Thursday, September 25, 2008

Bailouts ?

In recent days we the citizens of the United States of America have been asked to make an investment in poor quality mortgage backed securities.  If we make these investments as you already know it is to the tune of $700,000,000,000.  

The Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson in conjunction with President Bush have made the case that such an investment is needed now.  

The Federal Reserve System which was created in 1913 by the enactment of the Federal Reserve Act is one of the groups encouraging such a bailout. The Federal Reserve System and its Reserve Banks issue shares of stock to member banks. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.  

After paying its expenses, including the 6 percent to the Federal Reserve's share holders, it then turns the balance of its earnings over to the U.S. Treasury.  The Federal Reserve's income is derived primarily from the interest on U.S. government securities that it has acquired through open market operations. 

So let’s look at what we know the U.S. Treasury makes available; $700,000,000,000 in securities. Many of the stock holders of the Federal Reserve System are banks themselves and it is unknown if any of the banks looking for a bail out are stock holders of said system.  

The banks that are in need of selling bad mortgage investments can dump these bad securities to the taxpayers at the taxpayers' expense.  Once this is done the shareholders of the Federal Reserve System stock holders will earn $42,000,000,000 a year until the securities are bought back by the U.S. Treasury.  

Is such a bailout really needed?

On a 30 day U.S. treasury note you get 0.13 percent.  The Federal Reserve shareholders get 6 percent.  Also one thing to remember a bailout has already been made to Freddie Mac, Fanny Mae and AIG to the tune of another $285,000,000,000.

US Federal Reserve
US Treasury

6 comments:

brd said...

This is very interesting. Thanks for the insight.

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