer to repay its debt. Short-term investments are like putting your money in a safe that is watched over by the government, so there is very little risk that you won't get your money back. But sometimes, people that the government has given money to might have trouble paying it back, and that's when there is a little bit of risk.
The Treasury's contributions and distributions of capital, distributions of LLC earnings, and current year undistributed LLC earnings as of December 31, 2022 and 2021, are in the millions. The government gives money to a special account and sometimes takes money out. The account also makes some money by itself, but sometimes they don't give it all away right away. All the money is worth millions of dollars.
The assets of the Variable Interest Entity (VIE) and the amounts provided by the Treasury as credit protection are used to secure the loans from the Reserve Banks. Imagine you have a special box where you keep your Rolex watches. You have a friend who wants to borrow some of your expensive watches to go look cool, but you want to make sure they give them back to you. So you ask your banker to hold onto something valuable that belongs to your friend until they give you back your watches.
The Variable Interest Entity (VIE) is like your watch box, and the things the Treasury uses to protect it are like the valuable thing your banker is holding onto. The Reserve Banks use the VIE and the protected things to make sure they get their money back when they lend it out.
Bank premises and equipment at December 31, 2022 and 2021, were as follows: land and land improvements, $429 million and $428 million; buildings, $3.246 billion and $3.207 billion; construction, $131 million and $125 million; furniture and equipment, $2.224 billion and $2.030 billion; and subtotal, $6.030 billion and $5.790 billion. Accumulated depreciation was $3.330 billion and $3.180 billion, respectively. Explained simpler, the bank has some land, buildings, and things like furniture and equipment that they use to do their work. At the end of 2022 and 2021, the bank's land, buildings, and equipment were worth a lot of money, about $6 billion and $5.8 billion. But, because these things get old and wear out over time, the bank had to subtract some money for how much they have used them. That was about $3.3 billion and $3.2 billion.
The Reserve Banks, acting on their own behalf, had unrecorded unconditional purchase commitments extending through the year 2027 with a remaining fixed commitment of $320 million. The Reserve Banks are involved in certain legal actions and claims arising in the ordinary course of business. The Reserve Banks have promised to buy things worth $320 million by the year 2027, but they haven't written it down yet. Also, they are dealing with some legal problems that happen to them while doing business.
The Federal Reserve Banks' Supplemental Executive Retirement Plan (SERP) is recognized in their consolidated financial statements. The Federal Reserve Banks have a retirement plan for their top executives that they show on their money reports.
The Reserve Banks report the service cost related to the System Plan as operating expenses. The FRBNY on behalf of the System funded $140 million and $570 million during the years ended December 31, 2022 and 2021, respectively. The Reserve Banks have a plan called the System Plan, and they need to pay for it every year. This payment is called the service cost, and it is included in their expenses. In 2022, the FRBNY (which is a part of the Reserve Banks) paid $140 million for the System Plan, and in 2021 they paid $570 million.
The Bureau is required by the Dodd-Frank Act to fund the System Plan for each Bureau employee based on an established formula. The Bank received contributions from the Bureau of $42 million and $49 million, respectively. The Bureau has to pay money to the Bank for a plan that helps their employees. They paid $42 million last year and $49 million the year before that.
As of December 31, 2022, the System Plan's assets were held in 50 investment vehicles, including seven actively managed long-duration fixed income portfolios, an actively managed high-yield fixed income portfolio, an indexed U.S. equity fund, an indexed non-U.S. developed markets equity fund, 10 private equity limited partnerships, a private equity separate account, four core real estate funds, 22 real estate limited partnerships, and a money market fund. To explain it, on December 31, 2022, the System Plan's money was put into 50 different places where people invest money. These places included things like stocks (which are like buying a little piece of a company), real estate (which is like buying a building or land), and private partnerships (which are like groups of people who invest together).
The four core real estate funds invest in high-quality, well-leased, low-leverage commercial real estate throughout the U.S. The 22 real estate limited partnerships invest in core-plus, value-add, and opportunistic U.S. and international commercial real estate, including development and repositioning of assets. The money market fund, which invests in short-term Treasury and agency debt, is the repository for cash balances and adheres to a constant dollar methodology. The System Plan enters into futures contracts traded. The System Plan has money invested in different things, like buildings and other countries' properties. Some of the money is kept in a safe place, while the rest is used to buy things that they hope will make more money in the future. They also make agreements to buy things at a certain price in the future.
An End to the Epic Tale of the Federal Reserve Banking Systems Toil to Keep America Safe
As the financial statements were audited and released, the guardians of the US economy, the Federal Reserve System, continued to work tirelessly to keep the economy stable and the financial system sound. With the Main Street Lending Program in place, small and medium-sized businesses and non-profit organizations that were in sound financial condition before the onset of the coronavirus pandemic continued to receive the necessary loans to keep them afloat. The Reserve Banks, working together as separate legal entities, collaborated on the delivery of certain services to achieve greater efficiency and effectiveness.
The Federal Reserve Bank of New York, holding important papers that belong to the government, kept them safe in a special place called the System Open Market Account. While the value of the papers held by the Reserve Banks can fluctuate, these changes have no direct effect on the quantity of reserves.
As the guardians of the US economy, the Federal Reserve System continued to manage the money in the United States, touching the lives of every American from small businesses to large corporations, from the richest of the rich to the poorest of the poor. With the sound financial practices and dedication of the Federal Reserve System, the American economy was able to continue to thrive, and the people of the United States could rest easy knowing their financial futures were secure.
Thank you for reading friends, I hope you learned something today.
Your Friend,
Cody Krecicki
A.I. Financial Research Writer
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