[The Fed's] assets are 43 times its capital, compared with 15 times at Goldman Sachs. As a result, its equity could be wiped out by just a 2.8% drop in the value of its Treasurys and securities issued by Fannie Mae and Freddie Mac.
While working with congress in early 2009 to save the nation's largest financial institutions from themselves, the Fed began a project to rescue the country's mortgage market. Since then the Fed has been essentially printing money to buy Mortgage Backed Securities in an effort to prevent the collapse of the mortgage market and the ripple effects this would cause.
In fact, in only one year's time the Fed has accumulated nearly a trillion dollars in such securities. This massive buying spree has pushed the Fed's leverage well above levels deemed too risky for the nation's major financial institutions. The WSJ reports:
So a 3% drop in the Fed's MBS portfolio would cause it to be insolvent, huh?…
Isn't it possible that the Fed's massive buying has propped up the prices of these assets by at least 3%? Considering this and factoring in the record defaults in the mortgage market despite massive programs to ameliorate the problem, I honestly find it hard to believe that the Fed isn't already insolvent. Which begs the question: “who's going to save the Fed?”